1. Verbal comm. 86% 2. Interpersonal skills Math Written comm Basic biz knowledge Accounting/Finance 46

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1 It s like horse trading! NW Walker Rd. # 1506B Beaverton, OR View note pages for more info pcc/sbdc buying a biz 1 Check points 1.Is this biz profitable? 2.Is there a fatal flaw? 3.Why do you want to buy this biz? Write down your top 3 reasons Will you have fun? pcc/sbdc buying a biz 2 Reasons for going into business Prior work experience (73%) Joined family biz (41%) More control over future (36%) Tired of working for someone else (27%) Fulfill longtime goal (25%) Downsized (5%) Advantages of Biz Ownership can be very rewarding Call your own shots Direct contact with customers Creativity Personal Satisfaction Do what you enjoy Wealth and job security Contribute to community pcc/sbdc buying a biz 3 pcc/sbdc buying a biz 4 Disadvantages of Biz Ownership can be very stressful Important workplace skills survey of small biz owners Still not your own boss Assume financial risk Hours are long & hard Income not steady Doing what you don t like Litigation & regulations Buck stops with you! pcc/sbdc buying a biz 5 1. Verbal comm. 86% 2. Interpersonal skills Math Written comm Basic biz knowledge Accounting/Finance Mechanical ability Computer expertise Internet knowledge Science 18 pcc/sbdc buying a biz 6 1

2 Top 5 small biz problems Problem Health ins. cost 1 1 Fed taxes 2 2 Qualified workers 3 11 Govt regs 4 4 Soc Sec taxes 5 5 Pros of Less risky? More quickly profitable than starting from scratch? Main advantages...established: Name Location Business methods Employees Customers Suppliers Licenses Relationships pcc/sbdc buying a biz 7 pcc/sbdc buying a biz 8 Cons of buying a Business... It s all horse trading! You are buying an income stream! Buy the assets Cash flow, Equipment, Machinery, Inventory Good name, Real estate, A/R, contracts Leave the liabilities Sunk Costs; Water Under the Bridge Why pay for other s mistakes & inefficiencies? Beware: If you buy the shares, the assets, the going concern, you generally assume the liabilities, too....or buying a job? Would you pay $80K for a $20K job? Is there real equity or competitive advantage? Legal barriers: Patents / Trademarks / Copyrights / Recipes / Trade secrets / Exclusive contracts lasting several years An operating system & employees in place Location, Location, Location Is business fulfilling the Customer Moment? Satisfy Needs, Desires, Expectations w/ Value First rate product / service / employees / premises pcc/sbdc buying a biz 9 pcc/sbdc buying a biz 10 Why is the business for sale? Dispel assumptions If the business is so good, why is it for sale? 1. Retirement 2. No heirs who will take over 3. Declining health 4. Time to harvest 5. Moving to distant city 6. Business growth beyond current owners ability & talent to manage effectively There are at least 2 reasons The real reason & the one you are told. pcc/sbdc buying a biz 11 Market Research fatal flaw? Secondary and Primary research Why is this biz worth buying? What about the competition? Parking lot survey Inquire in neighboring businesses Mystery shopper Work free for 2 weeks Network & Mentors Conduct a survey Focus group pcc/sbdc buying a biz 12 2

3 Financial Research fatal flaw? Extent of leasehold improvements! Ask for Audited Financial statements Review current lease Review tax returns & credit report Obtain corporate 10K s & 10Q s Better Business Bureau Oregon Consumer Protection Bureau Check w/local court & attorney general for any pending litigation & complaints Using audited statements, run the following ratios Compare to R.M.A., D&B and Industry association data Liquidity: Current Current Assets / Current Liabilities Safety:Debt to Equity Total Liabilities / Equity Profitability: Gross Profit Gross Profit / Sales Operating Performance: Inventory Turnover= COGS/ Inventory Days A/R = 365 / A/R Turnover pcc/sbdc buying a biz 13 pcc/sbdc buying a biz 14 Valuation Methods See library h/o for 7 references at Beaverton City Library. Three main methods 1. Adjusted Balance Sheet 2. Market Value 3. Earnings based method Determine at least 3 dollar figures to start your assessment & bargaining pcc/sbdc buying a biz Adjusted Balance Sheet Valuation audited financial statements The value of Owner s Equity (or Net Worth) Networth = Assets - Liabilities (150 = ) Adjust for actual market value of assets Include intangible assets Only if biz has been meeting the customer moment Has the business truly solved problems, created value and earned equity? Goodwill, sweat equity, name equity can now be sold Established strong connections: Clientele, on-going contracts, significant business connections (30), loyal & competent staff. pcc/sbdc buying a biz Market Valuation What a similar business sold for In the last 6 months In the local market Quoted as X times after-tax earnings for latest year What a willing buyer paid a willing seller. ($225K) 3. Earnings-based method I audited financial statements Recharacterize financial statements Account for unusual practices/items/changes Adjust the balance sheet & income statement accordingly Long working hours (16 hour days) Working for 2, getting paid for 1 Will overstate the net income Unusual expense items, undesirable assets, etc. Underinsured? Rent may increase for new owner Obsolete inventory, raw material, work-in-process Stale accounts receivables pcc/sbdc buying a biz 17 pcc/sbdc buying a biz 18 3

4 Recharacterize financial statements As given Your calculations Rent $20K Insurance $1,200 Credit card expense $2,000 Net income $30,000 Value of new price Rent $24K, rent ag to expire in 6 mo, rate to increase by 20% Insurance $2,400, property underinsured CC $500, too high Net income $20,000, owner working 60 hrs/wk Recalc depreciation pcc/sbdc buying a biz Earnings-based method II Calculate capitalization rate based on Small, Moderate or High risk Account for risk from Competition, Location, Visibility & Access Present owner s expertise/charisma is main selling advantage Industry & technology dynamics (changes) Target market flux & Seasonality Your Learning curve Licenses, permits, certificates, insurance, bonding & security measures needed/required pcc/sbdc buying a biz Earnings-based method III Calculate recharacterized earnings for latest year ($75K) Apply a capitalization rate Function = Normalized earnings/cap rate 15% ~ small risk ($75K/.15 = $500K) 25% ~ moderate risk ($75K/.25 = $300K) 50% ~ high risk ($75K/.50 = $150K) Recap of the 3 valuation methods 1. Adjusted Balance Sheet ($150K) 2. Market Value ($225K) 3. Earnings based method ($300K) You now have 3 dollar figures to start your assessment & bargaining High, Low, Most likely pcc/sbdc buying a biz 21 pcc/sbdc buying a biz 22 Is idea or business feasible? Why financier requires a business plan! Break-even analysis Forecasted profit and loss (P&L) Quick & dirty feasibility: Fixed + Variable expenses = Gross sales Gross margin % Needed Reality check! Is it feasible? Are you willing to work that hard? Is there a fatal flaw? pcc/sbdc buying a biz 23 Negotiations I anything goes! Beware Blue Sky Money! AKA: Sweat equity, Goodwill, Image Goodwill: asset that cannot be depreciated because it doesn t wear out nor expire. Realistically, most offerings are just too small & too weak to justify paying a large premium beyond asset value. You can start the same business from scratch for less! Horse trading What a willing buyer paid a willing buyer. No laws to protect you! You are free to make a bad deal! pcc/sbdc buying a biz 24 4

5 Negotiations II beware & use various techniques Principle of Least Interest Red Herring, Good guy/bad guy, Anger Flinch! Let them know you have a limit. Don t make a concession without getting one. Everything is negotiable! Rule of 3: Hi, Lo & Most Likely Price Hence the 3 methods of valuation You set the rules, time & place Arsenal of Facts: Informed Choice / Timely Action pcc/sbdc buying a biz 25 Negotiations III Can you stomach the risk? If YES, always structure payment NEVER, EVER pay 100% upfront 1/3 cash now; next 4 sale anniversaries, etc. Else, discount the cash flow w/npv To be sure business is OK, no skeletons in the closet. NO: fraud, pending litigation, judgments nor liens. No supefund site! Not a dog! If NO, don t worry about it. You can always invest in something else. Stick to your time table, not your opponent s. pcc/sbdc buying a biz 26 Buying a Franchise 1. Buyer Beware! 2. Thou shalt due diligence! 3. Get your own attorney! If you can t afford an attorney, then you probably can t afford the franchise. There s just too much legaleese to do-ityourself. pcc/sbdc buying a biz 27 Buying a Franchise Main reasons for franchise success. 1. National ads work due to mobile population. 2. Customers value uniform quality and service. 3. Franschisee minimizes problems of starting from scratch. 4. Franchisor saves capital and personnel from having to start own stores. pcc/sbdc buying a biz 28 Common Franchise Formats Franchisor is Producer/creator: Franchisee is a wholesaler: Independent Coca-Cola bottler Right to use a brand name to sell your prod/svs Franchisor is a wholesaler Franchisee is a retailer: Ace Hardware Sells products procured by the wholesaler Franchisor is Producer/creator: Affiliate franchises, aka: business format franchise Franchisee is a retail fast food restaurant: McDonalds or a motel: Howard Johnson. pcc/sbdc buying a biz 29 Benefit to small businessman Turnkey operation Immediately able to compete with large rivals Known name, Known quality Known product / services Access to experts Increased purchasing power Aid in lender negotiations Sample business and operating plans pcc/sbdc buying a biz 30 5

6 Downside of franchising Regulations Retain an attorney from day one Disclosure, territory, renewal, extension, sale Franchise agreements Application, deposits, negotiations Training, ad support, purchase of supplies Franchise fees and royalties Audits, definitions of gross / net, percentages Scams & near scams: buyer beware! pcc/sbdc buying a biz 31 Due Diligence Do your homework Arsenal of Facts Do you have free access to current franchisees? Is bulk of corp. profits from fees or royalties? Check track record; Dun & Bradstreet Your Time Table Take advantage of YOUR window of opportunity CAVEAT EMPTOR Buyer Beware If it s so good, why are they selling? pcc/sbdc buying a biz 32 Opportunity cost & alternatives Your current job & benefits A job that pays similar returns as proposed business Start a similar business from scratch Research: Library, Internet, Yellow PP, Sunday want ads & bankruptcy notices. Network...Mentors Friends ASK! Invest $$$$$$ in T-bills, CD s, Mutual funds, stocks, bonds, gold, Las Vegas! pcc/sbdc buying a biz 33 Check Points solving problems, adding value, earning equity Will you have Fun? Fatal flaw? Product / Service Customers Employees Audited financial statements Business Owners Assets Liabilities Location Traffic patterns, anchor tenants, easements, parking Appearance curb appeal & interior Competitors Registration, zoning & licenses Grandfathered / Transferable? Image / Goodwill? Name equity / recognition Meeting the customer moment Lawsuits pcc/sbdc buying a biz 34 BRAIN JAM & Networking session 25 min. discussion / 20 min. to report Discuss your opportunity Why is it for sale? Why do you want to buy it? Funding sources People, opportunity Context, profitability Name equity, curb appeal Is there a fatal flaw? Case study: Sprockets -- Download from Does it sound familiar? Does Charlie have enough information? Does Charlie have enough money? What is an alternative investment? What is the opportunity cost? Motivation/Reasons? Is it worth it? pcc/sbdc buying a biz 35 pcc/sbdc buying a biz 36 6