What’s on your radar?
August 17, 2007
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Over at The Remote Control CEO I have written about a new tool I am developing called CEO Radar: Read more
A Balanced Approach to Online Advertising
August 9, 2007
With compound annual growth rates (CAGR) ranging between 18%-70% is it any wonder that the diversion of dollars from print and broadcast media to the online market is getting so much attention? Read more
Companion Spreadsheet to Tips and Traps for Writing an Effective Business Plan
April 11, 2007
If you have purchased my business planning book, Tips and Traps For Writing an Effective Business Plan, you know that I offer a companion spreadsheet to help you prepare a proforma financial plan for your business.
The financial section of your business plan is likely the most challenging part of the process of writing a business plan for most entrepreneurs.
In my book I have simplified the way you build the financial projections. It mimics exactly the way a business actually functions. For example, the first thing that happens in any business
Book Excerpt: Sales Forecasts Using the Customer-omatic Method
Think of your business as a machine that manufactures customers. It looks a lot like a large funnel or a hopper where you load your marketing, sales, and customer service strategies into the top and what comes out the bottom is a customer and the resulting profit.
The Customer-omatic Machine
Avoid estimating revenues by assigning arbitrary gross dollars per month. In my experience this method is prone to exaggeration and inaccuracies. When a banker or investor asks you how you came up with your revenue projections, the last thing you want to say is that you just picked a number and plugged it in. In doing so, you will only expose your lack of experience and näiveté because there is no way to justify or explain your logic or approach about how you came up with your sales forecast. Plus it is too easy to overstate your revenues.
Using the Customer-omatic method to generate your sales forecast is the only method that actually mirrors how your business actually works.
To generate your sales forecast using the Customer-omatic method is a simple three-step process.
Step 1: Start by listing the number of leads from existing and past customers and add your leads from new customers (leads you will generate from marketing and sales activities). This gives you the total leads and contacts to whom you can sell your products or services.
Step 2: Next, multiply your number of total number of leads and contacts by the conversion percentage (percentage of those who actually buy), which will provide the total number of customers.
Step 3: The last step is to come up with your revenue number. Multiply the total number of customers by the average dollar amount per sale to get your revenue.
Help with Financial Projections
The financial section of my book is the single largest chapter, 45 pages and contains detailed, step-by step instructions on how to develop a financial plan for your business. With my sample spreadsheet and my book you will have everything you need to master the financial section of your business plan.
If you bought my book and get stuck, just email me and I will help you out.
Live Large!
P.S. Spreadsheet, here is where you can download the excel file. Email me if you have trouble accessing the file.
Should I Buy a Distressed Business That Is Losing Money?
May 2, 2006
I got an inquiry over the weekend from a entrepreneur who located a business that the existing owner listed for sale. The question I was asked was how much is the business worth? How do I come up with a price?
A Deal with Some Hair On It
The important part of the inquiry is that the business technically showed a profit except for the fact that the owners did not take salaries, pay rent (they own the building), or invest in marketing/promotion. So when factoring in the costs associated with those expenses the business is losing money.
I have seen businesses whose owners do not take an income from the business or do not show that they are taking income – sometimes it is just the owner treating the business as an investment. Other times it is a tactic they use to hide income and paying taxes. If it is the later, avoid that business like the plague.
There are two common methods to buy a business:
- Purchase the shares of the corporation from the previous owners and takeover control of the corporation along with all the assets and liabilities.
- Buy the assets of the business including the land, building, and equipment. Buying the assets of a business is popular because you have none of the encumbrances that you assume when you do a share purchase.
Buying a distressed business can represent a real opportunity provided you know the industry and have experience with the business. Without direct experience buying a distressed business can be a nightmare except when you wake up the nightmare does not go away.
Cost of a Start Up vs. Buying the Shares of a Business
The first comparison that needs to take place is what the cost of a startup would be including advertising, marketing, and sales costs to achieve the same level of sales. Then compare that to what you would have to pay for the business including the cost of the capital (or loan) used to buy the business.
If the total purchase (interest, loan repayment) is less than what it would cost to set up the business from scratch then it might make sense to make a deal. With an established business you get an established customer base, almost immediate cash flow.
Buying the Assets of a Business
The simplest transaction is to buy the assets of a business and then operate under your own corporation. Just make sure that you check to see there are no liens on the equipment otherwise you could end up losing your equipment and the cash used to buy it.
The Hybrid Deal
For every situation there are always exceptions. I have seen deals where the owner of the business sells the equipment for a negotiated price and then a separate deal is made for the customer list. You get access to customers, an endorsement from the previous owner, and the equipment but without the liabilities.
Whether you are buying assets or doing a share purchase make sure you include a non-compete clause that prevents the previous owner from operating the same type of business down the street or within a certain geographic area.
Personal Decision
Making a decision to buy a distressed business is a personal decision that requires a lot of self-knowledge, discipline, and intuition. You know you can make the business work but the real challenge will be in transferring that knowledge to paper and a business plan because your banker will want to see what you plan to do with the business.
If you plan on self-financing the purchase, you owe it to yourself to apply the same due diligence as a banker or investor because you are the investor. You need to be able to switch roles from investor/banker, business owner, and entrepreneur when needed. That is a discipline that you can learn but requires focus and the ability to switch perspective.
Article Series - Buying a Business
- Business Myth Busted: Starting a Franchise is Safer Than Starting Your Own
- Do Not Start a Business, Buy a Business
- Should I Buy a Distressed Business That Is Losing Money?
- Partnerships and Buying a Business
- Innovation, Fear and Their Role in Buying a Business
- Reduce Your Risk When Buying a Buisness
- Buying a Business – Obstacles and Deal Breakers
- Buying a Business – The Goodwill Controversy
- Long-Term Vision: Buying a Business Podcast
- Strengths and Structure: Buying a Business Podcast
Setting Your Price – Volume or Profit?
March 21, 2006
Via WaytoGrow.com Mary links to a post at MarketingProfs.com by Nick Usborne How to determine the best price for your product. It offers another perspective on the pricing issue. I recently linked to an article titled How to beat your competition at the pricing game which points to The Price is Wrong by Tom Tualli at Forbes. Both are worth a read and offer a slightly different perspective.
Accessing Retirement Funds to Start or Buy a Business
February 19, 2006
Should you use retirement funds to start or buy a business? According to a 2004 article at Entrepreneur Magazine you shouldn’t and the article makes some good points. In the USA there have been some changes to tax law to allow you to ‘borrow’ from your 401(k) account.
The keyword here is ‘borrow’ the money does have to be paid back. In some cases I think it has legitimate use and application to help fund a startup or purchase of an existing business. Especially when a bank requires 25 per cent of the total investment to buy a building or a business to come from you the entrepreneur. An extra $50,000 could make a big difference in the way a lender would view your application.
In the USA: How to Borrow from Your Retirement Account
If you are interested in financing your business, you should know …about a tax law change that allows you to borrow up to $50,000 tax-free from your 401(k) retirement account. Any business with no employees can establish a self-employed 401(k) plan that comes with a loan feature. It doesn’t matter if your business is a startup or has been around for years. You can run your business part-time or full-time in the form of a sole proprietorship, 1099 contractor, partnership,LLC, or corporation.
In Canada: The Self-Directed RRSP
In a self-directed plan, you make your own investment choices. These decisions can be based on information given to you by your tax or financial adviser. In fact, many Canadians allow their financial planners to look after their self-directed plans. However, as the owner of the plan, you always have the final say in how it’s managed and the types of investments purchased.
Yes, there are limitations and you should seek the counsel of a financial planner before using these funds to make sure you understand all the terms, risks, and requirements when making a decision to tap your retirement funds to start your business.
How Can I Convince A Bank Or VC To Invest In My Company?
December 13, 2005
Truth is you cannot convince any investor, bank or VC to provide financing for any business that is not viable or ill conceived.
Here is my own list of what to do to get the attention of a VC:
- Format: At the early stage some VC’s will prefer to see a PowerPoint presentation. Some are accepting proposals via a audio file and if interested they will get back to you.
- Connect the dots: Make sure you clearly state in the beginning WHO the customers are, WHAT problem is being solved, and HOW the company???s product/service accomplishes it.
- Meeting: If you are meeting with them face-to-face do not let empty air dominate the conversation. Make sure you control the timing and pace of the meeting.
- Research the VC: do some research in advance. Find out who you will be meeting with and make sure they invest in your type of companies
- Follow up: Do not be timid about following up with them.
- Push for a Decision: They will want some time to think about your proposal and you will not get an immediate decision.
- Be Real: Do not pretend to be something you aren???t. Be real, be you, be authentic.
Final Thoughts
You must have confidence in your business idea and have a well thought out business model and plan. If you focus on innovation and the viability of your business model, serious investors will want to take a good look at it.
Every major decision — to invest or buy involves getting the other party to buy into your idea. To get that strong emotional buy in – you must first get their attention. This involves spending a significant amount of time preparing and thinking through what makes your business idea special, unique and viable.
If you cannot explain it clearly — how in the world can you expect someone else to understand it?! How can you expect them to invest in your idea if they do not understand it?!
Spend your time working on your pitch to get their attention. NOTE: be careful not to over inflate your business concept and viability. You must also have a good business plan that supports the statements you made trying to get their attention. Remember: a presentation that cannot stand under scrutiny will fail to get investment dollars.
After you get their attention — you have to be able to get them to understand the business idea and prove its viability. This will require a well written business plan to close the deal.
Another thing — you will need a good list of potential Investors or Venture Capital companies to pitch your idea to. Make sure you have enough good prospects so that you do not run out of prospects before you refine your business plan and presentation.
Keep smiling! If you have a viable idea, you will find money. It is just a matter of time and your ability to learn, shift and adjust.
How to Not Pitch your Business Idea to a Venture Capital Firm
November 30, 2005
What do VC’s want? It’s been a mystery discussed among entrepreneurs. These are the days of the Internet, you can research people and companies easier than ever before. With a guy like David Beisel all you need to do is read his blog. His latest post is one of a series of ’sevens’ or observations David is writing about.
Over at Genuine VC, David Biesel speaks of seven tactical mistakes entrepreneurs make when doing their initial pitch.
- Not clearly stating in the beginning WHO the customers are, WHAT problem is being solved, and HOW the company’s product/service accomplishes it.
- Not controlling the timing and pace of the meeting.
- Worrying about the demo/pres that doesn’t work.
- Not knowing who you are talking to ahead of time.
- Not following up.
- Attempting to force feedback immediately.
- Inauthenticity.
As he says the goal of the first meeting is to get to the second meeting. You would not try to make a large sale in one meeting, working with a VC is no different. In the first meeting tell them what they need to know to decide if they want to meet with you again. Best to read David’s post than for me to try and intepret and filter it for you. 
Free Break Even Analysis Spreadsheet
October 28, 2005
Have you ever wondered what your break even point is? Well wonder no more. You can edit this spreadsheet and add your own numbers! Try it, the spreadsheet will recalculate immediately. For more information scroll down to read the notes below the spreadsheet.
Break Even
The break even analysis depends on four specific variables:
- The fixed production costs for a product.
- The variable production costs for a product.
- The product’s unit price.
- The product’s expected unit sales (sometimes called projected sales)
The Break Even calculation is the number of units that must be sold in order to produce a profit of zero (but recover all related costs).
Break Even = Fixed Cost / (Unit Price – Variable Unit Cost)
Understanding Break Even
While your break even can vary from month to month this tool can be used to calculate the sales volume required to recover all the variable and fixed costs associated with producing your product or service.
After your break even point, you begin to earn profit. This tool is a great aid when trying to make strategic decisions including price levels, determining the most favorable combination of fixed and variable costs.
Notice that each time you change a parameter in the Break-Even Analysis, the break-even unit volume changes, and so does your risk. If you have questions, leave a comment.
NOTE: best viewed using Firefox or IE/6
Should I Ask Venture Capital Companies For More Money Than I Need To Create A Cushion?
August 4, 2005
This is a great question. I recently helped a client deal with this issue. Let me share what we learned.
Raising money from VCs is much different than private investors.
Private money is usually friendly money. They know you and are investing because they trust you.
VCs, on the other hand, are more concerned with the business concept and viability. In other words, can you deliver on what you say!?
Asking for an inappropriate amount of money is one way for a VC to begin to question your idea. Test your resolve.
On the other hand, make sure you ask for every nickel you need and not one penny less. Make sure you can validate your request for financing.
They know a business needs adequate financing. They just want to be sure your business idea will work and that you have done enough research and planning to make it a success.
A well written and properly prepared business plan should answer most questions and help you get the financing you need.
New Commercial Business Loans from the SBA
July 31, 2005
New Commercial Business Loans from the Small Business Administration (SBA)
If you are seeking a loan guarantee from the SBA, there are other aspects of the SBA 7(a) Loan Program you should know about.
You should be aware of the general terms and condition to expect if SBA is involved in the financial assistance. While the terms of SBA guaranteed loans are negotiated between you and the financial institution, you can expect the following:
Maturity: The actual approved maturity varies according to the prudent economic life of the assets being financed and the applicant’s ability to repay — subject to the following maximums:
- For working capital: maturity up to 7-10 years
- For machinery & equipment: maturity up to 10-25 years
- For building construction or purchase: maturity up to 25 years
Maturity is a function of a business’s ability to repay. All loans supported by the SBA shall be repaid over the shortest possible time period, without causing undue hardship to the cash flow of the business.
When loan proceeds will be used for a combination of purposes, the maximum maturity can be a weighted average of those maturities, which results in level payments. Or, it can be the sum of equal monthly installments on the allowable maturities for each purpose, which results in unequal payments, with a higher requirement for repayment during the initial term of the loan.
Interest Rates
Interest rates are negotiated with the lender. They are tied to the prime rate and may be fixed or variable. However, these rates cannot exceed SBA maximums of up to 2.25 percent over prime for loans of less than seven years, and up to 2.75 over prime for loans of seven years or longer. Loans of $50,000 or less may be subject to slightly higher rates in order to induce lenders to make these smaller loans.
The interest rate for guaranteed loans reflect prevailing market rates and can either be fixed over the life of the loan or can fluctuate with the market. Most 7(a) loans are amortized with a variable rate structure.
Percentage of Guarantee
The SBA provides its guaranty on only a portion of the total financing provided by the lender, not the entire amount. This is done to both stretch the limited resources of the SBA so it can reach more small businesses and to make sure the lender maintains a certain amount of risk on every loan. As a result, there is a lender share and an SBA share of each loan. The SBA share is also known as the guaranteed portion.
The maximum amount of SBA’s share may not exceed $750,000 to any one business, including its affiliates. By law, there are several specific exceptions:
- The Pollution Control Loan Program, which has an SBA share limitation of $1,000,000;
- The International Trade Loan Program, which has an SBA share limitation of $1,000,000 unless this type of loan is accompanied by an Export Revolving Line of Credit loan where the combined limit is increased to $1,250,000; and
- The DELTA Loan Program, which has a total dollar limit of $1,250,000.
The maximum amount of SBA’s guaranty may not exceed 75 percent regardless of the total dollar amount of the loan to any one business, including its affiliates. By law, there are several specific exceptions:
SBA may guaranty up to 80 percent of any loan for $100,000 or less, unless the applicant has other loans guaranteed by SBA which in combination with the proposed loan exceed $100,000 in total.
- SBA can guaranty a loan under the DELTA program for 80 percent.
- SBA can guaranty a loan under the Export Working Capital Loan Program up to 90 percent.
Therefore, for all loans except as referenced above, the maximum loan amount with the maximum percentage of guaranty would be $1.0 million with a 75 percent guaranty. In this case the SBA share would be $750,000.
There is no prohibition against SBA making loans over $1.0 million, but in these cases, the percentage of guaranty would be less than the maximum. As an example, SBA could provide a 50 percent guaranty on a loan for $1.5 million.
Guarantee Fee
When a guaranty loan is approved, the participating lender must pay SBA a guaranty fee. This fee can, and almost always is, passed on to the borrower at disbursement. The borrower can pay this fee from the working capital loan proceeds of the loan. This fee is based on the maturity of the loan and the amount of the SBA share.
For loans with a maturity of 12 months or less, the fee is 1/4 of 1.0 percent of the guaranteed portion of the loan.
For loans with a maturity exceeding 12 months, the fee is:
- 3.0 percent on the first $250,000 SBA share;
- 3.5 percent on the next $250,000 of SBA’s share; and
- 3.875 percent on the final portion of SBA share.
Example: On a loan for the total amount of $600,000 with a 75 percent guaranty, the guaranteed portion would equal $450,000. The guaranty fee would be $7,500 ($250,000 X 0.03) plus $7,000 ($200,000 X 0.035) for a total of $14,500.
More in the New Business Loans 101 Series
How Do Lines Of Credit Work?
July 13, 2005
A line of credit is a flexible lending instrument secured by assets.
As an example, you are approved for a ceiling of say $100,000. It allows you to run up a $100,000 “over draft” in your operating or corporate checking account. Then, when you make your bank deposit the line of credit is repaid.
This provides a great deal of flexibility and can be a valuable “buffer” to pay your accounts payable before your receivables come in.
Most often, a line of credit is granted based upon sales volume and your accounts receivables (AR). Each month you report your sales and AR (there may be other reporting required, as well). Based upon the amount of sales and AR the bank calculates a percentage of your AR to determine the amount of your line of credit.
Typically, you will be lent somewhere between 20-30% of your total AR. The older the aging of your AR the less the bank will lend. For example, amounts over 60 days will not likely be included in the calculation.
A line of credit can be secured with other assets as well, but using your AR is the most common. You will also likely be required to sign a personal note or guarantee. This would allow the bank to liquidate your personal assets if your business failed, and the line of credit is not repaid. A personal guarantee should state a specific amount (the amount of the line of credit), but these days you sign an unlimited personal guarantee. You will likely also be required to sign a letter that restricts you borrowing money elsewhere without approval.
Ask lots of questions when talking to your banker, and make sure that you have a good relationship. It can make a world of difference!
Getting the Price Right
My Books on Amazon
Recognition
