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When Buying a Business, Applying This Information Will Keep You Profitable and Out of Trouble

For someone buying a business, your situation is similar but different from selling a business. Your main concern will center on getting an acceptable return on your capital. And that is at a minimum. Sounds quite simple doesn’t it? Well, it is simple, but it isn’t easy. As you have likely already seen, getting an acceptable return on your capital is the result of a whole bunch of other things working out right.

The first of these is that when buying a business, you need a price that makes good economic sense. As a starting point, this means that the price that you will pay for the business will provide you with a return that is considerably higher than the rate of return on risk free securities like government bonds. At some times that benchmark may seem a bit controversial, but is normally works. The reason for getting this premium is that with any business there is an element of risk. The future, by its nature cannot be known. So your job as a buyer is to be your own risk manager.

When you commence buying a business, you will be presented with many alternative opportunities. Each of these can lead you to examine a set of financial statements. There are any number of pitfalls for the unwary in these kinds of statement. For owner owned businesses, one of the most significant of the pitfalls deals with owner compensation. If the current business owner works in the business, how is he paid? And has his compensation been deducted from gross profit in order to get to earnings or cash flow? If it hasn’t the earnings or cash flow will have been overstated. So they need to be adjusted lower to provide for market compensation for the person doing what the current owner does.

With this as your starting point, you will be able to do a quick return calculation. Start out by dividing the yearly earnings or cash flow provided by the business, by the asking price. If that number seems to provide you with an adequate premium over what your money could earn from risk free securities, then you should continue considering the business as a reasonable target. And remember that if you really like the business for many other valid reasons, you can make an offer at a price that makes economic sense to you. After all, what is the worst that can happen?

Because the future is unknown, as a buyer you can be taking on the risk of an unknown future. In buying a business the big risks are revenue and cost. What drives revenue? What will continue to drive revenue in the future? How confident are you in your ability to drive revenue in the same manner as it has been done in the past? To answer this question satisfactorily you will need to determine whether revenue is based on the talents of one or more key people, or whether it is systems and process based. Remember that one of your key responsibilities is to act as your own risk manager. So you need to understand this key distinction. To learn more you will need to do a marketing audit.

The cost structure is also of key importance. You need to understand the underlying economic model. What kinds of margin does the business enjoy? What are the variables that impact break even? When total cost equals total revenue. And what are the various key levels at break even? Doing a break even analysis will give you a broader understanding of cost structure and how to evaluate it?

One of the things to remember as you examine various businesses is the reason for franchises being so popular. Part of it is their promise that you can be in business for yourself, but not by yourself. To fulfill that promise they provide franchisees with proven effective ways of handling most business critical issues. The franchisee does not need to reinvent the wheel. Nor learn what works and what doesn’t through trial and error.

When you consider a business as a prospective buyer, see how closely it resembles a franchise in terms of the documented systems and processes that come with it. When you are considering price, be sure that if the price clearly contemplates growing revenue and growing earnings, that the systems and processes that will drive all this are included. Don’t pay for what isn’t there. So you need to do an audit to determine how far the current owner has gone to systemize the business.

If certain systems and processes are absent, it may not be a deal breaker. Although their absence should definitely impact either price, or terms, or both. As an example, if the business lacks proven effective marketing and selling systems, that could be OK if you are a highly effective marketer. So long as you can develop and document the needed systems quickly. But if there is also a systems void in other areas, you may just have a deal breaker. You may not have the time or the skill to develop, implement, and document these missing systems. And still operate the business at an acceptable level.

Regardless of how it happens, if you buy a business lacking critical systems and processes there will be a cost to develop and implement them. It will include the easily overlooked cost of lost revenue and profit as you develop and implement them. It will also include any and all direct cost of developing and implementing the missing systems. Again, don’t pay for these if they are not there.

Remember, they are not visible in the price. However, their presence may well be implied in the assumptions underlying the asking price. So armed with what you have learned so far, you need to understand how the person selling the business arrived at the asking price. What does this price assume in the external environment, and in the internal environment of the business? And now the big question. Are these assumptions reasonable? And do they reasonably match up with the asking price?

Ideal Home Business – 7 Characteristics of an Ideal Home Business

What are some characteristics to look for and investigate when it comes to starting and running a business from home so that we can have an ideal home business? There are several benefits to starting a home business that make it appealing to a large variety of people. Being able to stay home with family, setting own hours and the flexibility make it a very attractive way to have another source of income. But what qualities do we need to consider when thinking about starting a business that can make it an ‘ideal home business?’ Here are 7 topics to consider evaluating when it comes to running a business from home.

  1. Home Based Business vs. Home Business – It is important to understand the difference between a home based business and home business. Think about how much of your efforts, meetings, and sales can be done from home. If all of your communicating and can be done by phone or internet etc., then you have a home business as it can be completely operational from home. If you have to leave home for meetings, in order to generate sales and so on then you have a home based business because your business is not fully functional from home. It is only based at home. In an ideal home business you want to be able to be completely functional from home. Of course this can be preference you may enjoy more outings and the socializing, but there is something nice about truly being your own boss.
  2. Portability – If being able to run a business fully from home is appealing then what about being able to take it with you anywhere? If your business can be online operational, then you can take your business with you where ever you go. It is important to research the ability to market the products online if you want your business to be portable.
  3. Products – Think about the products you are looking into selling. What types of people will be excited about and want your products? In an ideal home business your products will have great appeal to anyone and be available globally.
  4. Start Up Costs – How much will setting up your prospective business cost you? Of course a low start up cost is appealing. It is also important to look at your start up costs in comparison to the potential money to be made. How many sales will it take for me to recover my input costs 2, 10, 100? Is investing in inventory a must in order to run my business? If so how much? In an ideal home business products sold online without having to carry an inventory is ideal, then you know exactly how much your business is going to cost you.
  5. Financial Potential – Is this a company that in order to do well financially I have to be involved in for a long time or is there potential to make money right from the start? In an ideal home business there is ability for the beginner to do just as well as the person involved for a long period of time.
  6. Uncomplicated – An Ideal home business is a business that is easy to learn for anyone, regardless education.
  7. Support and Training – Will you get the support and training from others in the company you need? How will your business succeed without the proper assistance and direction? It is critical to the success of any business to have training that is staying current and up to date with applicable topics. In an ideal home business this training will be able to be done from home. You may wonder how can that be. A recent and popular way to have company meetings and training is through online webinars. In doing so several people from different countries if necessary, can be attending the same meeting using the internet and have questions answered immediately.

Depending on what type of business you are starting from home, some of these characteristics may apply more than others. Of course there are other characteristics that may make a home business more desirable to you specifically, but these are great guidelines and topics to investigate when looking into starting a business from home so that you can have your ‘ideal home business.’ Is there a ideal home business out there with all these qualities? One that fully operational from home yet portable, have the ability to reach a global market, low cost to start up, easy to learn, support, ongoing training and quick financial benefits? The answer is yes!

Small Business Mistakes

In a time when everyone is losing their job and the world seems a little discouraged, many people consider starting their own business. They feel that “being my own boss” is the answer to the “lay-off” blues and that becoming a business-owner is going to solve their income problems. And while owning a business can be the best thing that ever happened to you, it can also produce as much or even more stress than the old boss ever could.

As a business coach, I love to work with brand new business owners. They are excited and full of promise, willing to work hard to get their business rolling. Doing the right things at this critical stage in the business is very important to avoid the pitfalls that often befall small business. Success in small business depends on a lot of factors and with the rate of failure in the first year very high, it is important to consider a few things before getting started.

1. Make sure you have a plan. One of the biggest mistakes a business can make is not planning carefully. Business owners get caught up in the excitement of the business and don’t take the time to plan out how to build it. Because they fail to plan, they often do not realize exactly how much work it will take to get their business up and going. It doesn’t matter if the business is a brick and mortar, online store, direct sales or multi-level-marketing business, all take a certain amount of effort before profits are realized. Creating a business plan will bring that information into focus.

2. Define early what will be your definition of success and how long you need to make success a reality. This is a critical point because for some people success means lots of money and fast, because they are out of job and need an income. Others will feel successful even if it takes a long time to make money because this is a retirement dream. Define why you want the business and then you will know what will make it a success for you.

3. Understand that starting a business takes money. Many people take on a new business idea thinking that they can do it with no money or on a budget. No matter what your business is, you need a certain amount of working capital to get it up and producing profits. Even small home-based businesses require an investment in products and materials to get going.

4. Just because you build it does not mean they will come. The saying for a brick and mortar business to get noticed and bring is customers is location, location, location. While that is true, it is also important to consider what your business will sell and what is the market for the product or service. Be ready to invest in claiming your piece of the internet to help you get noticed. That means you will have to invest some money or time and energy into search engine optimization. The world wide web is pretty crowded. Just because you have a site does not mean they can find it.

5. Price your product or service correctly. Many people make the mistake of not pricing their product or service correctly. Understanding your market and what they will pay for your product or service is key to success. Enlist the help of a professional in necessary because it is critical that you are priced right.

6. Marketing matters. I am convinced that there are many businesses out there that could experience giant success if someone just knew they were there. Many people make the mistake of believing that if they offer good service and a fair price people will hear about them, in this market that is just not so. Make sure you include enough money in your budget for good marketing and visibility advertising, especially as a start up. Hire someone to help with this!

7. Hire some good advice. It doesn’t matter how much experience you have in business, you need someone to tell you when you are headed in the wrong direction. No one is immune from being so excited about their idea that they miss pitfalls along the way. Hire a coach or business manager to listen to your ideas and repeat them back to you. Often those ideas don’t sound quite so brilliant coming from someone else.

8. Make some friends. Joining the local Chamber of Commerce or a networking group is not only good for business, it is also good for the morale. Many people do not count the cost of relationships when they leave a job to start a business. Making friends with other people building a business can lessen the burden.

Owning and operating a business is exciting and rewarding. Getting off to the right start is imperative to making sure you don’t fail in the first year. Don’t be afraid to get professional advice along the way. Getting it right is a combination of skill and determination and you will make sacrifices along the way, but it isn’t beyond the realm of possibility to believe that you can be successful. Preparation is key and being realistic about the fact that owning a business will not solve all your problems will keep you grounded and focused.