Be an Ethical Entrepreneur, Marketer, and Business Builder

The fundamentals of Buying, Building, and Selling a business

October 30, 2009 by Leave a Comment

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To my knowledge, there is no other blog or book or lesson or presenter who shows someone the basic pieces necessary to generate wealth with real world experience as I will. It’s the nuts and bolts of the whole buy, build, sell process.

There are basically 4 steps:

  1. Preparing – What you need to know prior to getting started.
  2. Buying – How to find, value, negotiate, and purchase a business.
  3. Building – What you can do quickly to increase the value of the business.
  4. Selling – The ins and outs of selling your business.

Preparing

Ironically, as my most recent blog has pointed out (it’s ironic because it took me 18 months to write the blog that I should have written first), the most important part is your mindset and your attitude. Next, you’ll also need to take the first 3 steps to becoming wealthy including, always spending less than you earn, understanding the difference between where you are and where you want to be is education, and framing your goals into  Do x Be = Have context. Possibly most importantly, you need to have a clear motivation for being an entrepreneur (even if it’s different than mine) and you need to appreciate that the ethical route is always the most profitable. And make sure you’re able to get over your fear of failure in trying new things.

It’s important to understand that there’s no better, quicker way to go from very little money (let’s say less than $5,000) to a lot of money. You can even take it to the next level and setup a business to generate $1,000,000 per year if that’s your desire. Recently, as part of another blog, I’ve outlined a basic plan for how someone can go from $5,000 or less to $1,000,000 primarily through business. To stress the point even further that buy, build, sell is the best way to generate wealth for the average individual, review my suggestion to skip getting your MBA and just buy a small business for your business education.

Buying

In the buy, build, sell strategy, the part that will have the greatest influence on your profit is the purchase price so learn as much as you can for this stage.

First, you’ll want to know some basic questions to ask the seller about their business and maybe even what questions to ask about any given business idea. Then you’ll have to understand how banks value a business in case you need to go to them for financing and also how EBIDTA can tie into business values (since sellers and business brokers may reference it). As you start looking for businesses, you need to have some ideas of where to find businesses for sale for little money down and how to deal with the business brokers once you find one you’re interested in.

Before you start making any offers, it’s very important that you get the seller (or broker) to like you since then they’ll be more likely to accept your business valuation. It’s very simple to turn someone down you don’t like anyway. Once you’re ready to make an offer, make sure you only purchase the assets and then put them into an LLC filing as an S-corp. If you do that, you won’t have to spend nearly as much time fighting with lawyers. But since you may need one anyway here are a few tips for getting the best rates from your lawyer.

When you’re just starting out you may be considering a partner but make sure you don’t take on a business partner unless absolutely necessary.

Building

In the building stage you’re going to need to know what to do your first 2 weeks onsite at a business you’ve just purchased. If you don’t already know the difference between profits and cashflow, I’m sure you’ll learn very quickly.

Immediately you need to work on polarizing your company’s culture, improving teamwork, and communicating effectively. Right out of the gate you need to start setting up your business for running without you through the effective use of technology, incentives, and empowering your team. If you don’t do that immediately, you’ll soon be asked to do lots of things “in” the business that will take away from you working “on” the business. This is vitally important because if you’re not working on the business you’re not taking the time necessary to double profits, improve marketing, teach your team the importance of NLP, create systems, processes and scripts, or improve closing ratios. In other words, your primary focus for building value in your business is going to entail 3 parts:

  1. Increasing Sales – through new and improved marketing and better conversion rates. In other words you have to make sure your system for taking a lead and converting it to a customer is top-notch. Don’t forget that your back-end sales (sales to existing customers) will always be your most profitable business. With that in mind, if you can buy an already profitable business that’s horrible at back-end sales you can quickly increase its value.
  2. Cutting Costs – look at all of your expenses and simply cut those that aren’t needed. We reworked our accounting and phone costs alone to save thousands of dollars per year.
  3. Improving Efficiencies – this is primarily about scripts, systems, and processes for every aspect of your business.

Don’t make the mistake I did and wait until cash gets tight to realize that cashflow is king and then start building recurring revenue while looking for quick, easy, cheap ways to generate immediate cashflow.

Chances are you’re going to run into some issues with team members so it’s helpful to know the proper way to fire someone without having to pay unemployment and effective ways to get your team members to do what they do best.

As you’re building your business you need to work on getting it to achieve critical mass by, in particular, hiring or training the 3 leaders every business needs to succeed.

In summary, you need to have a game plan from day one including an exit strategy or else you might end up like one of the 300 businesses in NYC who failed because they failed to plan for success.

Selling

Since this blog is getting long and selling isn’t much different than buying I’ll keep this short. You need to basically understand 3 things:

  1. How to value your business just the same as discussed in buying so you can justify your price.
  2. Where to list your business which is again the same places where you’d go to find a business for sale (such as bizbuysell.com)
  3. How to foster relationships so that when it’s time to sell, you have a few personal contacts in mind.

With regards to the 3rd, you may want to get to know other business owners in your area who have complimentary (or even competing businesses). You may also consider hiring a leader who would like to take over and own their own business some day. If you have a franchise like mine, you will also want to stay in touch with owners in other areas as they might want to expand their operations.

The goal with this post is to organize and direct the many varied posts I’ve written about my adventure buying, building, and now selling my business over the last 18 months. As I add more posts I’ll try to keep this summary updated so you can always reference it for new material.

To your generating-wealth-through-business success, Bryan

Filed Under: Business Buying/Selling Tagged With: , , , , , , , , , , ,

Skip business school, buy your first business, and make it a franchise…

January 24, 2009 by Leave a Comment

If you’ve never run a business before, no matter how many blogs or books you read, or seminars or classes you attend, you have a lot to learn. There are just too many things to deal with to pick it all up without actually doing it. For that reason, the first business you own should be purchasing an already established franchise.

Until I owned a franchise business I never quite understood why this is so important. Firstly, I’m assuming you’re buying the business to rapidly build it (less than 2 years) and either sell it or keep it for cashflow with minimal input from you, the owner. If you prefer the hardwork and pride of building your own business from the ground up over 20,30, or 40 years, then by all means do that. Based on that assumption, let’s break up your “building” efforts into 2 basic categories: Front-End and Back-End

  1. Front-End – This simply means your sales and marketing. What are you doing to generate leads, convert those leads to customers, increase the amount each customer spends with you, increase the number of times those customers come back, and get those customers to tell their friends? That’s a quick summary of the front-end of any business.
  2. Back-End – This is talking about what you do once the sale is made. It includes inventory management, delivery of product, servicing customers, dealing with customer service issues, paying billings, billing customers, collecting payments, leading your service team and everything else that isn’t directly associated with your sales efforts.

So when looking for a business to buy, the ideal situation would be to find one with a strong “Back-end” system but weak “Front-End” system. That means when they make a sale they do so consistently, accurately, and predictably. Every customer knows what to expect. Their inventory is managed well, bills are paid on time, customers are billed accurately, and money is collected efficiently. However the business is not real good at creating or closing leads. It’s even worse at taking advantage of referrals and letting customers know all of the goods and services they offer. They have a great, well-maintained, database of current customers, however they fail to know how to utilize it. Why is this the ideal situation? Because if you’re developing guarantees, Unique Selling Propositions, and other direct and specific marketing to set you apart from your competition, you better be able to back it up. For that reason, if you have a weak back-end that MUST be addressed first. If however you have a strong back-end, the only thing left to do is grow the business through improvements in your front-end sales machine. You can put in less effort building the front-end then the back and reap 2-3 times the reward in less time. It’s very difficult to grow a business while improving the back-end, however the whole point of improving the front-end is to increase sales and profits.

Ok, so let’s get back to a franchise. Why is it helpful to cut your teeth on business with a franchise? Well the reality of business is that it’s impossible to only work on back-end or front-end alone. You’re constantly working on improving both and that’s where a franchise comes in. Generally a franchise, through much testing and measuring, will tell you how to run your back-end very precisely. They’ll tell you what to say, what to wear, how to produce, order, install, and/or service your product. You’ll have a large support system of people to help you address problems when they arise. In other words, most of your back-end is already setup.

Moreover, a good franchise, is also providing the necessary resources for the front-end. They provide marketing materials such as radio and TV ads along with direct mail pieces or newspaper ads. They’ll tell you what to put on sale when and while you’re too busy working on your business to come up with new ideas they’re producing new and exciting products for you to present to your customers. Sure you may pay 2%, 4%, 6%, 8% or more in gross revenue to your franchisor but in most instances that investment in learning is well worth it. And that’s exactly how I would view it – an investment in your education. Where else can you make good money and learn all the ins and outs of a well run organization? In fact, if I had the choice between attending business school or just using that money to buy a well-managed franchised business, I’d buy the business every day of the week. They’ll provide me with the tools and certainly the experiences I need to learn about business. After 4 years of running a business do you think you’d be more prepared for the “real-world” than your counterparts with a business degree?

Obviously, that was a rhetorical question. Their is one last important reason to make your first (and maybe second and third) business(es) franchises – Name Recognition. As Brad Sugars says, the most expensive thing in business is buying your customers. That’s right, your marketing dollars are simply you buying customers. If you’re buying a franchise, someone has already been marketing to your future customers for 10, 20, 40, or 60 years. They know and recognize the name. If you’re buying an established franchise in your area (versus bringing one in for the first time) that investment of someone else into your customers and area will ultimately make your cost for acquiring new customers less. Does that make sense? All well-established, professionaly run franchises will provide that benefit. Don’t underestimate it’s power. In my personal situation, without that name recognition my business would be a LOT smaller then it currently is.

To your success, Bryan

Filed Under: Ethical Marketing, General Business Tagged With: , , , , , ,

Business Valuation 2 – EBIDTA can eat my shorts…

February 29, 2008 by 11 Comments

Ok, so maybe that’s not the most professional way to title a blog… We can discuss that another time.

In the last blog we discussed the 2 main criteria a bank looks at for approving a commercial (and theoretically personal) loan.

  1. Cash Flow – do you make enough money to afford the payments?
  2. Tangible Assets – if you don’t make enough money what can we sell to pay off what you owe us?

Since that blog was written a banker educated me concerning listing revenue and a customer list as an asset “There is no way to assign a value because that customer base can decide to go away on a moment’s notice. They are not required to do business with you. So that value in the business is actually a part of the “blue sky.”” So you know I’m not making this stuff up. To think that customers are just going to disappear when, on average, each one has been with you over 8 years AND new customers are going to stop buying from you when you’ve had a successful revenue generating strategy in place for nearly 40 years is kinda silly. For most people their business’ are their lives. With that kind of track record how/why in the world would they all of a sudden sabotage it. That just seems like a ridiculously minor risk.

Does anyone know if banks are “forced” to not consider revenue or customer base as an asset because of some strange banking or FDIC regulations?

At any rate, we’ve spent enough time on valuing a business based on tangible assets so let’s consider valuing a business based on EBITDA. Firstly, EBITDA and cashflow are NOT the same thing. If you’re buying a business, you should always value it by looking at profits. Secondly, EBITDA in no way approximates or represents profits. I only point that out because if you’re trying to buy a business and someone tells you that it’s worth $1 million because EBITDA is $200k and the standard multiplier is 5 then you should indicate that EBITDA doesn’t tell you anything about the business and you need to look at profits instead. Let’s look at each piece piece of EBITDA so we can see why its only helpful when you sell your business (because it’ll drastically inflate the business’ value).

  1. Earnings – depending on who’s doing the evaluation this can be either Net Operating Income or Net Income. In essence, this is your “book” profits. Except there’s one problem. If your business is based on Accrual accounting (which over 95% are) then earnings are based on sales, not on deposits. Just because I made a $1000 sale, doesn’t mean I’ve actually collected $1000 and have that cash in my bank account to spend. In other words, this tells me what earnings should be but not how much of that is cash in my pocket.
  2. Interest – The theory goes that when you buy a business you’re not buying the business’ debt so you have to pull out its interest. That makes sense as long as you add back in the interest you’ll now be paying for whatever loan you need. If you’re just using EBITDA to measure “free cashflow” in a public company, you definitely don’t want to pull out interest because they have to pay that every month and that certainly affects their cashflow.
  3. Depreciation – The basic idea is that if you buy a truck, car, building, computer, or office equipment for your business, you can’t write-off that expense all at once and so have to depreciate it over 3,5,7, or 21 years depending on what it is. Well you had to pay for it upfront, so now you have a non-cash expense (i.e. an expense that shows up on your income statement that isn’t a part of payables) and more cash in your pocket every month, right? There are 2 problems with that.
    1. You generally still have mortgage or car payments to make that don’t show up on your Income Statement. So in this instance some portion of that depreciation IS actually decreasing your cash flow every month.
    2. Depreciation is designed to expense an item over it’s lifetime. However, at some point you’ll have to replace that item again. If its your habit to pay for everything up front without a loan then every month you’ll have to be setting some cash aside to replace that item when its useful life expires.
  4. Taxes – This one is similar to Interest in that when you buy the business you’ll have a new accountant and and so the amount you pay in taxes is going to be different. That sounds reasonable to me. So figure out how much in taxes your super-accountant will be able to save you and subtract that. Don’t just assume taxes are going to disappear and base your business valuation on that assumption. One way or another you will pay taxes – or end up like Al Capone.
  5. Amortization – The whole concept of amortization is probably the one I understand the least but here’s my explanation anyway. Admittedly, this one can be a very legitimate non-cash expense. I’ve discussed this one with business owners, accountants, lawyers, and bankers and, though they all seem to have a slightly different explanation, from what I can tell, it’s a GREAT accounting gimmick. Here’s how it works, it’s basically the same as depreciation except for non-tangible assets. For instance, let’s say you pay $1 million for a business but through certain accounting practices you can show the business is worth $600k. You now may have the ability to amortize that $400k “blue sky” asset, that has no “tangible” value, over the next 15-20 years. Now, if you are the one who is making payments on a $1 million loan then the amortization is just like the depreciation. It’s not really a non-cash expense since you’re making loan payments against it. However, if you buy a business where the previous owner was amortizing from his purchase, now you could potentially have 10-15 years left of that non-cash expense to write-off. This is most common when the previous owner bought the business when it was losing money (if you pay any money for a business that is losing money you should have some “blue sky” to amortize) and then made it profitable and sold it to you.

The Bottom Line

EBITDA has it’s place. In fact, it’s great when you want to sell your business. Most people in the business and banking world use EBITDA multiplied by some arbitrary number (generaly 3-9) to come up with the value of a business. Since that value will always be higher than valuing the business based on profitability, then why wouldn’t you try to sell your business based on that?

On the other hand, I’m not sure I can think of one solid business reason to evaluate a business based on an EBITDA, EBITA, or EBIT number. Maybe that’s why EBITDA is not a GAAP (generally approved accounting practice) calculation.

Nonetheless, you have to give it to the first guy who invented EBITDA by highlighting it in a corporate report to show how well his business was doing. We all bought into it and now he even has the banks and accountants using his inventive, creative, and pointless calculation.

Just make sure the next time you’re looking to buy a business or just some stocks, you’re not spending too much time on EBITDA.

To your success, Bryan

Filed Under: General Business Tagged With: , , , , , ,