Five Ways to Simplify Your Life As a Small Business Owner

Most small business owners decided to start their own business because they believed it would allow them the freedom and flexibility to set their own schedule, make their own decisions, and only work as much as they wanted to. They might have thought that running a small business would give them more personal time and the opportunity to explore other activities outside of work. However, the nature of running a small business is such that most small business owners quickly discover that their business is controlling their entire life, and that they are working much harder than they ever did at any previous job. This is why it is always crucial for business owners take a step back and consider ways in which they can simplify their lives, practice better time management, and be more focused on the issues that are truly pressing at their business.
Here are five tips that will help you if you find yourself in this predicament:

1. Quit Sweating the Small Stuff
Don't let the minutia of owning and operating a business get in the way of you working effectively to achieve larger goals. While the small details of your business are certainly important, you can't let them hold you back from the more large-scale projects and tasks that you must accomplish. The lesson applies to perfectionists too: you will either have to let the small details and problems wait, or you will need to expand your staff to take care of them for you.

2. Set Concrete Goals
One way to deal with the issue of having too many projects to deal with at the same time is to set concrete goals and follow timetables. Once a week on Monday mornings, or every day - if necessary - write down a list of the goals you hope to accomplish that week or day. Keep your goals realistic.
Remember how much time you have and who is helping. No matter what issues may arise, ask yourself a few times every day, "Am I doing what I need to to accomplish my goals for the week?"

3. Stop Planning, Start Doing
There is at least one new study, blog entry, book, or Podcast published every week to help small business owners achieve success. Especially when it comes to small business marketing - a rapidly evolving and expanding field - it seems like there is way more information out there than any small business owner could feasibly comprehend and follow. This is why it is more important to take a look at what has actually worked to produce money for your business, and to use this knowledge as your own framework for success. You know your own business better than any author does, no matter how reputable they may be.

4. Allocate a Certain Amount of Time To Your Personal Life Every Week
No matter how pressing the issues confronting your business may be, there is nothing more important than your own health and happiness when it comes to running a business well. Balance is extremely important. If you are feeling overworked, exhausted, or overly stressed out, your emotions might begin to affect the way you work and the people with whom you work. There is nothing worse than snapping at a staff member or a customer because you aren't tending to your own well being. Give yourself a certain amount of time every week to spend with people you love, or doing the things you love, to help clear your head from all the work-related stress.

5. Make Your Workplace Your Happy Place
Regardless of how much you choose to follow the preceding four tips, the fact remains that, as a business owner, you will be spending a very large portion of your daily life in your workplace. This is why it is crucial to make sure that you enjoy your surroundings as much as possible. Hang up pictures of the people you love, bring some of your favorite or most sentimental pieces of art from home, or decorate in whatever other way makes you feel comfortable and at peace. Buy yourself a comfortable chair or invest in a nice sound system to play your favorite album (if the nature of your business permits it). Personalizing your work space and making it somewhere you like to spend your time will reflect in your work ethic and attitude more than you may realize.

Tracking Your Prime Cost? Good, Just Make Sure You're Calculating It Right

One of the most important and telling numbers of any restaurant is its Prime Cost.

Prime Cost is the total of food and beverage costs plus all payroll expenses including wages paid to management and staff and payroll taxes and related benefits.

Prime Cost is a key indicator of a restaurant's profit potential and how well management is managing the restaurant's biggest and most volatile costs.

Generally accepted industry rules of thumb tell us that in tableservice restaurants the goal should be to keep Prime Cost at or below 65% of sales. QSR or non-tableservice operations should aim for a Prime Cost is 60% of sales or less.

When Prime Cost exceeds these percentages by more than a point or two, it usually becomes a real challenge for any restaurant to make a sufficient bottom line profit regardless of the other expenses on their P&L.

Some independent operators may not be getting an accurate reading of their Prime Cost because of the way owner's compensation is handled.

When calculating Prime Cost, the owner's compensation should be included in management payroll only if the owner is actively working in the restaurant and the amount of compensation does not exceed 4% of sales.

If you own a restaurant but have a GM manage the daily operations, don't include your compensation when calculating Prime Cost

For owners who perform the duties of a GM and/or chef, first see if your salary exceeds 4% of sales. If it does not, don't do anything. If it does, take the amount that exceeds 4% of sales out of Prime Cost.

Reason for the 4% amount is this. In general, GMs or chefs are not paid more than 3%-4% of sales. When a restaurant is very profitable, working owners may pay themselves more or even much more than 4% of sales so including all of their compensation in Prime Cost can cause it to be artificially high in comparison to other restaurants.

If applicable, reclassifying some portion of owner's compensation out of Management Payroll should give you a better number for comparing your Prime Cost to industry averages and rules of thumb.

Have a profitable week!  Jim Laube & Joe Erickson

The Regulation Modifications That Can Help You Start a Business in Latin America Countries

When it comes to starting a new business in Latin America, the general misconception on the part of the potential investors is that the legislative limitations of the countries situated in this area outweigh the benefits. It is fairly true that in the past many governments imposed restrictive laws which deemed the business environment constraining.
However, nowadays, business in Latin America seems to be picking up the pace quickly due to several favorable modifications of the legal system and new regulations that favor development and the expansions of companies in the region. Although the following article will exemplify the highlights of these changes, it is advisable to employ the services of specialized consultants if you are not familiar with the Latin America market.
For Brazil, the most notable modification comes from the tax system, which has now synchronized the federal and the state taxes, for the convenience of the companies. It is necessary to point out that the old system of taxes made it very complicated and confusing for businesses to stay up to date with the full array of taxes in order to avoid penalties. Furthermore, those interested in the Chilean market will be happy to learn that the authorities have implemented an online business registration method as well as one that allows you to file publication requests.
Moreover, Chile now promotes corporate transparency and regulates the transaction approval, all in the interest of investors.
In Colombia it is much easier now to obtain construction permits, as the pre-building certificates are verified by the authorities online. There is no other notable achievement for Ecuador except for the implementation of the online system that manages social security registrations. In Mexico, on the other hand, several changes have been made, the first one being the one-stop shops which allow companies to register their business. At the same time, it is now much easier to obtain construction permits, as two major services (utilities and zoning) have been merged and streamlined. However, corporate taxes in this country have been increased, although the administrative tasks are much simpler due to the widespread popularity of online payment methods and high usage rate of accounting software programs.
Nicaragua, while it has regrettably imposed several new taxes (10 percent withholding taxes for the gross interest generated by a deposit) on companies and increased the preexisting ones has substantially improved the trade using innovative electronic data transfer systems for the department of customs and one-stop shops for goods exports. In addition, the investments made in the equipments for Corinto, one of the major ports of the country will also facilitate exports and imports trading.
In Uruguay, entrepreneurs will find it easier to register properties due to the elimination of the preemption rights waivers, which was required up to now. At the same time, Paraguay also allowed companies to obtain a construction permit with less hassle thanks to the improved administrative structures and the superior tracking systems which eliminated a great deal of bureaucracy. In a nutshell, many countries are striving to make business in Latin America enchanting for investors and many more changes are yet to come.

Preparing a Loan Application

Obtaining a business loan has become more difficult as the economy, regulations, and lendig policies become more stringent.  I took the following notes during a recent staff training presentation and hope they will help you to understadn what lenders need to see in a business loan appllication. 

I. Understanding the Lender

It is much easier to find a business lender if you understand what a lender needs in order to process your loan application. I recommend starting with the lender you are already doing business with but check for the most recent bank policies and procedures. Government regulation and bank policies are frequently updated. To prepare you application it is helpful if you know the following:

Bank Policies –

Loan portfolio mix, number of and type of loans they like to make.

Loan Programs they use? (SBA or USDA programs?)

Loan requirements – Minimum Credit score, Loan to Value, Collateral, Equity, Lending Ratios -- Liquidity, Debt Coverage, others

Risk tolerance – some banks are more liberal, others more conservative.

Lender’s experience with customers in your industry?

Recent changes in the bank’s corporate structure that effect lending policies.

Banking regulations that affect the bank’s lending policies.

Average time to close a loan.

• Loan Underwriting – The lender will only know what you provide, incomplete applications get denied. Your loan officer will need to justify a loan approval based on due diligence review of you and your business. Information they are looking for includes:

Is the loan purpose consistent with the type of loan?

Credit Standing (score and credit report)

Cash Flow, is the business be profitable?

.... Are losses explained?

.... How were losses funded?

Collateral

.... Quality and value

.... Collateral value covers loan?

Equity/Net Worth

.... Has equity increased or decrease over last three years?

.... Amount of contributed equity and earned equity (retained earnings)

Financial ratios

.... Exceed lenders minimum target?

.... Ratio trends over last three years

Business condition – Strengths, Weaknesses, Issues

Other

.... Other business owned

.... Other sources of income

.... Personal Financial history

II. Preparing a loan package

Presenting the lender with a complete package is critical. Your package must demonstrate your capacity to manage the business, your capacity to produce stated outcomes, and the market place capacity to buy your service/product. Incomplete packages slow review and errors or misstated information will result in a denied application. Lenders will be examining:

1. Financial Statements – History

• Profit Loss Statements- YTD  Revenue, margins, profit

 • Cash Flow: EBITDA and Working Capital needs, Owner draws, distributions, When you spent cash, when you received cash

• Last three years of Tax records, Explain differences between tax records and Profit & Loss Statements. Explain any expenses made for tax purposes

• Balance Sheets – current liquidity, asset quality, leverage, capital structure, retained earnings, Aging of A/R and A/P

• Budget Projections with assumptions

• Break Even analysis

• Ratio analysis - Liquidity, leverage, performance over time has been consistent and is sustainable Sales to Assets, ROI, ROA, A/R Turnover, Average Collection period A/P turnover, average payment period Inventory Turnover, Inventory on hand

2. Management

Character of top management, resume of management experience, experience as management in this business/industry. Team depth, who does the tasks of CEO, CFO, A/R and A/P. Succession (who runs the business if you can’t be there?) Performance as compared to industry standards and trends

3. Business Plans

• Supports and explains how you will accomplish what you claim in your budget. How you meet the five C’s of credit. (Character, Capacity, Capital, Conditions, Collateral)

• Explains market opportunity

• Provides budget assumptions.

• Describe the business, how you make money

• Describe the service/product, provide pictures, marketing materials, samples

• Associated documents, Articles of Incorporation (Partnership), Leases, Contracts, firm estimates on major purchases, Collateral

III. Presentation Tips

• Be enthusiastic

• Be professional

• Be prepared

• Make an appointment, be early and ready

• Be organized and bring copies of all the document to leave with the lender

IV. Deal Breakers

Some issues in your history can be deal killers, there must be extenuating circumstances before a lender can consider proceeding with an application. Other problems could result in a loan application being considered as a higher risk. If a loan were to be approved, these issues could result in higher interest rates and more conditions and restrictions.

Preparing a quality loan application package will help identify potential deal breakers and provide you the opportunity to explain what happened and what you have done to correct the situation. Remember, it is safer for the lender to say no if there is any doubt or perception that your loan is a higher risk than the lender wants to accept.

Typical Requirements For Business Loans

Seeking a business loan requires preparation and excellent documentation of your businesses financial health. The following list will help get you started, complete and accurate information will help the lender complete their review with a better chance of reaching approval. Pay close attention to financial projections and cash flow needs, they must be believable and supported by your business plan market assumptions


Proof read your documents as errors will delay review and possible cause rejection. Have someone else review you documents did they clearly understand what you wrote?


I. Cover Letter --States who you are, how much money is needed, what the money will purchase and what results are expected.

II. Business Plan
A. Description of the business
B. History and nature of business
C. Ownership structure. Attach contracts or organizing charter, copies of business licenses, EIN, Resolution/Articles of Incorporation or partnership contracts.
D. Key Management resumes
E. Description of product/service and market place. Including competition, market area, major customers, major suppliers, description of plant and equipment
F. Amount of loan requested. Specific dollar amount and purpose of loan, use and benefits, amount of owner’s contribution, primary source of repayment and repayment terms, list of collateral.

III. Business Financial Reports
A. Projected cash flow budget, income statement, balance sheet, financial assumptions
B. Business financial history for last three years
C. Tax returns for last three years
D. Itemization of all debts
E. Current aging of accounts receivable

IV. Personal Financial Statements (for each co-owner)
A. Recent personal financial statements, recent
B. Personal Tax returns for last three years

V. Attachments
A. Application forms.
B. Business incorporation documents, partnership agreements, buy/sell agreements, etc.
C. Legal documents: leases, contracts, franchise agreements,
D. Detailed lists of assets to be purchased
E. Summary of market research
F. Supporting documentation, pictures, plans, contractor estimates, customer contracts.


NOTE: Loan Decisions Points – Lenders have several critical decisions points. The information you provide must prove to a lender your ability to accomplish your business goals.  A lender review will include but is not limited to:

• Evidence of your ability to achieve the cash flow budget
• Total amount existing debt and how much more debt will be added with a new loan
• Ability to pay all of your debts and still be profitable
• Personal and business credit history
• Amount you are investing as the owner
• Amount of collateral
• Potential risk of business failure
• New business vs. well established business

Social Media Marketing Strategy

Recently read "The New Conversation: Taking Social Media from Talk to Action" anHarvard Business Review Analitic Serviceds Report regarding Social Media strategies. Follow the link to read the full text http://www.sas.com/resources/whitepaper/wp_23348.pdf


Executive Summary
The exponential growth of social media, from blogs, Facebook and Twitter to LinkedIn and YouTube, offers organizations the chance to join a conversation with millions of customers around the globe every day. This promise is why nearly two-thirds of the 2,100 companies who participated in a recent survey by Harvard Business Review Analytic Services said they are either currently using social media channels or have social media plans in the works. But many still say social media is an experiment, as they try to understand how to best use the different channels, gauge their effectiveness, and integrate social media into their strategy.
Despite the vast potential social media brings, many companies seem focused on social media activity primarily as a one-way promotional channel, and have yet to capitalize on the ability to not only listen to, but analyze, consumer conversations and turn the information into insights that impact the bottom line.

For instance:

• Three-quarters (75%) of the companies in the survey said they did not know where their most valuable customers were talking about them. 
• Nearly one-third (31%) do not measure effectiveness of social media.
• Less than one-quarter (23%) are using social media analytic tools. 
• A fraction (7%) of participating companies are able to integrate social media into their marketing activities.

While still searching for best practice and measurements, two-thirds of the companies surveyed are convinced their use of social media will grow, and many anticipate investing more in it next year, even as spending in traditional media declines.

Only a small group — 12 percent — of the companies in the survey said they felt they were currently effective users of social media. These were the companies most likely to deploy multiple channels, use metrics, have a strategy for social media use, and integrate their social media into their overall marketing operations.

Clearly, most companies are still searching for the best practices and metrics so they can understand where to invest and target their social media activities and build their own competitive advantage. It will take those new tools and strategies to create what Avinash Kaushik, Google’s Analytics Evangelist, describes as a new reality in harnessing the power of social media. “Too many companies have not evolved from what I call ‘shout marketing’ — think TV, newspapers, magazine ads — to influence by initiating and participating in conversations with consumers,” he said. “There needs to be a generational shift.”

Buying and Selling a Business

You've worked long and hard to build up a good business. Maybe the business is hugely profitable, or maybe from a financial perspective the business may have paid you a modest salary over the years, but maybe not more. You may ready to retire, move onto another challenge, or perhaps you are burned out. You are wondering if you can and should sell the business. Will you be able to get some return for your investment? How do you come up with a price? How to market the business? How to negotiate with potential buyers? What steps do you take to close the deal? Where are the hidden traps?

Selling your business can be financially rewarding as well as give you the personal satisfaction that what you created will continue after you. Your customers will be happy, and the jobs your business provides will continue. Plus you’ll give someone else a chance to be a small business owner. Our tips on selling your business can help you achieve your goals. Through this process your SBDC counselor can be a  valuable resource.

What do I need to do to get my business ready to sell?

Ideally, entrepreneurs should plan ahead if they are going to sell their business. This may take a 1-2 year look ahead. To get the best price and ensure continued success of the business you are selling usually involves specific activities from perhaps getting the business to be more profitable to writing documentation that will assist a buyer—an employee manual or technical manual, for example. Some key areas are:

Initial questions to ask yourself:

• Why are you selling your business? Most buyers will ask you this question. Are you retiring? Looking for a new challenge? Burned out? Having financial difficulties?

• Why should they buy your business? Why should someone buy your business rather than starting from scratch or buying something else? Your assets might include a sound reputation, a loyal customer base, industry knowledge, established suppliers, and good employees. In addition to those possible assets, consider how much cash the business will generate for a new owner. We discuss that factor under valuation.

• Is this the right time to sell? How is the economy doing? How is the industry outlook for your business? Have you been able to show profits for the past several years? Are there similar businesses on the market?

Get your books in order.

Buyers evaluating your business will generally require at least three years’ worth of financial information including tax returns and a current balance sheet. Have the most recent twelve months’ financial statements by month as buyers will want to see any seasonal fluctuation.

Have a list of the assets for sale and either the current book value or a supportable value of each. Other information that might be valuable for a buyer can be: permits, licensing, leases, customer and vendor contracts, supplier lists and marketing materials.

Get a business valuation.

Placing a dollar value on the worth of a business is a complex process involving many factors. One of the first things you should do is get a realistic idea of what your business is worth. A professional valuation will give you the basis for evaluating buyer offers and help you set your asking price. It will also tell you if there are weak areas that, hopefully, you can correct before you put the business on the market. Sellers often overprice their business — they have put their hard work into the business and have a difficult time realizing if profitability is low, that the business may not be worth as much as they think it is. Being aware of the factors that go into valuing a business can be of help. Valuations can be obtained from a number of sources, ranging from local accounting firms to regional business brokers and investment banking firms. Your SBDC counselor can explain to you, using your financial data, the most commonly used valuation techniques. See our discussion on valuation.

Get your advisory team in place.

Your advisory team includes your attorney, your accountant, possibly a business broker or realtor, your banker, and your SBDC Advisor.

Marketing: Determine a strategy, prepare a marketing package, and implement your action plan.

One question you should determine early on is: do you plan to use an agent or broker to help with the deal? If not, are you comfortable negotiating with potential buyers? If you have emotional attachment to the business, it may be helpful to have an intermediary for the transaction.

Be prepared for prospects.

Make sure you will be available to answer prospective buyers’ questions and meet with them. Keep your business ready to be shown at any time. Keep in mind also that prospective buyers may contact your business as potential customers.

Tips on sharing information with potential buyers.

When a potential buyer contacts you to buy your business, they will need to see the financial statements for at least the last three years, including tax returns, profit and loss statements by month for the most recent twelve months and a current balance sheet in order to evaluate the opportunity. Often the seller is reluctant to give out business tax returns to “just anybody who asks for it.” You don’t want your financial information known all over town (or perhaps given to the competition). You can meet the buyer’s need for information and your need for confidentiality by doing the following:

• First interview the potential buyer. Ask about their background in the industry. Get a sense of whether or not the buyer seems to have the skills and experience to run your business.

• Next explain that in exchange for giving the potential buyer your financials you will want the following from him or her:

~ A signed nondisclosure or confidentiality agreement. This should clearly state that the potential buyer’s intent is to evaluate purchasing the business and not for the purposes of gaining any information for business competitors or for any other reason.

~ A resume.

~ A personal financial statement.

Evaluating an offer.

What is the proposed purchase price? What are the terms? Will you be asked to finance all or part of the purchase? Many times a lender will want the seller to finance part of the sale to ensure that the seller has an interest in helping the business continue to be a successful one. Will you be available after the sale to help train the new owner or answer questions? How will the transition period be handled? What are the qualifications of the buyer? Does he or she have experience in owning or managing a small business? Any experience in this industry?

How will the buyer finance the deal? Does it seem reasonable that he or she will be able to secure the financing they need? What will be used for collateral? Does the buyer have sufficient cash for a down payment and perhaps for working capital? How good is the buyer’s credit?

Next Steps a list of things to do for the buyer and seller.

For Buyers

Perhaps you have considered starting your own business, but you realize there is good competition in the area. Perhaps you also know yourself and know that you are an excellent manager, but starting something from scratch if not one of your strengths. Whatever your reasons, you’ve become aware of a business for sale and are not sure how to proceed. How do you evaluate the price? What about financing? What contingencies will you need? What about training, and learning about the business? Buying a business can be an excellent way to be a small business owner. It may also be less risky since you should be buying a “successful formula”. Our tips on buying a business can help guide you in the initial steps of considering buying a business. They will prepare you to meet with an SBDC Advisor who can guide you further in this area.

Where do I start?

Some initial questions to ask yourself:

Is this the right business for you?

What will owning this business be like?

Talk to the current owner about what your day will be like.

Spend a day or two in the business to see what you would be doing.

Do you have experience in this industry?

If not, how will you get it?

Have you owned a business before?

If not, see our section on:

“What does it take to run a small business?”

I don’t know if I am “entrepreneurial?”

Why should you buy an established business?

Why should you buy an established business rather than start one from scratch? Assets of an established business can include their customer base, industry goodwill, established suppliers, and good employees. In addition, you are buying an identified cash flow. Other advantages of buying a business are time saving and reduced risk. Cons include reduced  reward (perhaps), and higher cost (the cost of buying a business is usually greater than starting one yourself ).

Why is the business for sale?

Don’t depend solely on what the owner tells you. Probe. Ask around town. What kind of reputation does the business have? Have there been legal or financial problems? Visit the business unannounced, as a customer.

What are you actually buying?

Ask the owner for the business records. You’ll want to see their financial statements for at least three years including tax returns, a current balance sheet and the most recent twelve months’ financial statements by month to determine any seasonal fluctuation and a current balance sheet. What are the terms of the lease? Do the statements appear to be accurate? Have they been prepared by an accountant? Are they audited statements? Request a specific list of all the assets you will be buying and what they are worth. Is property included? Inventory? Equipment? Generally you will be buying only the assets and good will and not liabilities.

What are some other tips for buying a business?

Information the seller wants.

The seller will most likely want some information from you before they release their financial statements. Typical information is: signing a nondisclosure or confidentiality agreement, a copy of your resume and a copy of your personal financial statement. The seller will want to know that you are a serious buyer and are in good financial shape to buy this business. Remember that you may be competing with other potential buyers.

Get your advisory team in place.

Your advisory team includes your attorney, your accountant, your banker, and your SBDC Advisor.

Financing buying the business.

First you will need to determine how much cash you have and how much you will need to borrow. Will the seller finance all or part of the deal? How is your credit? Can you get a bank loan? What will you use for collateral? Are the business assets sufficient collateral or will you need additional collateral, such as equity in your home?

Making the offer.

The offer is usually made in the form of a purchase agreement or a letter of intent. A letter of intent is a nonbinding agreement that allows the buyer to take a closer look at a business and its records before committing to a formal contract. The letter of intent lets the seller know that you are serious and that the two parties are in agreement on the basic terms of the transaction, such as price, terms, conditions, and timing. An alternative to a letter of intent is a standard purchase agreement that states specific contingencies that must be released before the offer becomes binding, such as financing. Keep a written record of meetings, conversations, and agreements with the seller or seller’s agent.

• Some things to consider in your offer are: What is the proposed purchase price? What are the terms? Will you ask the seller to finance all or part of the purchase? Many times a lender will want the seller to finance part of the sale to ensure that the seller has an interest in helping the business continue to be a successful one. Will the seller be available after the sale to help train you or answer questions? How will the transition period be handled?

How likely is it that key employees will stay with the business? Should you ask for them to sign an employment contract as a condition of sale? Your SBDC Advisor can assist you in determining other issues to be included in the offer letter. You may also want to get your attorney involved in the drafting of the offer.

My offer has been accepted! What’s next?

For Both Sellers and Buyers

Valuation

Placing a dollar value on the worth of a business is a complex process involving many factors. If you are the seller you will need to determine an asking price. Valuations can be obtained from a number of sources, ranging from local accounting firms to regional business brokers and investment banking firms. Your SBDC Advisor can explain to you, using your financial data, the most commonly used valuation techniques. There are a lot of ways to value a business. There is no “right” way. Ultimately, a business is worth whatever you think it is worth, based on your criteria. You can make your estimation by analyzing several ways to value a business. Let’s review some basics to help you get started.

• Asset Value: You can start by looking at the value of the business’ assets. What does the business own? What equipment? What inventory? Any assets such as a building? This rationale says that a business is at least worth its liquidation value. If you were starting a business you’d need to buy similar assets, so the business is worth at least the replacement cost of the assets. The balance sheet can give you a good indication of the value of a company’s assets.

• Revenues. Revenue is probably the crudest approximation of a business’ value. Often, businesses are valued as a multiple of their annual revenue. The multiples depend on the industry. For example a business might typically sell for “two times sales.” While a professional may be able to find out typical multiples for your industry, revenue doesn’t mean profit. While revenues can sometimes give a buyer an indication of potential if the business is poorly managed now, it is not a reliable indicator of value.

• Earnings or Discretionary Cash Flow. Using earnings or what we call “adjusted or discretionary cash flow” may be a better way to think about valuation than revenues. Basically, this technique determines how much cash a business will generate for a new owner to take for him or herself as compensation and for any debt acquired in buying the business. The more cash a business generates, the more valuable it is. Here are the steps in determining discretionary cash flow:

1 Take net profit for the most recent year.

2 Add to that figure any non-cash expenses, such as depreciation.

3 Add to that any expenses that a new owner will not have or are discretionary. The most common ones might be charitable contributions, perhaps some travel or expenses for conferences, interest on any debt (a new owner will have their own debt and will have a different interest expense figure).

4 Add to that the any wages that the owner has taken during the year. A new owner might have different income needs.

5 Subtract from that any known expense, other than new debt and a new owner’s compensation, a new owner will have. An example of this is if the seller is a couple with both working in the business and the buyer is an individual, the buyer will need to add another employee to replace one of the sellers. Another example would be if the seller owns the building where the business is located and will lease it to the new owner. A buyer then needs to subtract from the net profit figure what the new rent payment would be on an annual basis.

6 You now have how much cash this business currently generates for a new owner. If the financial statements you are using for this analysis are several months old and the most recent year is already proving to be different from last, you will want to adjust your analysis for that recent evaluation.

7 Have your SBDC Advisor help you with this analysis or review your figures.

Applying a multiple to DCF: Multiples are usually applied to the discretionary cash flow figure to arrive at a valuation for the business. Factors that determine a multiple can be:

• Type of business—service versus retail or manufacturing, for example. Also whether the business has significant assets.

• Whether special managerial skills or industry expertise is needed.

• Stability of historical profits.

• Business and industry growth.

• Location and facilities.

• Stability and skills of employees Competition.

• Diversification of products, services and geographic markets.

Feasibility: Whatever the asking price of a business is, whether you are the seller and used one of the valuation techniques to arrive at a specific asking price and/or a range that seems acceptable to you, or you are a potential buyer trying to evaluate an opportunity to purchase a business, you should look at the feasibility of someone buying this business at this price. If you are the potential buyer, you can apply your specific situation to this feasibility analysis.  If you are the seller, you might want to first look at feasibility for yourself and then look at what the situation might be for a “typical” buyer. For feasibility for the seller, the question is “can you afford to sell the business for this price?” Do you have business debt that needs to be paid off out of the proceeds of the sale? The steps for feasibility for the buyer are: take a specific price for the business, whether it is the asking price or one of the values in a range of prices; to that that add the working capital a buyer would need to start as well as any other initial costs (perhaps there are some needed renovations or equipment that needs replacing etc); this gives you the total amount a buyer will need to buy and begin to operate this business. With that figure:

~ Subtract the amount a buyer will have of his or her own funds. That leaves you with the amount of debt the buyer will have to incur.

~ Figure out what the annual loan payment would be on the debt. Subtract that from the discretionary cash flow figure you arrived at in step 6 above. Subtract the minimum amount the buyer will need to take out of the business for his or her own compensation. If there is not enough for the buyer, or if you are at a negative figure, the sale as outlined above is not feasible.

~ Look at the deal and see what, if anything can be changed to make it feasible. Can the seller finance all or part of it at a lower interest rate or longer term? Can the buyer come up with more cash? Is it feasible for the seller to reduce the price? Your SBDC Advisor can assist you in looking at the feasibility of various scenarios. 

Next steps: a list of things to do for buyer and seller.

This list includes some of the activities after the offer has been accepted and any contingencies have been removed, but prior to closing. We recommend that both the buyer and seller consult with both their accountant and their attorney in the transaction of buying/selling. These professionals should be different for each party. Your SBDC advisor can assist you in determining any additional steps.

• The seller continues to run the business in a sound and responsible manner until closing.

• The lease: if applicable, the buyer confirms the details of a new lease with the landlord.

• Business License: The buyer needs to get a state business license (www.wa.gov/dol); and a city business license if necessary.

• If the buyer is going to be a corporation, he or she will need to file incorporation papers as well (buyer’s attorney can do this).

• Seller will indicate that the business has been sold on the last B&O report that is filed.

• Buyer needs to get an EIN (employee identification number) from the IRS to be able to employee people or if the business will be a corporation (www.irs.gov).

• Buyer needs to get insurance prior to taking over the business (liability, property, fire, theft, vehicle, business interruption and the lender may require life insurance on the new owner.)

• Buyer is to inspect and approve the equipment list. Prepare allocation of purchase price forms that are for equipment (your accountant will have this IRS form).

• Inventory: determine who will take inventory and when. Estimate inventory level for closing documents.

• Contact utility companies to have accounts transferred. Contact phone company and web hosting firm, if applicable, to have accounts transferred and web site changed to reflect new owner (if applicable). Examine all marketing materials for any needed changes (such as owner’s name).

• Clarify training period and activities.

• Contact all suppliers and transfer accounts. Buyer to find out if suppliers will give terms and what they will be.

• Contact merchant’s credit card company and arrange for transfer or new account.

• Buyer to set up business checking account.

• Seller to close business checking account.

• Prepare joint press release to be sent out after the closing.

• Seller to turn over all records for the business to buyer at closing