By Bhadresh Bundela
What are some sources for business financing?
• The seller of an existing business will often provide some of the financing and will be your best source of financing. Businesses are sold by motivated sellers. In many cases the seller will take some cash down and let you pay the rest out of earnings over a period of time.
• The SBA (Small Business Administration) offers loan guarantee programs through commercial lenders. These will almost always need to be secured by additional assets.
• Equipment suppliers often have financing programs available for the development of a new business.
• Venture capital firms, commercial banks and relatives offer an additional source.
• Review the sources in Session 8, "How to Finance Your Business".
Other factors to consider in determining value:
• Unless you are also buying the property, the lease is probably the most important document you will evaluate. Review Session 6, "Location and Leasing". The following are the most relevant lease items:
o The term or length of the base leases
o Are there options to the base lease term?
o Is the base rent affordable and competitive?
o How often and how much is the adjustments to the base rent?
o What are NNN charges?
o What are the assignment provisions?
o If new, what will the Landlord contribute to the improvements?
• What is the quality of the improvements and fixtures: will they need replacement?
• What is the quality and size of the inventory: is it overstocked with obsolete items?
• What is the condition and amount of the receivables: are they collectable?
• If I am to buy the payables, how current are they and what is the accurate total?
• Is there an order backlog?
• How strong are customer relationships: the goodwill you will pay for?
• Is the primary marketplace stable or changing?
• Does the business have, or can it obtain, all necessary government approvals and licenses? Are there any exorbitant fees?
• Is the seller motivated or anxious?
How to verify revenue and receivables information:
• Ask for the seller's personal and business tax returns. In some businesses, you can determine the income by analyzing utility bills or supplier's records.
• If you are skeptical about the information's accuracy, make your offer to purchase based on a trial period where both you and the owner collect the receipts. A week spent at the cash register will disclose a lot and is the best way to verify sales.
• The receivables of a business (amounts still owed by customers) can be best verified by requiring written verification from people who owe the business money.
• Interview the owners of similar businesses for financial comparisons.
How do I know if starting my own business, buying an existing business or buying a new business is best for me?
• Is it affordable? A new business will often cost more than an existing business of the same type. An existing business may be the only way to enter the industry.
• Location is an important factor. In some communities, certain types of business can no longer be built and an existing business will be the only way to enter the industry. Proximity to your home will also be a factor.
• Some benefits to buying a new business:
o Everything is new and works
o Customers like to go to a new business
o The area may be under-served
o The value of the new business after you open may be greater than the cost of equipment
o New and inventive ideas may be better executed
• Benefits to purchasing an existing business:
o The business has a track record of income and expenses
o Operating costs are often lower than in a new business
o The business will already have trained employees
o There may be true goodwill already built in
o The business may already dominate the market in the trade area
What should I know about a prospective franchiser?
• Financial statement of franchiser
• Copies of profit and loss statements on franchise locations that you select.
• Any franchisee lawsuits pending against franchiser?
• Conduct due diligence interviews with other franchisees whom you select. (Probably the least important step in your "due diligence" investigation is to talk to the names of franchisees the franchiser gives you as references.)
• Existing franchises will normally be happy to share information on the success or shortcomings of their operations.
• Don't rely too much on "pro forma" financial statements. These are statements that are estimates provided in advance regarding future prospects.
SUGGESTED ACTIVITIES:
• Visit different operations, both independently owned and franchised and interview the owners for advice.
• Attend trade shows.
• Get to understand your intended business really well before you decide to buy or start one.
• Analyze any appropriate existing business that is for sale:
o Get the necessary information from a business opportunity broker.
o Describe your method for evaluating the business.
o Describe your financing plan on purchasing that business.
• Do the same analysis for a franchised operation. Study the term and conditions of a real franchise agreement, item by item.
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