Raising Money For Business Purchase
Raising Money for Business Purchase may sometimes seemed herculean task, but in actual sense, there are usually more options than you think. In this web resource, you will learn the following techniques and tips about raising money for business purchase:
1. Buying an existing Business
2. Sources for Business Funding
3. Four Keys to Raising Capital
4. Financing the purchase of a Small Business
Once you have decided on the kind of business you want to buy – whether it’s a restaurant, a pub, a hotel or even a tropical island (yes, they do come up for sale), you will need to address the all important issues of financing your purchase.
Few people have the means to buy a business with cash without the need to borrow. This is the same for all buyers – whether they’re acquiring a tea shop in Cornwall or a multi-million pound software company in California.
Using a bank
Unsurprisingly, a survey by The British Chambers of Commerce found that banks are the most common form of external finance for small businesses – and this will be the same for you.
In fact, between 60% and 70% of all business buyers approach their local bank to borrow money when structuring their finances to buy a business. Banks will commonly lend up to 60% of the total price of the business, with you having to provide the final 40%.
So if you’re looking to buy a hotel for £300,000 a bank may lend up to £200,000. This will leave you to find the remaining £100,000 which could come from a remortgage of your home (especially as many home owners have seen the value of their property increase significantly over the past decade).
However, in order to be successful you must make a coherent case for borrowing the money as banks have strict lending criteria. You will often be required to show the following information:
About the business
You will need to supply audited accounts for the business you intend to buy, for the last three years where possible. Make sure that these accounts are a true reflection of the business. A bank can only lend money to you based on these accounts, regardless of any hidden income that an owner may assure you of.
This has to be a realistic revenue forecast for the business. You can even create two or three scenarios to give the bank comfort on the likelihood of different outcomes. You must also detail what your cash flow is going to look like after you have factored in costs – such as repayments of the loan you are taking out.
This doesn’t have to be an exhaustive 50-page plan but it must make a credible case for the business you are buying, its market and your plans to reach that market – whether you’re buying a widget manufacturer or a fish and chip shop. It should include what you propose to do with the business you are buying, whether you intend to simply run it as it is or improve it.
You will need to provide evidence of the value of the business you are buying. Where possible, this should be undertaken by a professional, such as an accountant or valuation expert who is paid to give a professional business appraisal.
In the case of a property based business, such as a restaurant or hotel then a surveyors report will help value the bricks and mortar. If the business is not property based (for example a PR company or a recruitment consultancy) then you will probably be using a multiple of that business’s earnings. For example, many businesses are currently valued between three and eight times their profit.
Selling agent’s details
You will be required to provide contact details for the agent representing the business or the vendor’s details if you are buying directly from the seller.
A CV with details of your previous work experience will be needed. Keep this short and to the point, outline relevant experience that will help persuade the bank that they are reducing risk by lending to you.
Asset and liability statement
This will detail what you own (such as the equity in your home or shares) and what you owe – including credit card debts and other outstanding loans.
Normally, you will be required to make bank statements available for the last six to 12 months. Anti laundering and fraud legislation now requires proof of your ID and residency, such as photocopies of your passport.
If you do intend to go down this route (borrowing money from a bank) it’s important to spend time researching the various loan products available to you. For example, longer term loans but with lower interest rate payments may be preferable to a shorter term loan with a higher interest rate.
In other words, don’t just look at the interest rate – look at the term. For example:
• Loan A for £100k at base rate + 2%, over 10 years, will work out at £1,110 per month
• Loan B of £100k at base rate + 3%, over 20 years, will work out at £710 per month
Even though you are paying pack the loan on a higher interest rate with example (B), because you are paying it back over a longer period (20 years, as opposed to 10 years) you are paying £400 less per month.
In cash flow terms that difference could be very important to you in the early stages of your new business – crucial, in fact. Therefore, don’t automatically look at the interest rate – consider the term too.
If you decide to finance your purchase without the use of a bank you may also wish to consider the following options:
Business finance specialists
These are brokers that help business buyers and owners get the best deal. Generally, they’ll have access to hundreds of different providers and be brand agnostic; meaning they’ll offer you the finance that’s right for you, regardless of their commission structure.
It’s worth noting that not all brokers are alike. Some will charge commission to the prospective business owner, while others charge the lender.
Either way, having access to a variety of options will help you make a measured and informed decision. Some brokers have partnered with finance broker Rangewell (who charge the lender a success fee, not you) to help their customers get the best deal.
Enterprise Finance Guarantee Scheme
Launched in 2009 the Enterprise Finance Guarantee (EFG) is aimed at businesses lacking adequate security or proven track record for a standard commercial loan. However, the Government has made it easier to apply and the number of people who successfully source funding this way is on the rise.
The scheme, which is run by the Department for Business Innovation and Skills, has so far provided more than 18,000 SMEs with £1.88bn worth of loans.
The Government guarantees 75% of the loan, while the borrower pays a 2% per annum pro-rata premium to BIS as a contribution towards the cost of providing the Government guarantee. The borrower is responsible for repayment of 100% of the loan, not just the 25% beyond the Government guarantee.
The scheme is open to businesses whose turnover is less than £41 million. Loans can vary in size from £1,000 to £1million, while repayment terms range from three months to 10 years (less for overdraft and invoice finance facilities). Most sectors are eligible.
They are often referred to as ‘angels’ or ‘high net-worth individuals’ and these private investors – looking to back new ventures with potential – now make up a sizeable group. The growth of these backers – the same type of people that may invest in art or property – is partly attributable to some poor stock market returns of late.
You can connect with potential angel investors through platforms like Angel’s Den and CapitalList.
They may not be investing with the might of venture capital firms but their ethos is the same – a good return on their investment in a short period of time.
So if you have plans to buy a business or more than one; consolidate them and then float on the stock market these are the type of people you might want to approach.
However, there are very strict The Financial Conduct Authority (FCA) regulations on the best practice of approaching private individuals looking to invest in unquoted companies.
You will certainly need the services of a professional – a lawyer or an accountant – before you can target individuals on this basis, even before you draw up any agreements.
For more information about angel funding, you can use the British Business Angels Association as a model.
Venture capital funds
There are over 250 venture capital funds in the UK who seek to invest in exciting business ideas with high growth prospects, products and services with a competitive edge and highly skilled management teams.
However, if you are likely to be a business owner interested in running a lifestyle business (a business whose main purpose is to provide a good standard of living and job satisfaction for you as an owner) then you are unlikely to provide the high financial return that venture capital investors are looking for.
Some venture funds look to invest £10m with the expectation of making £50m (or more) within three years. This is not a loan and you will have to give up a big stake in your business.
The investor will generally expect to be actively involved in your company and its progress. However, you may have big plans to consolidate a business sector, like nurseries for children or fast food outlets and venture capital might be the way to go.
This is one of the newest ways to raise finance. Essentially, it’s the process of individuals or groups pooling money to fund other groups, indivduals or businesses. It’s not regularly used to help people purchase pre-existing businesses, but there are those that have had success on site.
There are numerous nuances within crowdfunding, though in comparison to most other methods of raising finance, there’s a lot of transparency as campaigns perform much better when social media is involved. You can take a look at the Wikipedia article for a list of crowdfunding platforms.
You may find it useful to speak to an accountant before jumping in to the Angel’s Den, filling in bank forms or posting up a Kickstarter, but hopefully you’re better prepared to make the right decision when it comes to raising finance.
Financing The Purchase of A Small Business
Here, let us look at some options for people thinking about buying an existing company.
With the improving economy, many people will have considered purchasing a business either to add to their existing portfolio or as a means of leaving the rat race behind. Despite the banking institutions growing confidence in the small business lending market, securing external finance can still be a daunting process for the uninitiated. There are a number of outlined financial options available in 2014, including the newly established peer to peer funding market.
Securing funding the first step in acquisition
Specialist business transfer agents, Intelligent Business Transfer recommend securing your financing before you’ve even settled on your list of potential business acquisition. Jonathan Russell of Intelligent Business Transfer says, ‘Although this is counterintuitive to many, securing funding and speaking to would be lenders will ensure you select a business that you can definitely afford. Often the main reason business sales fall down is due to poor planning by the buyer of the business.’
Securing funding through the large bank institutions has been extremely difficult for anybody looking to purchase a business since the collapse of the housing market and the global recession. However with the UK economy growing, banks are starting to demonstrate increasing confidence in small businesses. Additionally banks tend to look more favourably upon on the purchase on an existing business with a proven track record, especially if you can demonstrate your capabilities in the industry, than upon a start-up or young business.
There are even further supports for people looking to purchase a business with a bank loan. The EU and UK government still believe that banks are not going far enough to support small businesses seeking lending. Under new proposals, banks could be required to refer people looking for funding to alternative funding providers if they are not deemed creditworthy. The banks would more than likely have to refer the unsuccessful applicant to other providers such challenger banks and peer-to-peer lending services such as Funding Circle. James Meekings, co-founder of Funding Circle says that ‘the government proposals would be a huge catalyst to growth for alternative finance.’
Peer-to-peer finance and crowdfunding
Peer-to-peer (P2P) lending and crowd funding provides financing through a consortium of investors, championed by the likes of Zopa and the aforementioned Funding Circle. On the P2P sites, businesses request a specific amount at a set interest rate, and lenders fund all or a portion of the loan. As with a standard loan the lender is then paid back with interest over a set period.
We are witnessing the popularity of this type of lending soar as the government attempts to diversify business lending. Although this type of lending is typically utilised by the actual owners of the businesses, people can still use P2P lending to fund the purchase of an existing business that may otherwise not survive or if they can demonstrate the businesses importance to a local community.
Although alternative options are typically recommended, especially in the present climate with low interest rates, there are a number of other financing options available to buyers. These range from borrowing from friends and family, to taking money from your retirement funds. These options are often the last options that people pursue in their search for finance and carry very different type of risks – typically putting more strain on personal relationships.
Four Keys To Raising Capital
It’s no secret that raising capital to grow your business or invest in property has become harder. Traditional lenders are requiring you to jump through more hoops, and they are applying less attractive terms after all the jumping is over. Private lenders and investors are more cautious and have upped their standards, as well. What’s a businesswoman to do?
It’s Simply Common (Business) Sense
It’s actually not the mystery that many make it out to be. More than anything, good common business sense will prevail. It’s often said that the key to raising capital is a person’s ability to sell. Selling is a crucial skill for any entrepreneur. When it comes to raising capital, the question is “What are you selling?” In other words, what is the lender or investor looking for?
The key to raising money, whether it’s to start or expand your business or to purchase and operate a rental property, comes down to four factors.
1. The Project
2. The Partners
3. The Financing
4. The Management
If you can show a prospective lender or investor that you have command over these four pieces of the puzzle, then selling will not be an issue, and you will attract more money than you thought possible.
You might not be aware of these four gems, so much of your sales pitch to prospective investors was based on BS–blue sky. The “sell” was much more difficult because 1) You didn’t know what the investor was looking for and 2) You relied solely on your persuasion skills instead of sound business sense. Even though it was much more difficult, you will still be able to raise a quarter of a million dollars from 10 investors. And in the end, every investor got his or her initial investment back and made an excellent return on that investment. The process today, whether you are the one raising the money or people want money from you, is much more efficient and leads to better results.
The Overall ‘Want’ of a Lender or Investor
The what-I-want umbrella covering any deal an investor is considering is that he or she wants a healthy return on her investment. If one gives you X dollars, then how much money will one get back? That’s the overall want of an investor.
(Note: When you refer to a “lender or investor,” you are referring to anyone or anything from a traditional bank or lending institution to a private organization or an individual. The same criteria apply no matter whom you are approaching for capital.)
Music to an Investor’s Ear
A presentation should not be long or complex. It will differ depending on the business or investment involved. Often when a “pitch” is short and concise, it reflects that the people presenting it are confident in knowing what the investor wants and secure that they can deliver it.
Let’s take a closer look at the four key factors:
1. The project: What is the project the lender or investor is providing you capital for? If it’s your business, then what exactly is your business? What makes your business unique from others in your industry? And what is the advantage your business has that will build the investor’s confidence? What will make it successful? Keep it simple. Keep it concise. Keep it real.
2. The partners: Who are the key partners behind the project? Who is putting the deal together? What is the track record of the partners, and what experience do they have. Put yourself in the investor’s shoes for some perspective. Whose music project would you be more likely to invest in–Paul McCartney’s or Mike Tyson’s? Whose new skin-care company would you back–Mary Kay’s or Lindsay Lohan’s? It’s not rocket science. It’s common business sense. The experience the partners bring to the table and how comfortable the investor is with their level of expertise are what will drive any investor’s decision.
3. The financing: Show me the real numbers. This is obviously a bit trickier for a startup company because most of the revenue numbers will be projected numbers, not actual numbers. This is where previous experience can overcome that obstacle. Show the investor, as accurately as you can, how the project–be it a business or an investment–will make money. Be realistic. As an investor, no one would want to see the best-case scenario. I want to see the most realistic numbers, including the problems and roadblocks ahead. Every business and investment project has problems; pretending that yours won’t makes you look like an amateur.
How much money are you raising in total? Where is the money coming from? Is the money being raised from private parties, traditional lenders, pension funds or government programs? What are the terms? For example, let’s say I’m being approached for the down payment on an apartment building. I’m told the other 80 percent is coming from a top lending institution. What would be more attractive to me as an investor: borrowing the 80 percent at a lower interest rate that must be refinanced in two years or getting the 80 percent at a slightly higher fixed rate for 25 years? The first option presents more unknowns down the road while the second scenario has fewer potential surprises.
How are you going to use the money being raised? What are the funds being allocated to? One hint–if it’s ever suggested that some of the money raised is to pay you, as the owner of the business or the deal, then my door is closed. If you want a paycheck, get a job. And, of course, you must answer these two key questions for your potential investor: How soon until I get my initial investment back, and what is the return on my money? The bottom line: Is your financing structure attractive to an investor?
4. The management: It’s said that “money follows management.” I agree. However, your case is so much stronger when you address all four components, not just management.
Investors want to know who’s running the day-to-day operations. This is key to the ongoing success of any venture. What is the experience level of the management team? Who are they? What are their backgrounds? What makes them vital to the success of this project or business?
If you are starting your own business or if you’re raising money to grow your existing business, then the partners and the management team may be the same people. That’s not a problem at all, given experience and expertise on the team that the investor has confidence in.
How It Plays Out in Real Life
Let me give you a real-life example of how this formula works.
My husband, Robert, and I were approached by a friend about an investment opportunity. We knew this gentleman personally but had not done any business dealings with him. He is very well-respected in the business community.
Here is what he told us:
“This is the investment–an Arizona landmark resort with three golf courses plus two additional golf courses from a second as-prestigious resort. It has gone into foreclosure and we are certain we can purchase it for about 25 percent of what the previous owner put into the property.” (The Project)
“My two partners and I are purchasing this investment. This is the 54th venture we’ve done together. Here is a list of those projects and the results. You know of one of my partners, Mr. XYZ.” (Just about everyone in town, and beyond, knows of this man. He is a business legend.) “We’ve been actively searching for three years for a great project, and we feel this is the one.” (The Partners)
“We are raising 10 percent of the purchase price as a down payment. Two pension funds are putting up X number of dollars, and the bank that has foreclosed on the property is financing the rest of it. You can conservatively expect a return of X percent on your investment, and you should have all your money back within three to four years.” (The Financing)
“As to the management (at this point he drops a four-inch binder on the table that falls with a thud), this is the company that will be managing the hotel. It also operates the ABC and MNO resorts.” He then drops a second four-inch binder on the table. “This is the company that will manage the golf courses. There is a listing of the other golf course it manages. We’ve checked out both of these companies thoroughly.” (The Management)
“That’s the investment. What do you think?”
What We Thought
It took us all of five minutes to say, “Count us in.” Here is the beauty of our friend’s approach: This is a multimillion-dollar venture. He could have gone into all sorts of graphs, figures, projections and data. He could have spent hours telling us about what a great deal this was. Instead, he took all of 10 minutes, answered the four key issues, and five minutes later we had a deal.
Raising capital does not have to be a laborious, drawn-out affair. If you can keep it to the four key points and provide your investor with confidence, then money will flow to you.
Oh, just one last point–you’d better deliver.
Buying An Existing Business
When most people think of starting a business, they think of beginning from scratch–developing your own ideas and building the company from the ground up. But starting from scratch presents some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow, all without a track record or reputation to go on.
In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation that’s already generating cash flow and profits. You have an established customer base, reputation and employees who are familiar with all aspects of the business. And you don’t have to reinvent the wheel–setting up new procedures, systems and policies–since a successful formula for running the business has already been put in place.
On the downside, buying a business is often more costly than starting from scratch. However, it’s easier to get financing to buy an existing business than to start a new one. Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable. Of course, there’s no such thing as a sure thing–and buying an existing business is no exception. If you’re not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods. To make sure you get the best deal when buying an existing business, be sure to follow these steps.
The Right Choice
Buying the perfect business starts with choosing the right type of business for you. The best place to start is by looking at an industry with which you’re both familiar and which you understand. Think long and hard about the types of businesses you’re interested in and which best match your skills and experience. Also consider the size of business you are looking for, in terms of employees, number of locations and sales. Next, pinpoint the geographical area where you want to own a business. Assess labor pool and costs of doing business in that area, including wages and taxes, to make sure they’re acceptable to you. Once you’ve chosen a region and an industry to focus on, investigate every business in the area that meets your requirements. Start by looking in the local newspaper’s classified section under “Business Opportunities” or “Businesses for Sale”. You can also run your own “Want to Buy” ad describing what you are looking for. Remember, just because a business isn’t listed doesn’t mean it isn’t for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer. Put your networking abilities and business contacts to use, and you’re likely to hear of other businesses that might be good prospects.
Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals. If you hire a broker, he or she will charge you a commission, typically 5 to 10 percent of the purchase price. The assistance brokers can offer, especially for first-time buyers, is often worth the cost. However, if you are really trying to save money, consider hiring a broker only when you are near the final negotiating phase. Brokers can offer assistance in several ways.
• Prescreening businesses for you. Good brokers turn down many of the businesses they are asked to sell, whether because the seller won’t provide full financial disclosures or because the business is overpriced. Going through a broker helps you avoid these bad risks.
• Helping you pinpoint your interest. A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you.
• Negotiating. The negotiating process is really when brokers earn their keep. They help both parties stay focused on the ultimate goal and smooth over any problems that may arise.
• Assisting with paperwork. Brokers know the latest laws and regulations affecting everything from licenses and permits to financing and escrow. They also know the most efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker reduces the risk that you’ll neglect some crucial form, fee or step in the process.
A Closer Look
Whether you use a broker or go it alone, you will definitely want to put together an “acquisition team”–your banker, accountant and attorney–to help you. These advisors are essential to what is called “due diligence”, which means reviewing and verifying all the relevant information about the business you are considering. When due diligence is done, you will know just what you are buying and from whom. The preliminary analysis starts with some basic questions. Why is this business for sale? What is the general perception of the industry and the particular business, and what is the outlook for the future? Does–or can–the business control enough market share to stay profitable? Are raw materials needed in abundant supply? How have the company’s product or service lines changed over time?
You also need to assess the company’s reputation and the strength of its business relationships. Talk to existing customers, suppliers and vendors about their relationships with the business. Contact the Better Business Bureau, industry associations and licensing and credit-reporting agencies to make sure there are no complaints against the business.
If the business still looks promising after your preliminary analysis, your acquisition team should start examining the business’s potential returns and its asking price. Whatever method you use to determine the fair market price of the business, your assessment of the business’s value should take into account such issues as the business’s financial health, its earnings history and its growth potential, as well as its intangible assets (for example, brand name and market position).
To get an idea of the company’s anticipated returns and future financial needs, ask the business owner and/or accountants to show you projected financial statements. Balance sheets, income statements, cash flow statements, footnotes and tax returns for the past three years are all key indicators of a business’s health. These documents will help you conduct a financial analysis that will spotlight any underlying problems and also provide a closer look at a wide range of less tangible information.
25 Things to Consider
Following is a checklist of items you should evaluate to verify the value of a business before making a decision to buy:
1. Inventory. This refers to all products and materials inventoried for resale or use in servicing a client. Important note: You or a qualified representative should be present during any examination of inventory. You should know the status of inventory, what’s on hand at present, and what was on hand at the end of the last fiscal year and the one preceding that. You should also have the inventory appraised. After all, this is a hard asset and you need to know what dollar value to assign it. Also, check the inventory for salability. How old is it? What is its quality? What condition is it in? Keep in mind that you don’t have to accept the value of this inventory: it is subject to negotiation. If you feel it is not in line with what you would like to sell, or if it is not compatible with your target market, then by all means bring those points up in negotiations.
2. Furniture, Fixtures, Equipment and Building. This includes all products, office equipment and assets of the business. Get a list from the seller that includes the name and model number of each piece of equipment. Then determine its present condition, market value when purchased versus present market value, and whether the equipment was purchased or leased. Find out how much the seller has invested in leasehold improvements and maintenance in order to keep the facility in good condition. Determine what modifications you’ll have to make to the building or layout in order for it to suit your needs.
3. Copies of all contracts and legal documents. Contracts would include all lease and purchase agreements, distribution agreements, subcontractor agreements, sales contracts, union contracts, employment agreements and any other instruments used to legally bind the business. Also, evaluate all other legal documents such as fictitious business name statements, articles of incorporation, registered trademarks, copyrights, patents, etc. If you’re considering a business with valuable intellectual property, have an attorney evaluate it. In the case of a real-estate lease, you need to find out if it is transferable, how long it runs, its terms, and if the landlord needs to give his or her permission for assignment of the lease.
4. Incorporation. If the company is a corporation, check to see what state it’s registered in and whether it’s operating as a foreign corporation within its own state.
5. Tax returns for the past five years. Many small business owners make use of the business for personal needs. They may buy products they personally use and charge them to the business or take vacations using company funds, go to trade shows with their spouses, etc. You have to use your analytical skills and those of your accountant, to determine what the actual financial net worth of the company is.
6. Financial statements for the past five years. Evaluate these statements, including all books and financial records, and compare them to their tax returns. This is especially important for determining the earning power of the business. The sales and operating ratios should be examined with the help of an accountant familiar with the type of business you are considering. The operating ratios should also be compared against industry ratios which can be found in annual reports produced by Robert Morris & Associates as well as Dun & Bradstreet.
7. Sales records. Although sales will be logged in the financial statements, you should also evaluate the monthly sales records for the past 36 months or more. Break sales down by product categories if several products are involved, as well as by cash and credit sales. This is a valuable indicator of current business activity and provides some understanding of cycles that the business may go through. Compare the industry norms of seasonal patterns with what you see in the business. Also, obtain the sales figures of the 10 largest accounts for the past 12 months. If the seller doesn’t want to release his or her largest accounts by name, it’s fine to assign them a code. You’re only interested in the sales pattern.
8. Complete list of liabilities. Consult an independent attorney and accountant to examine the list of liabilities to determine potential costs and legal ramifications. Find out if the owner has used assets such as capital equipment or accounts receivable as collateral to secure short-term loans, if there are liens by creditors against assets, lawsuits, or other claims. Your accountant should also check for unrecorded liabilities such as employee benefit claims, out-of-court settlements being paid off, etc.
9. All accounts receivable. Break them down by 30 days, 60 days, 90 days and beyond. Checking the age of receivables is important because the longer the period they are outstanding, the lower the value of the account. You should also make a list of the top 10 accounts and check their creditworthiness. If the clientele is creditworthy and the majority of the accounts are outstanding beyond 60 days, a stricter credit collections policy may speed up the collection of receivables.
10. All accounts payable. Like accounts receivable, accounts payable should be broken down by 30 days, 60 days, and 90 days. This is important in determining how well cash flows through the company. On payables more than 90 days old, you should check to see if any creditors have placed a lien on the company’s assets.
11. Debt disclosure. This includes all outstanding notes, loans and any other debt to which the business has agreed. See, too, if there are any business investments on the books that may have taken place outside of the normal area. Look at the level of loans to customers as well.
12. Merchandise returns. Does the business have a high rate of returns? Has it gone up in the past year? If so, can you isolate the reasons for returns and correct the problem(s)?
13. Customer patterns. If this is the type of business that can track customers, you will want to know specific characteristics concerning current customers, such as: How many are first-time buyers? How many customers were lost over the past year? When are the peak buying seasons for current customers? What type of merchandise is the most popular?
14. Marketing strategies. How does the owner obtain customers? Does he or she offer discounts, advertise aggressively, or conduct public-relations campaigns? You should get copies of all sales literature to see the kind of image that is being projected by the business. When you look at the literature, pretend that you are a customer being solicited by the company. How does it make you feel? This can give you some idea of how the company is perceived by its market.
15. Advertising costs. Analyze advertising costs. It is often better for a business to postpone profit at year-end until the next year by spending a lot of money on advertising during the last month of the fiscal year.
16. Price checks. Evaluate current price lists and discount schedules for all products, the date of the last price increase, and the percentage of increase. You might even go back and look at the previous price increase to see what percentage it was and determine when you are likely to be able to raise prices. Here again, compare what you see in the business you are looking at, with standards in the industry.
17. Industry and market history. You should analyze the industry as well as the specific market segments of the business targets. You need to find out if sales in the industry, as well as in the market segment, have been growing, declining, or have remained stagnant. This is very important to determine future profit potential.
18. Location and market area. Evaluate the location of the business and the market area surrounding it. This is especially important to retailers, who draw the majority of their business from the primary trading area. You should conduct a thorough analysis of the business’s location and the trading areas surrounding the location including economic outlook, demographics and competition. For service businesses, get a map of the area covered by the business. Find out, based on the locations of various accounts, if there are any special requirements for delivering the product, or any transportation difficulties encountered by the business in getting the product to market.
19. Reputation of the business. The image of the business in the eyes of customers and suppliers is extremely important. As you know, the image of the business can be an asset, or a liability. You should interview customers, suppliers and the bank, as well as the owners of other businesses in the area, to determine the reputation of the business.
20. Seller-customer ties. You must find out if any customers are related or have any special ties to the present owner of the business. How long has any such account been with the company? What percentage of the company’s business is accounted for by this particular customer or set of customers? Will this customer continue to purchase from the company if the ownership changes?
21. Inflated salaries. Some salaries may be inflated or perhaps the current owner may have a relative on the payroll who isn’t working for the company. All of these possibilities should be analyzed.
22. List of current employees and organizational chart. Current employees can be a valuable asset, especially key personnel. Evaluate the organizational chart to understand who is responsible to whom. You must also look at the management practices of the company and know the wages of all employees and their length of employment. Examine any management-employee contracts that exist aside from a union agreement, as well as details of employee benefit plans; profit-sharing; health, life and accident insurance; vacation policies; and any employee-related lawsuits against the company.
23. OSHA requirements. Find out if the facility meets all occupational safety and health requirements and whether it has been inspected. If you feel that the seller is “hedging” on this and you see some things you feel might not be safe on the premises, you can ask the Occupational Safety and Health Administration (OSHA) to help you with an inspection. As a prospective buyer of a business that may come under OSHA scrutiny, you need to be certain that you are not buying an unsafe business. Some sellers may perceive your asking for OSHA’s help as a dirty trick. But you must realize that as a prospective, serious buyer, you need to protect your position.
24. Insurance. Establish what type of insurance coverage is held for the operation of the business and all of its properties as well as who the underwriter and local company representative is, and how much the premiums are. Some businesses are underinsured and operating under potentially disastrous situations in case of fire or a major catastrophe. If you come into an underinsured operation, you could be wiped out if a major loss occurs.
25. Product liability. Product liability insurance is of particular interest if you’re purchasing a manufacturing company. Insurance coverage can change dramatically from year to year, and this can markedly affect the cash flow of a company.
Determining a Fair Price
No decision is more emotionally charged than deciding upon a price for an existing business. The owner has one idea of how much the business is worth, while the buyer will typically have another viewpoint. Each party is dealing from a different perspective and usually the one who is best prepared will have the most leverage when the process enters the negotiating stage.
Keep in mind that most sellers determine the price for their business arbitrarily or through a special formula that may apply to that industry only. Either way, there usually aren’t very many solid facts upon which to base their decisions.
Price is a very hard element to pin down and, therefore, is for the buyer to assess. There are a few factors that will influence price, such as economic conditions. Usually, businesses sell for a higher price when the economy is expanding, and for a much lower price during recessions. Motivation also plays an important factor. How badly does the seller want out? If the seller has many personal financial problems, you may be able to buy the business at a discount rate by playing the waiting game. On the other hand, you should never let the seller know how badly you want to buy the business. This can affect the price you pay adversely.
Beyond these factors, you can determine the value of a business using several different methods discussed below.
Simply put, some owners gauge the value of their business by using a multiplier of either the monthly gross sales, monthly gross sales plus inventory, or after-tax profits. While the multiplier formula may seem complex and quite accurate to begin with, if you delve a little deeper and look at the components used to arrive at the stated value, there is actually very little to substantiate the price arrived at.
Most of the multipliers aren’t based on fact. For example, individuals within a specific industry may claim that certain businesses sell at three times their annual gross sales, or two times their annual gross sales plus inventory. Depending on which formula the owner uses, the gross sales are multiplied by the appropriate number, and a price is generated.
For instance, if the business was earning $100,000 a year and the seller was using a formula in which the multiple of gross sales was 30 percent based on industry averages, then, he or she would generate a price using the following equation:
100,000 x .30 = $30,000
Of course, you can check the monthly sales figure by looking at the income statement, but is the multiplier an accurate number? After all, it has been determined arbitrarily. There usually hasn’t been a formal survey performed and verified by an outside source to arrive at these multipliers.
In addition, even if the multiplier was accurate, there is such a large spread between the low and high ends of the range that it really just serves as a ballpark figure. This is true whether a sales or profit multiplier is used. In the case of a profit multiplier, the figure generated becomes even more skewed because businesses rarely show a profit due to tax reasons. Therefore, the resulting value of the business is either very small or the owner has to use a different profit factor to arrive at a higher price.
Don’t place too much faith in multipliers. If you run across a seller using the multiplier method, use the price only as an estimate and nothing more.
This is a fairly accurate way to determine the price of a business, but you have to exercise caution using this method. To arrive at a price based on the book value, all you have to do is find out what the difference is between the assets and liabilities of a company to arrive at its net worth. This has usually been done already on the balance sheet. The net worth is then multiplied by one or two to arrive at the book value.
This might seem simple enough. To check the number, all you have to do is list the company’s assets and liabilities. Determine their value, arrive at the net worth, and then multiply that by the appropriate number.
Assets usually include any unsold inventory, leasehold improvements, fixtures, equipment, real estate, accounts receivable, and supplies. Liabilities can be anything. They might even include the business itself. Usually, though, you want to list any unpaid debts, uncollected taxes, liens, judgments, lawsuits, bad investments–anything that will create a cash drain upon the business.
Now here is where it gets tricky. In the balance sheet, fixed assets are usually listed by their depreciated value, not their replacement value. Therefore, there really isn’t a true cost associated with the fixed assets. That can create very inconsistent values. If the assets have been depreciated over the years to a level of zero, there isn’t anything on which to base a book value.
Return on Investment
The most common means of judging any business is by its return on investment (ROI), or the amount of money the buyer will realize from the business in profit after debt service and taxes. However, don’t confuse ROI with profit. They are not the same thing. ROI is the amount of the business. Profit is a yardstick by which the performance of the business is measured.
Typically, a small business should return anywhere between 15 and 30 percent on investment. This is the average net in after-tax dollars. Depreciation, which is a device of tax planning and cash flow, should not be counted in the net because it should be set aside to replace equipment. Many novice business owners will look at a financial statement and say, “There’s $5,000 we can take off for depreciation.” Well, there’s a reason for a depreciation schedule. Eventually equipment does wear out and must be replaced, and it sometimes has to be replaced much sooner than you expect. This is especially true when considering a business with older equipment.
The wisdom of buying a business lies in its potential to earn money on the money you put into it. You determine the value of that business by evaluating how much money you are going to earn on your investment. The business should have the ability to pay for itself. If it can do this and give you a return on your cash investment of 15 percent or more, then you have a good business. This is what determines the price. If the seller is financing the purchase of the business, your operating statement should have a payment schedule that can be taken out of the income of the business to pay for it.
Does a 15-percent net for a business seem high? Everybody wants to know if a business makes two, three, or 10 times profit. They hear price-earning ratios tossed around, and forget that such ratios commonly refer to companies listed on the stock exchange. In small business, such ratios have limited value. A big business can earn 10 percent on its investment and be extremely healthy. The big supermarkets net two or three percent on their sales, but this small percentage represents enormous volume.
Small businesses are different. The small business should typically earn a bigger return because the risk of the enterprise is higher. The important thing for you, as a buyer of a small business, is to realize that regardless of industry practices for big business, it’s the ROI that you need to worry about most. Is it realistic? If the price is realistic for the amount of money you have to invest, then you can consider it a viable business.
Valuing a business based on capitalized earnings is similar to the return-on-investment method of assessment, except normal earnings are used to estimate projected earnings, which are then divided by a standard capitalization rate. So what is a standard capitalization rate?
The capitalization rate is determined by learning what the risk of investment in the business would be in comparison to other investments such as government bonds or stock in other companies. For instance, if the rate of return on investment in government bonds is 18 percent, then the business should provide a return of 18 percent or better on the investment into it. To determine the value of a business based on capitalized earnings, use the following formula:
Projected Earnings x Capitalization Rate = Price
So, after analyzing the market, the competition, the demand for the product, and the organization of the business, you determine that projected earnings could increase to $25,000 per year for the next three years. If your capitalization rate is 18 percent, then the value of the business would be:
$25,000 / .18 = $138,888
Generally, a good capitalization rate for buyouts will range between 20 to 40 percent. If the seller is asking much more than what you’ve determined the capitalized earnings to be, then you will have to try and negotiate a lower price.
Some business owners try to sell goodwill as an asset. Normally, in everyday accounting procedures, most companies put down perhaps one dollar as the value of goodwill. There is no doubt that goodwill has value, particularly if the business has built up a regular trade and a strong base of accounts. But it is the financial value of the accounts, not their psychological value, that should be placed on any financial statements.
Goodwill as such is not an asset. You as a buyer would assess the business based on the return on investment. Certain rules of the game may change when you enter the fields of acquisition and merger. Suppose you buy out your competition, merge all your facilities, and double your volume. Now the labor and overhead factors are much lower. Thus, even if the seller was losing perhaps 5 percent a year, if you bring them into your company, which is making 15 percent a year, it might allow you to increase sales and end up making 20 percent.
The Art of the Deal
Deciding on a price, however, is just the first step in negotiating the sale. More important is how the deal is structured. David H. Troob, chairman of Geneva Companies, a national mergers and acquisitions services firm, suggests that you should be ready to pay 30 to 50 percent of the price in cash, and finance the remaining amount.
You can finance through a traditional lender, or sellers may agree to “hold a not,” which means they accept payments over a period of time, just as a lender would. Many sellers like this method because it assures them of future income. Other sellers may agree to different terms, for example, accepting benefits such as a company car for a period of time after the deal is completed. These methods can cut down the amount of upfront cash you need; Troob advises, however, that you should always have an attorney review any arrangements for legality and liability issues.
An individual purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first is asset acquisition, in which you purchase only those assets you want. On the plus side, asset acquisition protects you from unwanted legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.
On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to off-set losses from undesirable ones.
The other option is stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business assets and assume all its liabilities.
The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal standpoint. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It’s also a good idea to include a no compete clause in the contract to ensure the seller doesn’t open a competing operation down the street.
Remember, you have the option to walk away from a negotiation at any point in the process if you don’t like the way things are going. “If you don’t like the deal, don’t buy,” says Troob. “Just because you spent a month looking at something doesn’t mean you have to buy it. You have no obligation.”
Alternatives to Cash
Short on cash? Try these alternatives for financing your purchase of an existing business:
• Use the seller’s assets. As soon as you buy the business, you’ll own the assets so why not use them to get financing now? Make a list of all the assets you’re buying (along with any attached liabilities), and use it to approach banks, finance companies and factors (companies that buy accounts receivable).
• Buy co-op. If you can’t afford the business yourself, try going co-op–buying with someone else that is. To find a likely co-op buyer, ask the seller for a list of people who were interested in the business but didn’t have enough money to buy. (Be sure to have your lawyer write up a partnership agreement, including a buyout clause, before entering into any partnership arrangement.)
• Use an Employee Stock Ownership Plan (ESOP). ESOPs offer you a way to get capital immediately by selling stock in the business to employees. If you sell only non-voting shares of stock, you still retain control. By offering to set up an ESOP plan, you may be able to get a business for as little as 10 percent of the purchase price.
• Lease with an option to buy. Some sellers will let you lease a business with an option to buy. You make a down payment, become a minority stockholder and operate the business as if it were your own.
• Assume liabilities or decline receivables. Reduce the sales price by either assuming the business’s liabilities or having the seller keep the receivables.
Common Mistakes to Avoid
Don’t be too anxious when you’re looking to buy a business. As earlier mentioned, if you’re too anxious, this can affect the price.
Tremendous mistakes are made by people who are anxious. Business consultants called in by anxious buyers can sometimes salvage the situation, but oftentimes consultants are not called until a deal has been closed. And once your signature goes on that dotted line, you’re stuck with the purchase. So keep in mind that anxiety or impatience isn’t going to help you buy a business. Take your time. Recognize that there’s always time to reflect on the business that’s for sale. No matter what a business broker, a business seller, or any other person may tell you, there’s always time. Nine times out of 10, the business that’s up for sale is going to be around for awhile. And if it’s not, then it’s the seller who is going to be the anxious one; and the seller’s anxiety, of course, is something that can be manipulated to your advantage as buyer.
Some of the more common mistakes are:
• Buying on price. Buyers don’t take into account ROI. If you’re going to invest $20,000 in a business that returns a five-percent net, you’re better off putting your money in stocks and commodities, the local S&L, or municipal bonds. Any type of intangible security is going to produce more than five percent.
• Cash shortage. Some buyers use all their cash for the down payment on the business, though cash management in the startup phase of any business, new or existing, is fundamental to short-term success. They fail to predict future cash flow and possible contingencies that might require more capital. Further, there has to be some revenue set aside for building the business via marketing and PR efforts. So, if you have $20,000 to invest, make sure you don’t invest the entire amount. Keep some of the capital. Though figures vary from industry to industry, a common contingency is 10 percent. Additionally, you may want to set aside a sum that you regard as your working capital, which in a number of businesses is enough to cover about three months’ worth of expenses.
• Buying all the receivables. It generally makes good sense to buy the receivables, except when they are 90 or 120 days old, or older. Too often buyers take on all the receivables, even those beyond 90 days. This can be very risky because the older the account, the more difficult it’ll be to collect against. You can protect yourself by having the seller warrant the receivables; what’s not collectible can be charged back against the purchase price of the business. For receivables beyond 90 days, give those to the owner, and see if he or she can collect.
• Failure to verify all data. Most business buyers accept all the information and data given to them by the seller at face value, without the verification of their own accountant (preferably a CPA, who can audit financial statements). Most sellers want to get their cash out of the business as soon as possible, and buyers frequently allow them to take all the quick assets such as receivables, cash, and equipment inventories, and sometimes bring in equipment. The seller talks the buyer into virtually anything, knowing that the buyer wants the business badly.
• Heavy payment schedules. Novice business owners often overestimate their revenue during the first year and take on unduly large payments to finance the buyout. Generally, however, revenue rarely pans out. During the first year of any operation, the owner experiences numerous non-recurring costs such as equipment failures, employee turnover, etc. For this reason, it makes sense to have a payment schedule that begins fairly light, then gets progressively heavier. This is something that can be negotiated with a seller and should not be difficult to arrange.
• Treating the seller unfairly. People think that, because they are buying a business, the seller is at their mercy. All too often, the buyer will be cold, rigid and hard-headed. Sellers with savvy will throw such people out and tell them not to come back. Just because you have some money and may be interested in purchasing the business, that doesn’t meant that you aren’t going to have to give a little in the process of negotiation.
The transition to new ownership is a big change for employees of a small business. To ensure a smooth transition, start the process before the deal is done. Make sure the owner feels good about what is going to happen to the business after he or she leaves. Spend some time talking to key employees, customers and suppliers before you take over; tell them about your plans and ideas for the business’s future. Getting these key players involved and on your side makes running the business a lot easier.
Most sellers will help you in a transition period during which they train you in operating the business. This period can range from a few weeks to six months or longer. After the one-on-one training period, many sellers will agree to be available for phone consultation for another period of time. Make sure you and the seller agree on how this training will be handled, and write it into your contract.
If you buy the business lock, stock and barrel, simply putting your name on the door and running it as before, your transition is likely to be fairly smooth. On the other hand, if you buy only part of the business’s assets, such as its client list or employees, then make a lot of changes in how things are done, you’ll probably face a more difficult transition period.
Many new business owners have unrealistically high expectations that they can immediately make a business more profitable. Of course, you need a positive attitude to run a successful business, but if your attitude is “I’m better than you,” you’ll soon face resentment from the employees you’ve acquired.
Instead, look at the employees as valuable assets. Initially, they’ll know far more about the business than you will; use that knowledge to get yourself up to speed, and treat them with respect and appreciation. Employees inevitably will feel worried about job security when a new owner takes over. That uncertainty is multiplied if you don’t tell them what your plans are. Many new bosses are so eager to start running the show, they slash staff, change prices or make other radical changes without giving employees any warning. Involve the staff in your planning, and keep communication open so they know what is happening at all times. Taking on an existing business isn’t always easy, but with a little patience, honesty and hard work, you’ll soon be running things like a pro.
Sources For Business Funding
In today’s credit crunch, big banks are tightening up more than ever, and venture capitalists are becoming more careful with their investments. So now’s the time to get creative with entrepreneurial finance and seek out sources you might not have thought of before. From credit card schemes to handouts, we’ve got your guide to unconventional funding sources.
Desperate times call for desperate measures. Some of these ideas are for the truly insane entrepreneur. It’d be a good idea to speak to a financial advisor first if you’re considering any of these.
1. Title loans: If you’ve paid off your car, you can get a title loan against its value, similar to a home equity loan.
2. Credit card consolidation: Use a credit card consolidation service to free up your existing credit so that you can use it again.
3. Whole-life insurance: You can borrow against your whole-life insurance policy, but be careful not to default, terminate your policy, or die.
4. Get an advance: Many credit cards offer cash withdrawals, so you can take full advantage of your credit limit, albeit at a very hefty price in interest.
5. Home equity: A lucrative funding source just might be where you rest your head at night. Of course, if you screw up, you just might end up not living there any more.
6. Retirement accounts: Raid your 401(k) to put the money into a more here-and-now investment.
7. Credit card debt: The guys at Google did it, and so can you. Using credit cards to cover gaps in funding can work, as long as you’re diligent about repayment.
8. Gamble: If you’re talented at the tables, put your skills to work to raise funding.
9. Cosigners: If you can’t be approved for a big bank loan, call in a cosigner to boost your credit rating.
10. Overdraw your checking account: Many checking accounts have an insured ceiling, so you can write yourself a “rubber check.” Just plan on using your mattress as a bank for a while, because no one’s going to want to touch you after this sort of stunt.
11. Credit card companies: Many credit card companies offer outright loans to businesses who otherwise wouldn’t qualify for anything through big banks.
12. Payday loans: These evildoers of the credit world just might be your ticket to success if you can pay them back quickly.
13. Family and friends: Getting a loan from someone you know works, but make sure to put it all down on paper, and never waver on your payments unless you want to ruin your relationship.
14. Borrow from education funds: Your kid is only 10, so you’ve got a good 8 years to pay it back, right?
15. Credit card arbitrage: Turn all of those annoying credit card offers into cash for your business.
16. Negotiate delays: If you’ve already got credit card debts, and could use the payments for business cash flow, negotiate a hold on balance payments until things take off.
Get creative with your personal accounts and assets to find money for your business.
17. Liquidate assets: Sell anything you have that’s valuable to raise funds. This can be your house, car, or firstborn.
18. Downsize costs: Find money in your own personal budget by cutting back on entertainment, clipping coupons, and tightening up your finances.
19. Keep your day job: Keep a steady income while you’re earning from your business so you’ll always have a dependable source of funds.
20. Get a second job: If one job isn’t enough, take on a part time job and earmark the funds for your business.
Low Level Lending
Who needs a huge corporate bank? Turn to smaller banks and individuals to get the money you need.
21. Bartering: Income doesn’t have to mean cold, hard cash. Trade with other businesses for the equipment and services you need.
22. Amateur shares: Write small shares to budding capitalists and promise to pay them back at a profit, such as 1.50 on the year.
23. Microloans: These startups offer microloans to entrepreneurs.
24. Prosper: To get a loan funded by regular joes, check out Prosper, a peer-to-peer lending site.
25. Industry leaders: Ask individuals and businesses that are leaders in your industry for a loan. They’re more likely to be sympathetic to your needs and understand your goals than big banks.
26. Ask for advice: Advisors often want to put money behind their involvement, so find loan opportunities by seeking out help.
Check out these ideas for truly creative ways to find extra cash through innovative programs and even more risky lending.
27. Vendor financing: Discuss payment and leasing options with your vendors so you don’t have to buy supplies and equipment outright.
28. Assign a CD: Get instant gratification on a certificate of deposit by assigning it.
29. Revolving loan funds: Get a loan through a revolving loan fund, and once you’ve paid it back, it can be used by another budding entrepreneur.
30. Susu: Susus are just like a revolving loan fund, except the system is managed among a group of peers. Use a susu to pool your money, and you’ll each get a turn to use it and repay it.
31. Asset sales: Sell an asset like computer equipment to someone you trust, and have them lease them back to you for a fair price. You’ll get a nice amount of capital that you pay back over time.
32. Commercial finance lines: Often used by franchisees, commerical finance lines are similar to vendor loans and are used for small-ticket equipment.
33. Advance pay programs: If you have the potential for strong credit card sales, you can sell a fixed amount of future credit card recievables.
34. Purchase order financing: Just like advance pay programs, purchase order financing gives you a loan based on projected future earnings.
35. Supplier guarantees: Use a financial institution to guarantee that any receivables will be paid directly to your suppliers.
36. Margin loan: Margin loans aren’t just for buying securities. You can get these loans with flexible repayment terms, but you have to be careful not to default, or your brokerage firm can sell your securities.
37. Investment bank: Many investment banks like Merrill Lynch have loan products that cater to small businesses and entrepreneurs.
38. Factoring: Account receivables factoring companies leverage your account receivables into cash, allowing you to sell open invoices.
39. Community Development Financial Institutions: If you’re in an underserved market, you can get financing and development services from a CDFI.
40. 504 Loans: This underutilized program from the SBA offers assistance to entrepreneurs acquiring commercial property.
41. Royalty financing: Sell the rights to a percentage of revenue from your business to get funds upfront.
42. Community loan: Ask for microloans from members of your community if your business will fill a need, like a supermarket.
43. Securities-based lending: Put your securities up on the block for short term funding.
44. Venture leasing: Instead of venture capital, consider venture leasing, which is secured by equipment and doesn’t require equity in the business.
45. Online credit search: Online credit search services can often uncover creative sources of funding you may not have considered before.
46. Customer financing: If a potential customer has a lot to gain from the existence of your business, ask them to finance your startup.
47. Asset-backed loans: Get a loan by putting up collateral, whether it’s your home or existing business equipment.
48. International banks: Banks outside of the US are often interested in profitable investments, and can benefit from exchange rate fluctuations.
Make your assets go to work for you, and find funding in places you probably haven’t considered before.
49. Sell off excess inventory: Clean out your equipment cabinet with a fire sale to raise some extra cash.
50. Sell expensive equipment: If you’ve got expensive equipment that you don’t really need to own outright, lease equipment like it instead.
51. Timeshare equipment: If you don’t need access to certain pieces of equipment all of the time, share it with others for a cost.
52. Spread out large expenses: Spend slowly, and you just might find you have more funds than you think.
53. Discounted gift certificates: Offer $25 in free products for every $100 in gift certificates purchased, and you’ll raise capital while expanding your customer base.
54. Sell your customer list: Other businesses would love to be able to locate your customers, so sell them this information for funding. Just make sure you haven’t specifically promised not to sell customer information.
55. Sell office space: If you’ve got excess space, sell it or rent it out to another business.
56. Sell intellectual property: If your business has unused patents or licensing, sell them off.
Use these ideas to get by with a little help from others.
57. Strategic alliance: Create a joint venture with a complementary business to share costs and generate more business.
58. Merge: Allow your business to be acquired by another, at a price of course.
59. Sell shares to employees: Your employees have more faith in your success than you think. Sell them shares, and you’ll not only generate funds, you’ll have harder working employees as well.
60. Capital intermediary: Get a capital intermediary to give you seed money and let them go when you’ve reached maturity.
61. Get a financial partner: Marry your idea with a partner’s cash to raise funds, even if it’s just a “silent” partner.
62. Use a partner’s equipment: Save money on the basics by partnering up to share space and equipment with another business.
Use other people’s money to grow your business with these contests and programs.
63. Entrepreneurship programs: Many colleges and other organizations run entrepreneurship projects that offer development assistance, and sometimes even monetary rewards.
64. HUD: The US Department of Housing and Urban Development offers grants to small businesses.
65. Area residents: If your business plan includes revitalization of an area, ask for help from residents who would benefit from it.
66. Municipality: Check in your municipality to find out if there are any small business support programs.
67. Grants: Read this article to discover options for getting grants for your startup.
68. County: Many counties offer small business development assistance. Even if you can’t get financial support, they may be able to advise you on tightening up your books and other methods for raising money.
69. Chamber of Commerce: Often, local chambers of commerce offer assistance to members and small businesses in the area.
70. Idea Cafe: Get a grant from Idea Cafe, or just find one in their directory.
71. Donation jar: If you often find yourself doing favors for others, like fixing computers or retouching photos, kindly refer them to your donation jar.
72. Economic Development Directory: Check out this directory to find more than 2,000 agencies and other groups that want to help you out.
73. Business plan competitions: Enter a business plan competition-if you win, there’s usually a generous cash prize, and it’s good exercise anyway.
74. Business incubators: Get hooked up with a business incubator for support like office space, administrative services, and networking.
75. Found money: Take any inheritance, lottery winning, or cash you find on the street, and invest it in your business.
76. Contests: Don’t forget about non-business contests as well. Try to go on TV, enter the lottery, or participate in a sweepstakes for a chance at a quick financial shot in the arm for your business.
77. Local development: Many organizations offer grants to local businesses in order to foster growth in the area.
78. State small business grants: Lots of states offer grants to individuals who want to develop small businesses.
79. Grants.gov: Apply for more than 900 different grants from 26 government agencies on this site.
80. Social entrepreneurship contests: Just like business plan contests, great social entrepreneurship plans are heavily rewarded.
If you’re still working a regular job while building your business, take advantage of these ideas to get funding.
81. Overtime: Take on overtime as supplemental income to fund your venture.
82. Take an overseas assignment: By going overseas, you may be able to get a raise, and save money due to cheaper living conditions and favorable exchange rates.
83. Bonuses: Don’t blow your bonus on a trip to Vegas or a brand new TV. Instead, invest it into your business.
84. Contract: Turn your employer into a client by working as an independent contractor, and you can make up the difference through strategic choices in taxes and insurance.
85. Advances: Ask for an advance from your employer, and turn it into a profit.
86. Severance pay: If you’ve been laid off, turn your severance pay into entrepreneurial gold.
Borrow some of Uncle Sam’s money with these government loans.
87. Department of Agriculture: Through the Rural Business Investment Program, companies who are located in a small rural community can get early stage funding.
88. SBIC: The classification of Small Business Investment Company is bestowed upon investment firms that provide startup financing to small businesses, and they’re regulated and licensed by the SBA.
89. National Institute of Standards and Technology: Get a loan through the Advanced Technology Program by proving that your project has scientific and technological merit, and will impact the national economy. These are great because they don’t take stake, and they don’t ask for interest.
90. SBIR: A number of government departments have Small Business Innovation Research programs that offer grants to entrepreneurs with innovative businesses. These include clean energy, intellectual property, and more.
91. STTR: Small high-tech businesses can participate in the Small Business Technology Transfer program.
Find money in your own books by running a tighter ship.
92. Lower costs: Find any way you can to lower your overhead, whether it means cutting back on hiring or putting off equipment purchases to scrimp and save.
93. Shorten your terms: Make customers pay faster, and you’ll have more funds to work with, faster.
94. Charge interest: Charge interest on receivables that sit dormant, so customers will have an incentive to free up your cash flow situation.
95. Ask for deposits: Deposits are great for dealing with up front costs, another method that’s great for cash flow.
96. Discount up-front payments: Offer a 10% discount for customers who prepay and you’ll get faster cash.
97. Negotiate discounts: Talk to suppliers, and offer a profit percentage for discounted invoices.
98. Find unusual sources: Get materials from closing down shops, junkyards, and anywhere else you can find what you need.
99. Use cheap staff: Hire your punk little brother, a virtual assistant, or answering service to help you out.
100. Work at home: Cut overhead costs by avoiding rent and maintenance in a commercial property.
101. Find unconventional space: If you must have a physical presence, think outside the box when it comes to your location, and you just might find yourself with a cost savings.
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