Good article on why you need to do more than cost cutting

As the saying goes......a small business can't save it's way into prosperity.

Here's an article on how to focus on the things that will help your small business succeed in good times and bad.

CLICK HERE

Is 2010 the year you make your small business work for you?

If you own a small business, or considering starting or buying a small business, this article could give you a path to make your life as a small business owner more enjoyable.

Let this be the year you finally change your relationship with your business.

It will be difficult, you have habits and assumptions that won't be easy to set aside. If you adopt a few principles the day-to-day, hour by hour decisions will be easier, more predictable and less stressful . Many small business owners are so bogged down in the details of their business they have never really given much thought to the principles that guide their business. Even though they haven't thought much about their business principles rest assured the business is being run by certain principles. For instance, is your pricing based on cost plus? Or based on competitive position? Is your business principle is to always recommend what is best for the customer or is your policy to recommend the the customer what is most profitable for you?

Here are a few principles I suggest you consider in 2010:

• Start every business day by spending 30 minutes planning your day. Do this first every day.
• Commit to recommending what's best for your clients and customers, not what's best for you.
• Treat your employees respectfully. Good employees won't work long term for you if you are disrespectful. Employees who will work for a disrespectful manager long term are not employees you want.
• You have to be fair and honest with your employees but you don't have to be friends with them.
• Treat your suppliers and vendors respectfully and fairly. You can be tough without being a jerk.

There it is 5 principles that might help you run your business without interference from "situational ethics". If you apply the above principles in every situation you reduce the number of decisions you need to make, your employees will be easier to manage, your suppliers and vendors will more cooperative and your customers will trust you more which will lead to more long term customers.

The Myth of..... "If I had more capital I could grow faster and be really, really profitable."

Here's a request we often hear from small business owners:

"Can you find me an investor? If we had more capital we could grow like crazy and make a ton of money!"

My next question to the business owner is "What would you do with $100,000 if someone wrote you that check today?"

Wow, you should hear the answers I get to that question. Here are a few examples:

"I'd pay off my debts so I could get a new loan." Huhhhh???

"I'd lower my prices so I could sell more stuff." Huhhh?

"I'd pay off some of my personal debts so my wife would stop yelling at me." That one I understand!

Even for the biz owners with answers that sound reasonable the exchange often goes something like this:

Me, "What would you do with $100,000 if someone wrote you that check today?"
Biz Owner: "I would expand my business."
Me, "How would you expand it and when would your expansion turn into additional profits?"
Biz owner, Blank stare.

The bottom line is, in all my encounters (and there are very, very many) with small business owners who say they want or need additional capital less, than 5% have a plan that makes any sense whatsoever. And then they wonder why a bank won't give them small business loans.

The vast majority of small business owners are really very bad at planning. The reasons for it are many but I think the primary reason is they have little or no idea what pieces of their businesses create the results.... good or bad.

Most small business owners are hard working, they show up for work every day and hope that working hard will result in success. Unfortunately there is very little correlation between hard work and financial success. What you need is hard and smart, not just hard work. If you own a small business spend more time on detailing out a logical and well thought out business plan. A business with a good business plan is much more profitable and infinitely less stressful than a business that wings it day-to-day. Start now, create a 1 year plan for 2010. Simple 1 year plan, week by week. Do it NOW, your deadline is to have it done by January 2, 2010. Give it a shot, what if I'm right?

Once you have a plan have someone who is successful in small business look at your plan. Don't worry about being wrong. Worry about getting better, your health and your bank account will thank you.

Have questions about what should be in your plan? Shoot me questions related to your business in the comment section and I'll try to answer them.

To paraphrase a famous business saying "A weak plan with mediocre execution will always beat no plan over the long term. A good plan well executed will always beat a great plan poorly executed."

Small Business owners need to build and preserve wealth

Here's a good book to help you understand what it takes and an option for protecting the value of your business once you've created value from your business. It's worth the time if you're serious about your business. Click here

Steps to Starting a Small Business in a Difficult Economy...Part 2

In Part 1 Steps to Starting a Small Business in a Difficult Economy I gave you 6 things to nail down before starting or buying a small business. Assuming you've done your homework on those 6 items (or more likely you've probably decided to ignore at least 4 of the 6) it's time to move to the next phase... THE BUSINESS PLAN!

My job here is to give you the real world, not the theoretical text book version.

Here are some things to consider when putting together a business plan:

1. The more you lie to yourself the more likely you are to fail.
2. The business plan is for making good decisions not making good presentations.
3. Don't act on your business plan until it has been reviewed by and you've received comments from a successful small business owner. Ignore their recommendations at your own peril.
4. Know the numbers inside and out. If you can't recall from memory your sales, costs, working capital requirements, inventory, cash, etc, then you've haven't worked on your plan long enough.
5. Your business plan is not a tool to figure out how successful you can be, it's tool to make sure you don't fail.

Too many small business owners think the business plan is a necessary evil for banks and lenders. If you're smart you'll make your small business plan your best friend, a friend that can keep you from making dumb or careless mistakes.

How to save money the expensive way...

I see small business owners who will spend $5,000 making sure their pick-up truck has the best sound system and wheels. Expenses that are, in all probability, money down the drain.

Then I see the same business owner sign an important contract without having their attorney even look at it. Now I'm not an attorney and I don't like spending money on an attorney any more than the next person but here's what I do know, for certain:

1. I like to sleep well
2. I buy insurance for a car wreck, hail storm, hurricane, boat sinking, etc

Why should you have your attorney review all your material contracts?

1. You'll sleep better. At least if you have any sense you will. If you sleep fine now and don't have a good attorney reviewing your contracts then you don't know what you don't know.

2. Having an attorney review your contracts (oh yea, did I mention the attorney should review them BEFORE you sign it... attorneys right now are nodding their heads. They see more contracts from clients with the request .."get me out of this contract", than they see contracts where client a says "should I enter into this contract"?) is like buying insurance. I buy insurance because I want to spend some money now to protect me if there is something that really, really goes wrong.

I had a client once who was having some significant business problems. Problems like ...she was losing her shirt. It was a mall based business. When I started asking her about the situation I got to the lease. Here's how the conversation went:

Me, "what's your lease like?"
Her, "I can't remember, the leasing agent said they didn't make changes to their leases so I needed to take it or leave it. I took it."
Me: Do you have the lease?
Her: Yep here it is.
Me: Whoa this is pretty tough.
Her: I don't know why you say that, it's only $6,500 per month
Me: "Well, it's $6,500 per month now and it goes up every 2 years and it's for 10 years and you have personally guaranteed the lease. By my quick back of the envelop calculation the value of this lease is about $1,000,000"
Her: What????????????
Me : You didn't know this?
Her: No, they said that what they gave me was the standard lease and they didn't make changes, so I signed it.
Me: They didn't make changes or they didn't like to make changes?
Her: Uhhhh........
Me: I have another client in this mall and their lease is much more favorable.
Her: Oh no.


When she signed the lease she saw $6,500/month, and said toe herself "sure I can swing that." When I saw the lease I saw $1,000,000 contingent liability and she's on the hook for $1,000,000 personally if things in the biz go badly.

How do you know which contracts you should have your attorney look at? Figure out what the costs or damages are if something (or everything) goes wrong. For some people the threshold is a few hundred dollars, for others a few thousand. However, if your practice has been not to have your attorney review all contracts then I suggest you start now with basically every contract. Especially those that are recurring contracts like contracts with customers or vendors.

Stop looking at attorney review of contracts as an expense and start looking at it as insurance.

Should I find a job or I buy a job? Eight important questions.

Many people get fed up with working for someone else and consider starting a small business or buying a small business. If you are considering being your own boss please give consideration to the following questions. Can you ask yourself these questions and answer them honestly? I'm serious, can you answer them honestly?
1. Are you really as smart as you think you are?
2. Are you willing to work harder for yourself than you do for someone else?
3. Can you live with a high risk/high reward life?
4. Can you make good decisions with limited information?
5. When you're wrong can you admit it, correct it and move on?
6. Can you resist the urge to spend like a fool in good times so you'll have reserves for the bad times?
7. If the toilet needs to be cleaned will you do it?
8. Which would you rather have, a big image or a big bank account?

If you answered yes to at least 7 you have a chance to succeed. Now go back and take the test again. Remember be honest with yourself, it could make you wealthy or it could make you broke.

Steps to Starting a Small Business in a Difficult Economy

It seems obvious but unfortunately it's rarely considered by people starting a small business. Here's my pearl of obvious wisdom: "The key to having a successful small business is surviving long enough to be successful."

The key word...survival. Below are the Big 6 list of items that you have to consider and plan for. The lists assumes you are actually in the serious planning stages and you've done some basic research. Here's my list:

1) Know for certain how much liquid cash you have to dedicate to starting your small business. Not how much you think you can borrow from a bank nor how much you think your aunt Mary, who thinks you're perfect, will give you. Your money! If it's $0 it's $0 but know this number for certain.

2) Decide if your business will be something you want to "have fun" with or if your small business is a tool for you to achieve your goal of financial security and control.

3) Find at least 2 small business owners who run successful businesses and ask them the mistakes they wish they hadn't made. This step is more helpful if you interview relative strangers.

4)Know for certain how much money you or your family needs to live on each week, month, year. Your plan needs to assume your business will not generate a profit (free cash flow you can use) for at least 9 months.

5) If you've never worked in a small business go get a part time job in one or even work for free if you can't find a paying part time job. Do this for at least 3 months.

6) Don't read any books about starting or running a small business that aren't recommended to you by a successful small business owner. Here's my recommendation Click here

You didn't really think there were ONLY 6 things did you???

I'll post soon on how you can figure out what kind business might work for you.

Hidden Costs of Doing Things You Shouldn't Be Doing

Outsourcing is a much discussed topic but I rarely see it focused on the primary strategic issues facing a small business owner. What I too often see is "Outsource and save money". This is rarely true. However, what I think the outsourcing industry should market is...."Outsourcing = spend more money and make even more money."

When I talk to business owners I ask them "what does your business do best?" I get all kinds of answers, some make absolutely no sense. I once had a guy who owns a auto repair shop say "I have a great website". My reaction... what??? I may look at things differently but I'd prefer that my auto repair shop was best at...well, I know you see this coming, I'd like my auto repair shop to be best at auto repair.

But in other instances I get business owners with the right answer but....

For example, I asked a staffing business owner what her company does best and she says "we're really good at matching the right person to the right job." That makes sense. So then I ask... "In what area does your business need the most improvement?" Her answer, "sales". Makes sense, so then I ask, "What area of your business do you spend most of your time in?" Her answer "bookkeeping and accounting". What???? I see this all the time, all the time. The business owner knows what they are good at and what they need to improve but they spend a very scarce resource, their time, doing things that don't contribute to the improvement of the business in any strategic sense.

Business owners who spend time on "non core" activities think they are saving money but they aren't. What they're doing is making themselves feel good by being busy.

The reason to outsource is not solely to save money because often times it's hard to see a dollar for dollar return on peoples time when outsourcing. But what outsourcing does is a) provide more professional, complete and reliable task accomplishment and b) frees up the scare resource of owner time so that the small business owner can concentrate on perfecting what the business does best and improving on the core areas that need improvement.

Want to have a better business that is more focused, more profitable and easier to operate? Try smart outsourcing.

Soon I'll add a post on how to begin the analysis of what you should outsource and what you should control directly.

Should you have your small business books audited?

For the vast majority of businesses with revenues under $2,000,000 the answer is no. Unless, you have external requirements from bonding company, shareholders, finance companies, etc.

However, even if you don't have those direct external requirements for Audited financials you should have your books at least "Reviewed" by an independent CPA. A Review is not just "hey, take a look". A Review is a formal process that is less expensive than an audit but with many of the same benefits. What are the direct benefits to the business owner?

1. A look at your business through the eyes of business experts not involved in your small business day to day. These fresh eyes can show you how to improve profits, better manage cash, reduce risk, etc.

2. A reviewed statement will reduce the impact of "on the fly" accounting treatments that are often made by internal bookkeeping staffs. The review will add discipline which will make the financials more useful. For instance, do you now account for your cost of goods sold the same way every year, every month so that you can compare the information and make decisions accordingly?

3. It is much, much less expensive to get reviewed statements if you've committed to the review BEFORE the year begins. Going backwards is more work, much more work.

4. You may not think you need Reviewed books now but what if 18 months from now you are approached by a buyer who is willing to make you a great deal to buy your business but they only buy businesses with at least reviewed financials for 3 years. You could miss the opportunity of a lifetime. You need to commit to accurate reviewed books before you have any idea you will need them.

5. I assure you that a bank will be more likely to approve a loan to a business with reviewed books than a business without reviewed books. And what if having reviewed books means you don't have to sign a personal guarantee for the loan? Big advantage there!!

If you want a small business that is easier to run, more profitable to own and more valuable to sell then start NOW to get your books reviewed by a qualified CPA.

Run your business like you'll own it forever..and remember it's always for sale..

Sounds like a contradiction right? Well it isn't.

You never know when the opportunity to sell will present itself. The best course of action is to run your small business like a a buyer will determine how much they are willing to pay you for your business tomorrow. Run it well, do the right things and have all your books and records in excellent condition.

But...... then why run it like you'll own it forever?

Because you can't out guess what a particular buyer will value. The best you can do is, as always, do what's best for your business.

Your decisions and actions as a business owner will determine what your business is worth, tomorrow or 5 years from now.

List of Common Problems We See in Small Businesses

Below is a list compiled from talking to and evaluating hundreds of small businesses. Small business opportunities to improve are often very easy and inexpensive, it just takes a little attention to detail and a commitment to improvement. Here is my list:

1. Detailed written procedures for critical or repetitive tasks. Most small business owners struggle with "finding good employees" the problem is usually not that the employees are not "good" it's that new employees learn differently and written instructions can get new employees productive faster and less likely to get frustrated and give up.

2. No system to follow up on sales opportunities. It's incredible how often we see this. Customer calls, asks a few questions then says "I'll call back", business doesn't even ask for a phone number much less check back with the customer.

3. Poor accounting makes the financial statements essentially useless for operating the business. The lack of accurate financials makes budgeting very difficult and consequently we often ask the question "How's the business doing?" The answer, "Seems pretty good, I guess my accountant will tell me in March." Not good.

4. The small business owner really has no idea how his pricing is compared to competitors. They don't do any "research". Their only feedback is when their customers tell them "Your price is too high!" Duh, most customers will tell them that even if it's the lowest price they received!

5. Failure to seek expert advice until they have a problem. You know the saying, an ounce of prevention....... Often small business owners do not want to pay an attorney, CPA, financial planner because they think the issue won't be a problem....but when it is a problem... it costs them 10 times as much as it would have if they had done a little up front work.

How to Make an Offer to Purchase a Small Business

Buying a small business is a unique process in many ways. Here is a list of "elements" of a contingent offer that might make sense when considering a purchase.

Contingencies are very important when making an offer. A buyer is not likely to get full access to all of the business books and records without first agreeing to a purchase price and terms CONTINGENT on full due diligence. Contingencies to consider when making an offer:

1. Small Business Financing - If you will need financing include a contingency for obtaining small business loans on terms and conditions acceptable to you.
   
2. Include a contingency for buyer and seller to agree on a specific training and transition plan.
3. Contingency for any agreements to be assumed by buyer to be on terms acceptable to buyer (example, facility leases, copier contract, machinery leases, etc)
4. Contingency for background check on the business and the seller's themselves. It's important for buyer to know who they are buying the business from.
5. Contingency for full review of all business records including tax returns, sales tax reports, bank statements, etc.
   

As always, reassure the seller that you understand the confidential nature of this information. Those 5 contingencies above are a start to buy a business, some specialized businesses require more specialized contingencies. For instance there could be a case where a particular supplier is extremely important to the business, a contingency might be for the vendor to approve buyer and agree to continue to supply the buyer after closing.

These kinds of 3rd party approvals can be very tricky, get good advice before heading down this path. Think through your small business ideas and build your contingencies to make sure that you've covered all the bases.

Due Diligence when Buying a Small Business - Part 4

In a previous post, Due Diligence Part 3, we talked about how to deal with tax returns, in Due Diligence Part 2 we talked about Sales Tax issues. Here in Part 4 we'll talk about a background check you might considered getting when you are in the due diligence process of buying your small business. Do diligence is not just about investigating the small business accounting, it's about the entire business..

A business background check might turn up nothing, which is probably good. Or a business background check could turn up everything from tax liens, lawsuits with suppliers or customers or even criminal activity. Basic background checks can be very inexpensive and are available online. One possible source is Background Now.

Due Diligence is supposed to give you comfort, if you check everything and there are no deal killers you can complete the purchase of your small business and sleep a lot better.

SBA Loans have new underwriting policy

A few days ago the SBA came out with a new lending policy to be used when buying a business. Business brokers are very excited about this change since it will facilitate more financing for small business purchases. About 15 months ago the SBA made a draconian change in their underwriting that eliminated business acquisition financing for goodwill in excess of $250,000. This 2008 policy change effectively dried up SBA lending for buying a business sales. Small business financing is a unique problem since the loans are usually not large enough for lenders to make much profit.

SBA loans are a very important part of the small business financing options. The newly released SBA business loan policy allows up to $500,000 in goodwill financing or if the buyer puts up at least 25% in equity the goodwill limit is uncapped.

This policy change is important because the goodwill value in the transaction is an indication of a highly profitable business.

SBA loans are back and business buyers and sellers will be more able transfer business ownership to retain jobs and help their communities grow.

Teaching a course at Lone Star College

I have agreed to teach a course on "how to find the right business" at Lone Star College. Course will be at 4 different campuses. For info go to http://bit.ly/4gQtlx.

How to deal with a Business Broker if you are trying to buy a small business

Business Brokers are not all alike nor are their processes. Here are 5 Dos and 5 Don'ts when working with a Business Broker:

Dos

1. Make sure the business broker tells you, in writing, who they represent. Usually it is the seller.
   
2. Make sure you know what your financial situation is before you meet with the broker. How much of your own money do you have to invest? Not how much you think you can get, not what your golf buddy says he'll back you for... YOUR money!
3. Make sure you know the minimum amount of income you need to support yourself when you buy a business. Not the most you'd like to make and not what you think you deserve...the amount you need.
4. Be open minded about the kinds of businesses that might fit your financial situation
   
5. Do your homework but do it quickly. Clear your calendar so you can take care of what needs taking care of in a timely fashion
   

Don'ts

1. Don't expect the business broker to re-arrange his whole world to accommodate your schedule.
2. Don't assume you know more than the broker ( you might, but don't assume it)
   
3. Don't bad mouth a seller. If you're not interested just leave it at that and move on.
4. Don't try to convince the broker you have resources and skills that you don't have.
5. Don't be maybe, maybe, maybe.... a fast no is better than a slow maybe. Move through the process efficiently.

Keep these tips in mind and you'll have a better chance of seeing the good businesses.

When buying a small business - Allocation of Purchase price is important!

Allocation of Purchase Price is done for tax purposes when buying the assets of a small business. The allocation is important because it effects how the person buying a business and the person selling a business will be taxed and what deductions are possible.

Always do the allocation of purchase price before closing the transaction, it's real money! Business brokers should be able to provide you details and the appropriate IRS form 8594.

Here are the issues:

1. Buyer wants shortest depreciation schedule for acquired assets.
2. Seller wants tax treatment at capital gains rates, not ordinary income
3. Buyer wants to write up value in hard assets so buyer can deduct more in depreciation
4. Seller does NOT want to write up assets because it triggers depreciation recapture and tax at ordinary income rates
5. Goodwill and intangible assets are 15 year write off for buyer and cap gains rate for seller.

A good allocation of purchase price can reduce the total amount paid for a business after tax, and after tax is all we really care about, right? Same issue for seller, a good allocation of purchase price can maximize the after tax benefit to seller.

For buyer the difference is WHEN they can deduct the price, for the seller it's the difference between cap gains rates and ordinary income! Big difference!!

Talk to your business broker about how to address this issue in any offers.

Due Diligence for Buying a Business - Part 3

Assuming you've read Part 1 and Part 2 here we go with Part 3.

Sales Tax and Due Diligence in a small business purchase: Make sure the seller provides you with the Sales Tax Reports for at least 3 years. Double check those with the reports filed with the state. It is pretty unusual for small business owners to over-report sales and pay taxes they don't owe ,so this is a good source for determining the minimum sales level. If the sales tax reports and payments are not up to date seek legal advice on what effect that could have on you if you purchase the assets. In some states the sales tax "chase" the assets and you could be in for a surprise when the tax man shows up for old taxes on the assets you just bought.

If you are working through a business broker they probably already have the sales tax reports an can provide them to you in due diligence. But as always, trust but verify. Cross reference with the official state reports.

Financing the Small Business in Today’s Environment

Guest post from Mr. Tim Stamps DRDA, PC

Most of us have encountered a budding entrepreneur who has spent the majority of his/her career in the corporate world and then finally musters the courage to step out on a limb and start their own small business. They face a few problems, though: despite his long-standing corporate career and a nice 401(k) for retirement, they have very few liquid assets and are in need of some capital for their business start-up.

For many small business owners the prime source of funding comes from personal savings, or by refinancing their personal residence with a home equity line of credit. Even so, entrepreneurs still often use outside sources such as friends and family, capital markets, or private equity groups. Funding from third parties can prove undesirable, though, because outside sources usually expect a lion’s share in the business in return for equity financing.

BORSA: A compelling, yet widely unheard of source of equity is the Business Owners Retirement Savings Account. BORSA, for short, is a tool which allows entrepreneurs to fund the purchase or recapitalization of a franchise, business start-up, or business property using their holdings in a 401(a) pension profit sharing 401(k), 403(b), 457, or IRA rollover. By utilizing the BORSA these purchases can be accomplished without distributions, taxes, penalties, or the use of retirement plan loans.

DRDA, P.C., a CPA firm, designed the BORSA (c) in 2005 as a result of extensive research for a tax and penalty-free solution for clients with the need to access their retirement accounts to start a business. They analyzed the provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), as well as professional publications and court cases that they felt were pertinent. Additionally, DRDA sought the expertise of a nationally recognized ERISA attorney to solidify the legality of such a solution. Today, the BORSA is recognized and is available in all 50 states.

There are three basic requirements for setting up a BORSA for a business venture. First, the business owner must have an existing retirement account such as an IRA or one of the other aforementioned accounts and have the ability to transfer or rollover the funds in the BORSA. Second, the business must be an eligible “active trade or business” that will have at least one employee. Third, the individuals need to work with professionals familiar with BORSA rules and governing laws.

To clarify, a BORSA is not a loan, nor a self-directed IRA. A direct investment into an “active trade or business” by a self-directed IRA is prohibited. The federal government does recognize the use of money from a 401(k) plan as an equity investment. In fact, the Small Business Administration SOP 50-10(5) that was released August 1, 2008 stipulates the SBA will not require a 401(k) plan owning more than 20% or more of a company to guarantee the loan. What’s more, unlike other sources of funding such as credit cards, SBA or asset-backed loans the BORSA plan does not generate additional debt for the business owner.

For additional information on the BORSA plan visit www.borsaplan.com or contact Tim Stamps at DRDA, P.C: 1521 Green Oak Place, Ste 198, Kingwood, TX 77339; telephone: 281-852-3131; email tim@drdacpa.com.

Buying A Business: The Business Plan as a Guidebook

I am always amazed at what little effort goes into a business plan when business buyers are looking at a business. The buyer will spend more time trying to figure out how to make the office bigger than they will trying to build a business plan the will improve the business.

When considering the purchase of a small business here are the 6 elements I think should be in a well written plan:

1. Cash flow forecast: It's not enough to be able to make a profit, the business plan template should include a cash flow element, first 90 days week-by-week, after that monthly for 1 year.
   
2. A detailed step by step, minute by minute plan for exactly what you need to get done in the first 60 days.
3. A marketing section that deals with two elements a) what are you going to do to keep the business that is already there b) what are you going to do to get new business
4. A detailed plan for personnel, what you will discuss with each employee and a well thought out plan for anticipating the employees questions (insurance, benefits, pay, etc)
5. A detailed description of where you see the business in 3 years, bigger? Smaller? New products? New geography?
6. A detailed plan for keeping current vendors happy and a separate plan for identifying and nurturing back-up or new suppliers.

There you have it. A basic no frills look at what issues are important in the new business. The are many resources on the Internet for ideas on how to write a business plan. Many of those can be modified to serve your purposes. This business plan should mean something not be just a fluff piece to to use to apply for small business loans. This document should guide you and give confidence to your employees, customers and suppliers.

Take the time to make it make sense and avoid the common trap of convincing yourself you're a genius and then create some pie-in-the-sky plan that is useless as soon as you hit the print button.

Confidentiality in the Business Sales Process.. why it's important to buyers, sellers and business brokers...

One of the most misunderstood aspects of selling or buying a business is the confidentiality issue.
Why do owners who are selling a business want to maintain confidentiality? Why is everyone so paranoid?

Here's a short list:

• If employees find out the business is for sale they often assume the worst even though it's not true 99% of the time. For some reason most employees assume that if the business is being sold they will lose their jobs. That uncertainty between the time the employees hear the business might be selling and when it does sell leads employees to try to protect themselves by looking for another job. The irony is that business buyers are worried that the employees will quit, while employees worry a new owner will fire them. If the first any employee hears about the business being sold happens after the sale the new owner can say to them "I bought the business and I want you to stay with the business, you have a job ." Confidentiality helps the buyer and seller.
  
• If competitors hear about a business being sold they will talk to customers and spread rumors and try to scare customers into leaving the company. Comments to customers like "XYZ Co is for sale, they aren't able to fill your orders" can sometimes, even though not true, disrupt the business prospects. The buyer wants those customers after the business purchase so protecting confidentiality helps the buyer and seller.
• Vendors - Supplier's get antsy if one of their customers is being sold because they have a fear of not getting paid or losing the volume. So vendors sometimes will put a business on c.o.d. terms if it fears a sale will jeopardize the credit it has extended the business. Again, if buyer can tell vendor after the sale. "I've bought the business and I look forward to continuing to use you as our primary supplier" the vendor at least knows they still have a customer. Confidentiality is good for business buyer and business seller.

The above are just 3 examples of why maintaining confidentiality when buying or selling a business is important. Your business broker will have confidentiality agreements that outline in detail the specific terms that bind the parties to confidentiality. Read it, understand it and respect it because if you buy the business you'll be glad to did.

If you find this article helpful you may want to look at Part 1.

Due Diligence for Buying a Business - Part 2

When working through a business broker to buy a business the due diligence process should be more efficient than when working on an acquisition without a business broker involved.
In Part 1 we talked about doing due diligence for the Sales Tax issues. Now in Part 2 we'll talk about the business income tax return issues.

When conducting due diligence to buy a business we talked about "trust but verify". Income tax returns are no different. In most cases the seller will provide the business buyer with tax returns for the business. The assumption is that the tax returns accurately reflect the results of the business operations, right? Well, sometimes they do and sometimes they don't. However, your first step at this point is to ask the seller to sign an IRS Form 4506. This will allow you to get a copy of the tax return the seller actually filed with the IRS. The vast majority of the time the returns you received from the seller and the returns the IRS has are the same, sometimes they aren't. If they aren't the same there needs to be a really, really good reason.

If the seller was just trying to deceive you...run for the hills and find another business to buy from a seller that's less deceptive. And don't forget to tell the business broker, he will no doubt be just as surprised as you are.

A Business Buyer's Guide to Working with a Business Broker

When looking to buy a business often the business seller has retained a business broker to represent the seller, locate a buyer, assist with negotiations, guide the due diligence efforts and coordinate the closing process.

If you are seriously trying to find a business to buy you will come in contact with a business broker at some point. Here are some tips that might help you:

• Make sure you know who the broker represents and get it in writing. In small business sales it is most common for the broker to represent the seller (but the broker still usually has a duty to treat you fairly and honestly). Know the standard the broker is working under.
• Even though the business broker may represent the seller don't automatically assume he/she is your enemy
• If you don't feel like the broker is treating you fairly and honestly...go somewhere else.
  
• Make sure you understand the source of any information provided to you by the business broker. Did the seller generate the info? Accountant? Broker? Always ask.
• When you receive information live by the old saying "Trust but verify." If there is a reluctance to allow you to verify certain information... that should be a warning sign.
• Move deliberately through the process but at a decent pace... time kills deals. A fast no is better than a slow maybe.
• Be responsive to all parties, return calls promptly, check your emails, etc. If you are not interested that's fine, tell the broker and move on, but don't just go "radio silent" without advising the parties that you have lost interest.
• Finally, treat all information received as confidential, do not try to get cute with this. I've seen many buyers get themselves into a pinch because they failed to comply with confidentiality agreements. Immediately return to the business broker any information requested that is bound by the confidentiality agreement you sign.

Buying a business is a grind but the rewards are great for those who can get through the process with thoroughness while maintaining the goodwill of all the parties.

Due Diligence when selling a business Part 1

First in a multi-part series on due diligence.

When selling your business .... know your buyer.

Even in the rare instance of an all cash deal it is a good idea to do a background check on a potential buyer. They'll be getting your employees, customers and the good name you've built in your industry. Background checks are very inexpensive relative to the transaction price. Simply asking a buyer for information to perform a background check will tell you something... if the buyer opposes a background check you know something!

When you sell a business and close the transaction the deal is not over. There is a transition period when you'll be working with the new owner and you'll have to explain to customers, vendors, etc why you chose to sell to this person.

Choose your buyer as carefully as the buyer chooses your business!

Due Diligence for buying a business Part 1

The due diligence issue when buying a business is a long topic with many items. I will break them down into a series of steps that when completed will make a reasonable starting point for due diligence when buying a business. Since all businesses are different this list may not be appropriate for every situation but it is (or should I say will be) a good check list.

A critical element is examining the sellers business tax returns.......BUT after you examine the tax returns and before completing the business purchase make sure you ask the seller to sign an IRS form 4506. This form will allow you to pull a transcript of the tax returns from the IRS that will confirm that the tax returns filed by the seller are actually the same as the tax returns you received! If they are different you need to get a good explanation as to why (and I'd like to hear the reason as well!)

As always, trust but verify!

Tax Law Changes effecting Biz Sales

The new benefits offered by congress allow small businesses to reduce their tax bill which makes the business sale more appealing for the sellers.

S Corporation Built-In Gains Tax Relief. For tax years beginning in 2009 and 2010, ARRA shortens, from ten to seven years, the amount of time that an S corporation that has converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion.

Deal Closing!

This past Friday we completed a sale transaction. Buyer was an east coast Private Equity group funding a strategic acquirer. Lot of moving parts including a last minute hiccup with landlord but everyone pulled together. Seller is staying on for a smooth transition and buyer brings lots of support and buying power to the business - everybody wins.

We were retained by the Seller to locate a suitable buyer for the business and we're very pleased to have accomplished the mission in a difficult financing environment.

Is buying a business right for you?

We often get to speak to people who are undecided about looking for a new job or, usually as a plan B, buying a business to replace the income they've lost when they left their previous employer. It is rare when these people have thought through the process of buying a business with clear lens. Here are 5 Dos and 5 Don'ts when considering purchasing a business:

DOs

1. Understand your current financial situation and resources thoroughly.
2. Be prepared to move through the process at a good pace but without skipping steps. For instance, don't plan a 2 week vacation in the middle of the process.
3. Understand that being in business has risks, few of which are as risky as having a job, but risks none the less. You will not buy a quality business without some risk.
4. Be prepared to spend money for good advice from people who are experts (not your buddy at the country club who once bought a margarita machine to rent).
5. Look at businesses that need skills you have, not just businesses that "seem like they'd be fun to own". Your skills will determine the biz future, match your skills with the right business.
   

DON'Ts

1. Don't assume everyone is out to cheat you. You can find reputable people to deal with.
2. Don't let your emotions run wild. This is a arduous process that rewards discipline and a stick to it attitude.
3. Don't fail to listen, you night actually learn something.
4. Don't be afraid to admit what you don't know.
5. Don't assume the seller is your adversary. Experience has proven that the buyers who get the best price and terms on a deal are the buyers who treated sellers with respect and courtesy. You can say no in a good way or a bad way, choose the good way.
   

Email as Productivity Tool

We have been using gmail enterprise email system for about 6 months and I have to tell you it is a great system. Like most of what Google is known for, biz gmail is intuitive yet robust enough to handle a relatively heavy email user (I get about 150 emails a day). If you are looking for any easy to launch, low cost and full featured email system I think you'll find gmail for biz a good choice. Here's a place to start google biz email.

We have about 17 users on the system and although the email works great the google docs system has a way to go. We still have trouble with document conversions and I can't recommend google docs for any serious document management uses.

If you decide to try it let me know what you think.

Tax law changes and business sale net values

Tax changes are on the way! What does it mean for a business owner who may wish to sell his business in the next 3 - 5 years? Here's a link to an article you might find interesting, click here.

Now What?

The news about the national economy is enough to make us think the world is coming to an end..... it's not.

What should you do as a small business owner to protect yourself?

Don't be offended but... you should do what you should have been doing all along.

Focus on customer service and quality. Often these 2 things are FREE to you and increase profits. Want a simple example?

McDonald's, the food isn't very good but you know exactly what you're going to get. People go there for consistency - lots of food, at a low price at a quality that is predictable.

Consistent mediocrity beats erratic sometimes great, sometimes terrible.

Forget the news, get your business on track.

Customer service and consistent quality.