Since the start of the financial crisis last year, banks have stopped extending credit for virtually any loans including SBA type loans.  It is very difficult for business buyers to get approved for financing, even buyers who have excellent credit, money down and collateral, which are the three major requirements.  Of course this environment won’t last, but in the mean time there is a solution for both buyers and sellers and that is Seller Financing.

 

Seller financing is when the seller of the business acts as the bank and extends a note to the buyer of the business.  There are several advantages and disadvantages for both buyer and seller, however if done properly, it’s a great solution to the financial crisis of today.

Here is how it works.  The buyer of the business puts down a down payment, ideally 30-50% of the agreed sales price and the balance is financed by the seller, typically for 2-3 years at agreed interest rate.  In order to reduce the monthly payment, the loan could be amortized over a longer period of time.  At the end of the term, a balloon payment is due to the seller, at which point the buyer either pays off the loan, or refinances with a bank.  It should be easier to refinance at that time.  First of all the credit crunch should be over, second the buyer has owned the business for 2-3 years, which gives him a solid experience in the business, and third they are refinancing a smaller amount.  The note can be secured by the business, the business assets, personal property or anything else the buyer is willing to pledge and the seller is willing to accept. 

 

The advantages to the seller are; the business can sell quickly, they can earn interest income, get a bigger sales price for the business, postpone capital gains tax or sell the note to equity companies.  The disadvantages are: they don’t get all the money upfront, they run a risk of the buyer defaulting on the note, and they continue to be involved in the business indirectly.

 

The advantages to the buyer are; ability to buy a business, having owners participation and input, more leverage.  The disadvantages are: having to pay higher interest rate for the term of the loan, higher down payment than most SBA loans require.

 

I have many creative ways of financing a business and in today’s economic and financial environment, my creativity is being pushed to the limit, but the most important thing to remember, is that there is always a way to finance a deal as long as both parties are willing to keep an open mind, compromise, and achieve the common goal.

 

It’s a mixed feeling - both scary and exciting to own a business, especially when you are a first time business owner.  The fear of failing can be overwhelming and in most cases prevents an individual from buying a business. However two things can help you overcome the fear and they are knowledge and self confidence.  Sounds simple?  It is simple. By the time you finish reading this article, you will know how to obtain the right information, ask the right questions, and how to think like an entrepreneur.  All these actions will give you the self confidence you need to become a business owner.

 

I remember after I graduated college, I landed my first job in an accounting firm.  After 3 months of employment, the firm lost one of their biggest accounts and since I was the last person to be hired, I was the first person to be let go.  Shortly after joining the firm I got married and my wife was still in college, and needless to say it was a very scary time for us, since I was the primary source of income.  That was 18 years ago yet I still remember like it was yesterday.  I lost my job by no fault of my own and realized at that time that when you work for someone else, you are never in control and at that time made a decision to one day own a business.  Seven years later, I started my own company and have never looked back.  I have been working for myself for 10 years and have owned several successful companies, both start ups and existing businesses.  By now you are wondering, why am I telling you this?  Because I want people to know that everything I say and write about, I take from my own life and my personal experience.

 

I am sure most of you heard an expression “Knowledge is Power” and it definitely applies to business ownership.  The more you know about the business, the more comfortable you will get and that comfort will translate into self confidence.  You must learn to ask the right questions and don’t be afraid to ask for help.  There is really no such thing as a stupid question when it comes to researching an opportunity, so if there is something you want to know, ask.  Hire professionals to help you, such as accountants, attorneys, businesses advisors and brokers.  If you are looking at a Franchise, speak to the Franchisees, or seek advise from people you may know who are in a similar business.

 

Entrepreneurs are independent thinkers, but always keep an open mind and always give others an opportunity to express their opinion whether you agree with them or not. Be aware of “paralysis by analysis”.  Don’t over analyze everything because eventually you will get stuck.  Try to simplify things and set smaller goals for yourself which are more attainable.  Look at the information for what it is, not what you might think it is, and remember the way you make money in every business is simply Gross Sales minus Operating Expenses, thus you want to know what it takes to create the Gross Sales and minimize your Operating Expenses.  You see, when you break things down in simple terms, they are easier to understand and embrace.  

 

It’s not easy to be a business owner and of course there are risks involved, however the rewards will out-weigh the risks and you will get the financial independence you seek.  If we learned anything in these economic times, it is that no job is safe and there are risks associated with having a job no matter how good you are. Wouldn’t you rather be in control of your own destiny as oppose to your boss?  My hope is to inspire you enough to seriously consider becoming a business owner.  Believe in yourself and you will succeed.

The fundamental principle of investing is to buy low and sell high.  Every investor seeks to achieve this principle, regardless of what they invest in.  Whether you trade stocks, bonds, gold or real estate, everyone seeks to find the diamond in the ruff or “The Bargain”.  If you’ve ever read my blogs, or spoken to me on the phone, you know that I look at business ownership as an investment, and just like all the other investments, there are “Bargains” here as well and you could make a fortune buying under performing businesses as long as you know what to look for.

 

My definition of a business that is under performing is a business that is not reaching its full potential.  It has been a long practice of Asset Management companies to seek out businesses in a specific industry that are under performing, fix them, hold them for several years and then sell them for a profit.  Now Asset Management companies typically have access to millions of dollars and seek large companies, however you don’t need to have millions, to duplicate the same process.  You can seek smaller companies which are readily available and require a lot less money to buy, thus for $200K you could own 3-4 small businesses and keep growing from there.  The key to finding an under performing business is to know what to look for, ask the right questions, do some investigative work and come up with a business plan and strategy on how to fix the problems that maybe facing that particular business.  Here are some of the things to look for:

 

1. Owners Participation:  As I have stated in the past, owner’s participation is key to any business success and most absentee owners leave too much responsibility to key employees who have nothing at stake to make a business more successful.  These businesses typically have higher than usual costs, lack in customer service, and have ineffective or non existent marketing campaign.  These are all easily fixed with an active owner and if you must have a manager running your business, give your manager an incentive to be more diligent.  Profit sharing, bonus program or compensation based on performance are all excellent ways of motivating your staff.  There are plenty of businesses where the owner is actively participating in the daily operations of the business, but lack the “business experience” of running the business.  Most successful businesses have an owner who is the CEO and the CFO of their company and are actually working ON the business, not IN the business.  Here are some examples of this:  A plumber who does his own work, and thus does not have time to actively network the business, restaurant owner who works in the kitchen, instead of managing the restaurant.  When the owner is too busy working IN the business, that business will typically have the same problems as if it was being run absentee.
2. Distressed Owner:  A Distressed owner is someone who is selling because they are retiring, getting a divorce, relocating or illness.  Most of the time their companies and businesses are doing very well, but they are selling below market value for a fast sale.  Keep in mind that you still must do a thorough due diligence, to verify the reason for the sale.

 

As you do your due diligence, the important things to look for, besides all the things I have mentioned above, are sales trends over a period of 3 years if possible.  If there is a trend down ward year after year, ask why, it a good sign of mismanagement, but could be a sign of something worse, like a product getting obsolete, contracts being lost, etc.  Stay away from businesses that sell trendy products, since trends get hot and cold.  Interview the owner and find out why sales have been going down.  Talk to employees if possible, landlords, suppliers, etc.  The important thing for you to identify is what can be done to improve the company and the business and then ask yourself if it is something you can accomplish.  If the answer is yes, then you got yourself a “Bargain”, if the answer is no, move on.  Here is one more thing to consider.  Some of the best bargains are in Franchise Resale’s and they might be the easiest to do your due diligence.  Once of the best tools available to anyone looking to buy a Franchise is the ability to speak to existing Franchisees, Area Developers, and Regional Managers.  These people could be a great source of information for you and may give you an outline of what needs to be done in order to make a business work.  This is only available in the Franchise Industry, so if you are a new business buyer, or even a seasoned one, look at Franchises first.

 

I recently had a conversation with a Franchisee who owns several Hair Cutting Franchise locations.  One of the things he emphasized on is that royalties are the best money he spent in his business.  He specifically said that every time he needs help or a question answered, all he has to do is pick up the phone, and call the Franchise and he receives an instant answer. He attributes that to his success.

 

I therefore decided to further address the issue of royalties, specifically, so that people who are looking to start a new business or buying an existing business understand the royalties’ structure and the value you get for your money.

 

Every Franchise has some type of Royalty structure, the most common being a percentage of Gross Sales which a business makes.  There are Franchises that charge a flat fee for royalties and some require their Franchisees to buy product from them at a mark up.  Regardless of what type of Royalty structure a Franchise has, Royalties is how the Franchisor makes their money, thus, the more money their Franchisees make the more money the Franchisor makes. 

 

Let's review this again, the more money Franchisee makes, the more money Franchisor makes.  It is in the best interest of every Franchise to make sure that their Franchisees are successful, not just because of the money, but also because that success will translate to growth, financial well being and stability of the Franchisor. 

 

As the Franchise grows, so does it's name and brand and that is always beneficial to it's Franchisees.  Royalties, are not just free money which  Franchise collects.  Franchisors are experts in their fields and in return for these Royalties, they provide services to their Franchisees such as initial and on going training and support, marketing ideas, help with hiring and training of employees, as well as negotiate prices with landlords, suppliers and contractors.  Their goal is to help you succeed; one of the biggest reasons why the Franchise Industry has enjoyed a 95% success rate.  You are in business for yourself but not by yourself.  

 

Royalties are an investment in your business and Franchisees do get a return on that investment, so don't let royalties scare you away from Franchises, just think about the value and benefits they provide and I think you will find that over time Royalties are the best money you can spend in your business.

As we begin the New Year, more people are looking to get into a business for themselves.  I think it’s very important to understand the major differences between buying an existing business or starting from scratch.  There are pro's and con's on both sides, and I want to emphasize on major differences to buyers and break down the process in hopes that buyers and sellers can make educated decisions. 

 

Most people who decide to buy a business, look for an existing businesses first.  The idea of an instant cash flow, existing customer base, brand, and lack of knowledge on how to start from scratch, are the biggest reasons why established businesses are so attractive to buyers, especially first time buyers. 

The most common first question the buyer asks me is "How much money can I make in this business?"  This is the wrong question to ask and in order to understand why, let's closely examine the above mentioned reasons for people wanting to buy established businesses.

1. Existing Customer Base - this is very attractive to any new buyer since an existing customer base makes it easy to get into the business.  However, there is a big catch here and that is; how many of these existing customers will continue to be customers when they find out that the business is sold?  There is always a percent of customers who will leave once they find out that there is a new owner.  Some will leave because they don't like the new owner, some will leave because of their relationship with the old owner, some might have already left and the seller is not disclosing the information and etc.  Unfortunately it is very difficult to predict what percentage of customers will leave, and this factor will reduce the CASH FLOW of the business once a new owner takes over.
2. Brand - I am not talking about the name on the door, but the reputation of the business.  If the business has a bad reputation, it is very difficult to build it back up.  Unfortunately, it is also very difficult from the buyer’s stand point to determine what the reputation is.  Perhaps something happened recently that made the reputation a bad one, and it may not be reflected in the recent numbers.  Reputation does not just mean negative things about the business, it could also mean product.  Let's say that the company you are looking to buy has a reputation of being the most expensive for the product you sell, or it could have a reputation of having sub par product.  Again, the reputation and Brand of the company and business will impact the CASH FLOW.
3. Cash Flow - Notice I left this one for last.  The reason is all of the above factors directly impact the bottom line and even thought the business is making money for the seller, it does not mean the same cash flow will transfer to the new owner.  Just because a business is showing $100K cash flow annually, it does not mean the new buyer will make that money and the decrease could be substantial.

So what should the buyer ask as the first question? "What do I NEED to do to make the money I want and need in this business?"  Here is the reason why this is an appropriate question.  In order for the new buyer to make the same money as the seller, the buyer has to virtually duplicate what the owner is currently doing in the business.  That means if the owner is up at 5am and in the office by 6am, buyer must do the same.  If the owner is attending every business networking meeting, buyer must do the same.  If the owner is out all day selling, cold calling, etc, the BUYER must do the same thing.  If the buyer does not want to continue this pattern, the chances are sales are going to suffer and cash flow will be reduced.  Very often I hear sellers say that they are selling the business, because they didn't know there was so much selling involved, or they didn't know about the hours and etc. Every buyer needs to take a close look at  what the owner does on daily basis and ask themselves, "Can I do this? , Do I want to do this?", because if the answer to any of these is NO, then this business is not for you and you will not have the same cash flow.  Here is one last factor and that is employees:  It is very common for key employees to leave a company when ownership changes hands and that could be a big blow to the bottom line at least until that employee is replaced.  Most existing businesses are priced based on their cash flow or goodwill.  Imagine paying a price for a business based on say $100K and because of the factors above the business does $70K, you just lost equity.

Let's analyze start ups. 

1. Customer Base - Customer Base will take time to build, however once they become customers, they become YOUR customers and YOUR relationships.  Depending on the business and the owner, a customer base could be build quickly. 
2. Brand/Reputation-is build from scratch, so again it becomes YOUR brand and YOUR reputation.  We as people are very curious and like new things, so NO reputation is better than BAD reputation.
3. Cash Flow - Cash Flow in the start up is of course going to be minimal in the beginning, and that is why a person opening a business from scratch has to make sure they are well funded.  That means having at least 3 months of operating expenses for the business and 6 months of personal living expenses.  Depending on the business and the owner, a start up could be in the black after a month from opening their door, but as long as you are well funded, you can concentrate on running your business and not worry about paying bills.  Also keep in mind that you are building your equity from scratch.  
4. Unknown of starting a business - Look into buying a Franchise and they will guide you, teach you, train you and help you with all of the start up process.

So look at existing and established businesses, but ask the right questions and don't be afraid of looking at Start Ups, most of the time the real bargains are there.

The January issue of Entrepreneur Magazine is out on the news stands and for those who have never read the magazine, January issue is dedicated to the Franchise industry.  In this issue, there is an article (see link on my web site under News and Articles) that talks about the Magazine's predictions for Franchise Industries that hold the most promise for growth and stability in 2009.  Interestingly enough, I wrote a blog about the very same topic in October of 08 (See blog titled: "Businesses that are still making money in this economy").  Almost every industry that is mention in my blog is mentioned in the Magazine's article.  Now I am not saying that I am the smartest man alive, but it is comforting to know that the experts agree with my views and that I am on the right track.  There have also been plenty of talk about how Franchise owners are copping much better in this economy than their non Franchise counterparts.  All of this continues to re-enforce my views that people should start looking at owning a business as an alternative to other investments and look to Franchises as a way to get into a business.  It will take time for the stock market to recover, however if you are in the right business within a great industry, you will be able to recoup your stock looses quicker than if you left the money in there right now.  With a business you get income and build equity as that income goes up and with the right exit strategy, you can sell the business when you want and take the equity out when you need it, not when the stock market dictates.  As you make money in your business, you can continue to invest those profits back in to your business and grow.  Growth could be achived in a form of adding additional locations, buying more territories, and growing your existing customer base.  You could be a passive owner or an active owner, absentee or semi-absentee, or you could spend all your time in the business, the bottom line is that you have total control of your business, your money and your success.  You could pass the business on to your kids, who could continue to reap the benefits of your hard work and you could be at peace knowing that you have set them up on the right path.  There are also a great deal of tax benefits to owning a business.  When you are ready to retire, you could  find a partner who can actively run the business while paying you your share of the profits, higher a manager to actively run he business, stay on as a consultant or sell all together.  There are other choices for you, however your choices are limited when all you have to rely on is your IRA's and 401K.  I am not suggesting that people should not invest in the stock market, I am merely offering another alternative and providing information on the benefits.

I could go on and on about the benefits of owning a business, but the bottom line is this; Invest in a right business, with in a right industry and sky is the limit.

Bad Economy may Benefit Franchises  / Source: Entrepreneur.com - November 24, 2008

Franchising Hot Spots:Which franchise categories hold the most promise for 2009? We break it down and give you the first look. /Source: Entrepreneur.com - December  28, 2008

The most popular Franchises out there are Food Service businesses.  From fast food, casual dining to upscale restaurants, most people looking for a business will almost always look at Food.  Now food is a tough business (take it from someone who has been in the business).  Long hours, high employee turnover, recession, competition are some of the factors that make the Food business tough, and are some of the factors why Food industry has a high rate of failure.  Having said all that, I want to introduce you to a company that does not deal with most of these problems, and is in an Industry that is virtually recession proof and provides a service that every family in the United States and really the world needs and uses.  The name of the Franchise is Crystal Rose and they are a wedding and special event center that offers exciting celebration at a great value.  As you are reading this blog, think about how many weddings you go to through a course of a year, or what you had to go through planing your wedding or a wedding of your loved one's.  Here are just a few stats about the Wedding Industry:

• 2.4 Million weddings take place in the U.S. each year
• The average American Couple spends over $25,000 on their nuptials
• There are over 44,000 weddings per week in U.S. alone
• Weddings are part of every culture
• Weddings are not a fad and an Industry that consistently grows.

Crystal Rose Franchise is not just about weddings.  They also host Bar/Bat Mitzvas, Sweet Sixteens, Corporate parties, Fund Raisers, Proms, Casino Parties....the list is endless. 
Here are the best part of this business:

• No need to work 7 days a week for 12 + hours a day
• Easy to manage food and labor costs, since you know in advance what parties are booked and when
• Opportunity to own Real Estate
• Opportunity to own a Liquor License
  
• Multiple Income Streams
• Fun and Exciting Business to Operate
• Provide a great service to your community
• NO Experience Necessary

Crystal Rose has been operating in Golden Colorado since 1987 and currently have 4 Corporate locations.  Their Franchisees benefit from 20+ years of experience and if you ever have a chance to speak to Jay Byerly (Founder), you will hear the passion and knowledge in his voice. 

Here is the bottom line:  Regardless of the economic times, Weddings still go on, so when considering a business, take a close look at this Crystal Rose.