Monthly Archives: March 2017

Before You Buy a Business

Businesses are bought and sold each day and some make better investments than others. Before you buy a business, here are a few things to make sure you make the right move:

Why is the seller selling? There can be many reasons why a business is for sale, and some reasons are better than others. For example, if the business owner is retiring, that is a good reason, but if the owner is selling because they are not making much of a profit, then that is a negative sign.

Do you know the industry? If you worked for years as a general manager of a restaurant, then this would provide you with a good base of knowledge of how to run a restaurant. The same goes for any other industry.

Due diligence: You should not just take the seller’s word that the business is making a certain amount of money, as the seller should be able to substantiate it with information, such as bank statements and tax returns.

Seek the advice of a professional: Seeking legal, business, and tax advice can pay for itself over and over again. A good attorney will help to work out the legal agreements, while a CPA will help to advise on how to maximize the tax effectiveness of buying the business. I have seen business purchases after-the-fact whereas the new owner loses tens of thousands of dollars of deductions because it was not structured correctly. The agreements can be made so that both parties receive the benefits they are looking for.

The Hidden Retirement Asset

Financial advisors frequently mention the three main pillars of retirement, which are social security, pension plans, and personal savings. Yet, you rarely hear them speak about an asset that may prove to be an individual’s largest asset – their business.

Many business owners invest their money back into their business over the years, especially during the early year, which makes them appear to have minor savings at first. In reality, the returns of investing in a small business can potentially be far greater than any stock market returns. Of course, there are risks as well.

How valuable can a business be?  A business can be valued in several ways, such as a multiple of sales, profits, or the value of its assets, and each industry has its own ratios that it relies upon when coming up with a price. For example, if the net profit of a business is $200,000 and sells for 5 times profits, then the valuation would be $1,000,000. A part-time, home-based business may not be worth much at all, but a profitable restaurant, service business, medical practice or other well-managed business can be worth hundreds of thousands to millions of dollars.

Don’t Wait Until It’s Too Late: Selling your business at the right time will have a huge impact upon the selling price. For example, if you are nearing retirement and have health problems, then you may be forced to sell your business at a huge discount if you suddenly are not healthy enough to run the business. Worse yet, if you pass away suddenly, then the value of the business will usually drop even further.

Getting Top Dollar: Ideally, you should prepare for the sale of your business 3 to 5 years ahead of time. This will allow you to be in more control of cleaning up the finances and improving profitability. You will obtain a much higher selling price if your business is doing well and you don’t need to sell it in a hurry.

Do You Have Too Many Customers?

What do you think is better, 100 customers or 200 customers? It might actually be the lower number, and I’ll explain why.

Let’s say that a small business provides landscaping and maintenance services for both businesses and for residential customers. Most of the customers are within a reasonable driving distance from the main office, and the total amount of customers they have is 200 (50 businesses and 150 residential customers). In order to serve their customers the business has 10 employees and several business vehicles.

After reviewing the amount of services provided to each customer, the owner realizes that it is either unprofitable or only slightly profitable to service a small residential customer, especially if they are more than 15 miles away.

Furthermore, the owner realizes that if an employee performs work for a business customer it tends to be much more profitable because only several are being serviced in one day for a total of eight hours of service performed. For residential customers, only four hours of service is performed after factoring in travel time, plus there are additional costs of travel. Also, the work for business customers tends to be steadier and provides overall higher revenue.

What is one possible solution? The owner may decide that it makes sense to only service business customers. By decreasing the number of customers from 200 to 100, it means that 50 more business customers were acquired, while discontinuing service to 150 residential customers. If each business customer usually receives $5,000 of services per year while each residential customer receives only $1,000, then revenues will actually increase by 25%, while actually decreasing costs.

All you have to do is substitute the type of business with your own, such as computer consulting, printing, medical practices, all types of contractors, and you will get the same results. I believe that serving too many customers even leads business owners to feel that they are busy all of the time without having anything to show for it.

There’s Never Any Time!

We all work hard every single day, but often feel that the day was spent without getting anything done. There is something you can do about it, and here are a few tips to make your day more productive:

Do the Most Important Thing First: It may seem obvious, but if you don’t do what is important first, then you may never get to it. There are constant distractions that are always fighting for your time, and can easily eat away at it. This brings us to the second tip.

Don’t Let Your E-Mail or Mobile Phone Control You: E-mail is such a powerful tool, but can control and distract you. The same applies to your mobile phone, which usually receives phone calls, e-mails, alerts, text messages, etc. If you are always checking and responding to your e-mails and text messages, then your productivity will be decreased dramatically. It’s better to set aside time each day to take care of them.

Stop the Multi-Tasking Myth: I’m not convinced that doing two things at the same time makes you more productive. Rather, it will take you longer to complete two tasks together, then to complete one first and the other second.

I also like and practice the following: keep only the item that you are working on at your desk, plan your day ahead of time, and know the difference between urgency and importance. Use your time wisely as it is the most valuable resource we all have.