number five in a series taken from: How to Evaluate and Profit from a Business Opportunity - The Entrepreneur's Guide When you start looking into owning your own business you will find many businesses for sale. Existing businesses provide the opportunity to review real-time situations. You can visit the operation, touch the products or experience the services. You can look at the financial information, and perhaps talk to customers, suppliers, and employees. You can get a real feel for what is happening. As you look you may become intimidated by the magnitude of what you see. Thoughts such as, "It's too big, too many employees, I'll never be able to get my arms around this. And the asking price - how will I ever get that much money." At this point many people will begin thinking about starting their own business. They feel comfortable starting small, just themselves and maybe one part-time person. They also like the idea of investing a little money at a time -- to match the needs of the business. Either approach can be good, or both can be bad. If you buy a business and incorrectly evaluate the cash needed and your resources, you could find yourself unable to provide the capital when it is needed. If you start a business and limit your investment of additional cash because you havent seen positive results, you can starve the business and it may fail. The solution is to do a good job projecting what you think will happen. The tool that helps you do this is the Business Plan. Yes, you make one as soon as you can and you use it to operate the business. As you enter numbers in your plan; sales, cost, freight, utilities, rent, etc., note the reason or assumption you used to come up with each number. As each month passes, check the actual results with what you projected and identify the reasons for any differences. This exercise will let you get comfortable with your ability to manage the business and give you the confidence to invest more money or to sign personally for a bank loan. I remember being invited in to take over a steel fabrication business with the idea that I would buy it. Sales had fallen 40% to just under a million dollars per year and the loss for the year would probably hit a little over $200,000. I felt the possibilities were very good and I had identified the problems. The company had a loan with a bank which because of the company's condition had now been put on a thirty day due date. This means that the bank decided every month if it would call the note or extend it for another month. As soon as I began operating the business (with an option to buy it within a year) I made the changes I knew would help. I also took each month's principal and interest payment to the bank to discuss changing the note to a three-year term loan. Each month the loan officer said he wanted to see how we progressed. At the end of the year (when my option would expire) the company was making a profit and the monthly loan payments (always made on time) had reduced the loan balance significantly. I told the banker, "I'll buy the business if you convert the note to an amortizing loan." He said, "Why don't you just pay us off." What he didn't say was that if I bought the business, meaning I gave the seller the money he wanted for the business, he (the banker) would not renew the note and I would either have to raise that additional money or see the bank foreclose on the business I had just bought. I had done a good job of evaluating the business and of understanding my resources, but I had done a poor job of thinking through how the bank might react with respect to its loan. I should have gotten the seller to obtain the bank's commitment to change the terms of the note when the balance had been reduced to the level I wanted -- before I started. We get too soon old and too late smart -- that's why I wrote my book to help entrepreneurs get smarter quicker. You will find more about this topic in chapters five, sixteen, and twenty-four in my book. By Art Consoli www.artconsoli.com |
