Category Archives: Entrepreneurship

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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8 Secrets of Success – guest post by Jim Estill

The 8 Secrets of Success

One thing about blogging is people often send me blog ideas. I really enjoyed this short 3 minute video by Richard St. John – the secrets of success in 8 words.

1 – Passion. Every successful person I know is passionate about what they do.

2 – Hard work. Clearly one of my highest values.

3 – Be good at something. Focus. (I tend to have problem with this one. I am a generalist)

4 – Push yourself. No kidding.

5 – Serve others. Clearly offering high value to others is the only way to success.

6 – Ideas. Be curious. I have tons of ideas. Flies a bit in the face of secret #3.

7 – Persist. Every successful person I know is peristent.

8 – you don’t think I am going to ruin the movie by giving you all of them do you? Watch the video.

Speaking of success… My successful uncle, author, professor, Bruce Kellner has published his latest book. Not my usual business genre I am sure (it’s a love story). I hope now that he is famous he still talks to me although thats likely what he says about me.

posted by Jim Estill @ 2:01 PM
http://www.jimestill.com

Leading Quietly – guest post by Jim Estill

One of the books I read on the weekend was – Leading Quietly – An unorthodox Guide to Doing the Right Thing by Joseph Badaracco.

The book is more about the subtitle “An unorthodox Guide to Doing the Right Thing” than the title – “Leading Quietly”. It did make a valid point that often the best leaders are not the loud stars that the press talks about all the time. Often the best leaders are the quiet plodders that create value over a long period of time.

Much of the book talked about making decisions in uncertain circumstances. Much of leadership involves decision making. And most decisions are not clear. The mark of a good leader is one who is willing to make the decisions quickly. Good leaders know when enough information is enough (some people will not make decisions because they want more information even though the probability of that information changing the decision is negligible). As Badaracco says “the courage to prudently tackle tough situations”.

Good leaders do not balk at making decisions even though there is risk involved. Usually there is greater risk in not making the decision.
Much of good decision making is about identifying the problem and simplifying it. Einstein said “Everything should be as simple as possible and no simpler”.

One statement that rang true to me “leadership is hard work”. I guess I never really thought about it but at the time I was reading it, I was struggling with many issues and juggling many balls so it hit home. It also talked about tenacity. This is a trait that I try hard to have. When I do not get the answer I want, I try to figure other approaches to make the sale (and most things are sales even if they involve selling internally or selling someone in a negotiation).
Good book.
Posted by Jim Estill http://www.jimestill.com/

5 Key Ingredients for Success — in Sports and Business

The following tips come from a sports coach at Shelby High School in Montana, Ray Wanty.  Ray distilled his learning and coaching of successful athletes into 5 key elements.  I think these 5 key elements apply equally to business, and even to overall personal success.  Consider them and see if you agree:

The Level of  Our Success is Dependent on…

1. The Daily Habits We Create
     – am I creating good habits? 
     – am I getting rid of bad habits?
     – do I add new habits regularly that keep me growing and developing?
     … my daily habits become the core expression of who I am

2. Our Most Dominant Thoughts
     – my thoughts drive my feelings, which drive my behavior
     – positive thoughts will keep me upbeat
     – I need to control and focus the “channels” in my brain
     … my thoughts eventually become my beliefs and my behavior and my destiny

3. How Well We Serve Others
     – my interaction with others builds my own network and support system
     – my service to others builds my esteem and credibility
     … my behavior in my community establishes my reputation and esteem

4. The Amount of Sincere Gratitude You Show
     – my sincerity and gratitude provide opportunity for leadership
     – my sincerity and gratitude allow me to fully enjoy my successes
     … my sincerity and gratitude will build and strengthen my relationships

5. The Level of Commitment Towards Your Passion (Singleness of Purpose)
     – Commitment to my passion helps me remain focused on the end goal
     – Commitment to my passion heps me fend of distractions
     – Commitment to my passion increases my speed of success
     … Commitment and Singleness of Purpose is the ingredient that links my thoughts, behaviors, support systems and relationships together to attain success

Can’t is a four letter word! 4 Tips to break through barriers

High performance racecar drivers and pilots overcome obstacle courses with an interesting technique. They visualize the “path around” any obstacle or barrier in their way.

One professional pilot described the risks very succinctly:  “If you look at the barrier, you will most likely hit it.  If you look at the path around the barrier, you will be successful and maintain your momentum.”
How often do we focus on the negative barriers or obstacles in our own work or personal situations?
– I have watched teams implode because polarized groups took sides; each focused on negative aspects of the other position.
– I have watched marriages falter because one or both parties focused on the negatives and irritations of the other partner.
– I have watched business ventures fail because partners lost trust in each other and each “dug in” to a position that they could not work through to a resolution.
The secret?  Creative thinking, using “outside the box” analysis with the goal of creating a unified “new approach” to an agreed upon end solution.

Ha!  Easy to say, but how does one actually accomplish this?
1) Agree on a common vision or end result; get everyone on the same page.   Restating your end result as a “vision statement” can be helpful:
 

2) Use  creative thinking techniques to brainstorm alternative solutions (remember: ignore the barriers and negatives, focus only on new, innovative alternatives)

 

3) Filter your list of brainstormed alternatives into an agreed ranking of highest to lowest priority. If necessary, you may have to agree first on the criteria to be applied to  calculate the ranking.  For example, must be a) within current budget, b) feasible with  existing staff resources, c) leaves no department at a significant market disadvantage, etc.

4) Remember the “people” side of these issues — rebuild trust between polarized groups. A great book that I have used is The Speed of Trust by Steven M. R. Covey.




If you can break out of the downward spiral of negative emotion, you have a good chance of eliminating that 4-letter word, “can’t” from the vocabulary of your business.

It’s all about focus  — concentrate on the end vision to drive your success!