Buying a Small Business? Some Tips & Tricks

So you want to buy a small business.  You may have worked already in your target industry, even for the employer that you are thinking of buying from.  What should you look for?

1)  Cash flow of the business is the key, critical indicator of success

Make it your mission to know how every dollar comes into the business (revenue), and every type of expense that will require signing cheques or moving cash out of the business (expenses).    Most business purchases fail because a new owner did not identify all of the needed cash outlays, or they did not forecast accurately how high costs and expenses would be.

Know what kinds of capital equipment you will be required to purchase, maintain or replace in the next 10 years of your target business (vehicles, computers and software, buildings, warehouses, physical equipment, tools, etc.).
You will need enough positive cash inflows (revenues less expenses) to replace your equipment, vehicles etc when they wear out or become obsolete.  Many businesses fail within the first five years because they did not generate enough cash to reinvest in future assets.

2)  Request copies of documents from the business.

Documents that are provided by independent third parties are the safest way to verify the facts of the business so you can determine a proper value for the purchase price.  Most critical to obtain:

a)  Financial Statements:  Ask for the past 3 years of financial statements.  Most businesses should provide at least an annual income statement (report of annual revenues and expenses) and a balance sheet (report of existing assets and liabilities at a given date, usually December 31 of each year).   Get a year-to-date statement if you are buying in the middle of a year.

Find out if the annual statements are prepared internally or by an outside accountant.  Also ask if they have been “audited” or “reviewed” and get the audit or review opinion letter issued by the accountant each year.  Note:  audits and reviews are a process where accountants scrutinize the business’s financial statements to assess if they are reasonably complete or accurate — an audit has much more scrutiny and independent verification of statements’ content, but neither audits nor reviews are a definitive guarantee that the business is clean of fraud or error).

If your target business does not have financial statements, you are stepping into a whole new area of risk and taking a chance on the viability of that business.   The purchase price would be much lower based on inadequate information to support a value of the business.

b)  Bank Statements:  These will show all deposits into the business (revenues) and cheques written (expenses) out of the business.

Check the source of deposits into the business:  if owners have to regularly deposit personal funds into the bank accounts (to keep the business afloat and able to pay its bills), beware!  You may also have to continually prop up the cash accounts with personal funds, unless you have an amazing plan to run the business differently than the current owners.

Review carefully the kinds of cheques written on the business account – consider which of these expenses would be at risk of increasing if you take over the business.

c)  Income Tax Returns  and Tax Assessments:  Most businesses will be reasonably careful in preparing good financial statements for governmental income tax returns.  The penalties for lying or misleading statements to avoid taxes can be large.

Consider that some businesses will try to inflate their revenues to a potential buyer on internal financial statements, but will try to inflate their expenses (for tax deductions) to tax authorities.  Tax returns always have financial statements attached to each submission — check them and compare with the financial statements the business owner has provided to you.  If they are not the same, beware!

If there are no tax returns filed, you may have an even bigger problem – you could be buying into a large liability.  Think instead about buying only the business “assets” (customer list and equipment), and starting up your own business from scratch.  Always remember if you buy another company or business, you assume all the debts and liabilities, which can be significant risk.

d)  Customer Lists and Aged Accounts Receivable Report:  Customer lists should give you an idea of the sources of revenue in your target business.  Ask to see any formal contracts between the business and the Customer – is the customer obligated to continue using your target business for purchasing goods and services or not?  Side note:  make sure you have a non-compete agreement in your deal so the exiting owner will not set up a competitive business after he sells to you.

Review the accounts receivable and find out how long customers take to pay their invoices.  If the accounts receivable have invoice dates from many months ago, they may be a “bad debt” or give you an indication of high risk and poor cash inflows.  A revenue is really not a good revenue until the invoice is paid — high bad debts can cripple a business’s cash flow and ability to survive, especially during market downturns.

e)  Supplier Lists and related purchase agreements:  Ask for a list of current suppliers and contact names.  You may want to call a few of the larger suppliers to make sure the business doesn’t owe a lot of money for goods ordered.  Companies on the verge of receivership and bankruptcy often push for large orders from suppliers on extended credit, then are unable to pay.  These are the “invisible liabilities” that may not be disclosed on the financial statements.  Pay particular attention to volatile swings, or increases, in inventories as this can be a signal of heavy supplier commitments.

3)  Use professional accountants and lawyers to draft a solid Purchase and Sale agreement.  This costs a  bit of money, but accountants and lawyers are trained to find issues and protect you from fatal flaws in a purchase arrangement.  Ask around for recommendations from friends or others in the same industry business.   A few hundred dollars can save tens of thousands, and be the difference between success and failure going forward.

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5 Ways to Re-energize and Refocus When You Feel Adrift

So the Fall routine has set in, leaves are turning yellow and drifting off the trees in my backyard, and I feel like I haven’t quite settled into an optimum routine….  somehow, I should have accomplished more, I should feel more “energy” in my day-to-day doings.  How do I get myself re-energized and refocused?

1)  Identify the gap(s) that cause the “adrift” feeling, where you are not focused or moving toward a goal.  

– which areas trigger the most angst and worry?  family, work, personal health, education/learning, spiritual, recreation, financial, future/retirement

– list three things that you can control for each gap areas.  For example, for your financial situation:

“I can meet with my banker or trusted financial person to review my debts and decide the best repayment strategy”

“I can stop using my credit cards.”   or “I can reduce my vacation to a “staycation” this year.

“I can save $___ per pay cheque towards a family emergency fund/holiday/Johnny’s braces

2)  Prioritize the actions you can take into daily, weekly, monthly

3)  Create positive reminders of the daily actions – use a “to do” list from a journal or off the internet.  Place a sticky note or small reminder card noting the top one or two actions in your bathroom mirror or on your refrigerator

4)  Create “automatic tasks” or “accountability meetings” to monitor your weekly or monthly action items.  For example, set up pre-authorized payments if you have trouble remembering to pay your bills.  Make a commitment to have a special coffee/tea/hot chocolate date every Thursday with a family member as a ritual for touching base regularly. Find a workout buddy that will hold you accountable to show up for walks or the gym.

5)  Set reminders in your calendar (electronic calendars work great!) to review the weekly and monthly actions

6)  Give yourself a small reward if you manage to meet your goals for a few days/weeks (this doesn’t mean go on  a shopping binge if you are trying to swear off credit cards!).  Find a friend or family member that you can keep updated on your progress.

Enjoy your successes, and remind yourself that each small success contributes toward accumulated larger success in the long run.

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32 Dumbest statements by a Manager

This is a guest post by Geoffrey James | September 9, 2011

Here’s a list of real-life remarks that real-life bosses said in real-life business situations.  If I recall correctly, most of these came from the personal experience of my good friend Larry Jacobs, although some may have come from other lists on the web. In any case, the list contains some true classics:

1. “Am I the only one around here with half a brain?!”
2. “I know my plan won’t work, but don’t disagree with me in front of others.”
3. “I only say those things to look tough. I’m reshaping my image for advancement.”
4. “I tried to e-mail you to tell you that my e-mail wasn’t working, but my e-mail wasn’t working.”
5. “If you are on schedule, then your plan was not aggressive enough. If you are behind schedule, you must be goofing off.”
6. You don’t want a union! I know I don’t pay you much per hour, but I give you lots of hours. If you want more money, just work more hours! A union will take that flexibility from you.”
7. “I’m sorry if I ever gave you the impression your input would have any effect on my final decision.”
8. “We’ve experienced dramatic increases in our long distance bills. In the future, please exercise restraint concerning long distance phone calls, faxes and emails.”
9. “I’ve noticed that our ‘cost of goods sold’ rise whenever we experience greater sales. What can we do to reverse this trend?”
10. “What this department lacks is leadership.”
11. “Don’t worry, give it a try. You have nothing to fear but failure, demotion and termination.”
12. “I’m getting a new company car new week. Please call the dealer and ask him to delay the delivery until after Wednesday’s layoffs. I want to appear sensitive.”
13. “Your report shows that 65% of our customers live outside the Unites States. Well, where are the rest of our customers? Pay attention to these details in the future.”
14. “This marketing campaign will have a worldwide focus.”
15. “Bonuses in my department are rewarded to team players who have demonstrated an appreciation for my leadership.”
16. “I don’t want to force this decision on you. It would be much easier if you just agree.”
17. “I’ve already made up my mind, but I am eager to hear everything you have to say on the matter.”
18. “Next time, if you leave me an important voice mail message, do the right thing, call me and let me know it’s there.”
19. “Fairness is applied evenly, according to my rules.”
20. “I know there is a communication problem in my department. I just don’t want to talk about it.”
21. “We have too many unproductive meetings. Please put aside next Wednesday to attend an all-employee staff meeting to discuss this issue.”
22. “I know what the research reports says, but I have to go with my gut on this one.”
23. “I don’t like to micro-manage, but I need to know everything that’s going on.”
24. “Okay you bunch of cry babies, what’s this I hear about bad employer-employee relations?”
25. “I know that I am great leader. This department, however, needs help learning to follow.”
26. “Just because you’re right more often than me, doesn’t mean you’ll be a better manager.”
27. “We do things democratically in my department…and I’m the ruler.”
28. “Whenever you have an idea, discuss it with me first, and if I feel it is a good idea, I’ll tell the others. You must learn to let me get credit for your good ideas. That’s what team work is all about.”
29. “If it wasn’t for you, I’d be the shining star in this department.”
30. “I think you prefer your idea JUST because it’s better than mine.”
31. “It has come to may attention that your salary is well below the industry average. Therefore I am changing your title.”
32. “I threw your suggestion away. Only managers can make suggestions.”

Are You a Leader in a Fog?

This is a guest post by Doug Dickerson on Management Moment Leadership Services

Many of life’s failures are people who did not realize how close they were to success before they gave up. – Thomas A. Edison

I was fascinated by a story I read not long ago about Florence Chadwick. In 1952 she attempted to swim the chilly ocean waters between Catalina Island and the California shore. She swam through foggy weather and choppy seas for fifteen hours.

As her muscles began to cramp, her resolve was weakened. She begged to be taken from the water, but her mother, riding in a boat alongside, urged her not to give up. She kept trying but she grew exhausted and stopped swimming. Aids lifted her out of the water and into the boat. They paddled a few more minutes, the mist broke, and she discovered that the shore was less than a half mile away. “All I could see was the fog,” she explained at a news conference. “I think if I could have seen the shore, I would have made it.”

It might be easy for some to criticize Chadwick for giving up when she was so close to the shore. But it does not change the fact that she was in those chilly waters making the effort. What happened to Chadwick is not uncommon to many leaders. If not careful, you can get so caught up in the daily grind of your organization that by the time you realize what is going on you are walking in a fog.

The Queen of Hearts in Alice in Wonderland said, “It takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” But equally as important is who you run with. Are you in a fog? There is a way out, but you will need some help. Here are three things you will need to reach your goals.

 A leader in a fog needs wise counsel.

One of the most valuable assets a leader has in any organization is the counsel of his or her frontline people. When a leader values the counsel and perspective of those who serve on the frontlines it will be a game-changer in terms of the quality of service you can provide.

Unfortunately for Florence Chadwick, when she swam the cold choppy waters she did not have someone to tell her that her goal was within reach. In like fashion, all a discouraged leader may need is the voice of someone to say, “don’t give up, you are almost there!” If you are in a fog, listen to the counsel of those around you; your goal is closer than you may think.

A leader in a fog needs perseverance.

Although she did not reach her goal, Florence Chadwick swam for 15 hours. Can you imagine? All successful leaders have one shared trait in common: resilience. They persevere longer than those who fall short. Julie Andrews said, “Perseverance is failing 19 times and succeeding the 20th.”

The temptation in a fog is to stop striving, avoid uncertainties; to play it safe. The leader who perseveres is not distracted by the fog but remembers the vision and stays the course. If you find yourself in a fog then rest assured that you are not alone. Continue to do what brought you where you are, keep swimming, and don’t give up!

A leader in a fog needs a helping hand.

When Florence Chadwick was physically unable to continue in her quest, aides were by her side to lift her up. She had a lifeline. Conversely, when a leader is surrounded by a committed team of people who share a common purpose and goal, it makes a seemingly impossible task possible.

Charlie Chaplin said, “We all want to help one another. Human beings are like that. We want to live by each other’s happiness, not by each other’s misery.” What a great thought. When we commit to sharing in the happiness of each other, and have a stake in that happiness, we all win.

Being in a fog is not at all uncommon. These seasons come to all leaders. How long you stay there might be a variable, but how you go through it is a test of your character. As you keep wise counsel close, persevere through the fog, and share a helping hand, you will come through a stronger leader. Don’t give up!

© 2011 Doug Dickerson