DIY CASHFLOW

Cash Flow Terms and Definitions

When looking to purchase a business you will see all kinds of terms, many of which don't make any sense. Here's a list of common terms and a rough idea of what they mean:

Cash Flow - this is the worst definition used. It's an attempt to convey how much money is available to a business owner after all the expenses of the business are deducted from the revenue. Unfortunately Cash Flow technically also would include any increase or decrease in working capital items like inventory, accounts receivables, etc.

Seller's Discretionary Earnings (SDE) - This is calculated same as above but would include expense items added back that are not important to the business operations. Usually these add back items are owners "perks".... country clubs, entertainment, etc.

EBITDA - This is ..(E) earnings (B) before (I) interest (T) taxes (D) depreciation (A) amortization. The I&T will be different for the buyer than the seller so they are added back and a buyer will need to account for there I&T costs based on their debt structure. D&A are added back because they are non-cash expense. Meaning you don't write a check to pay for D&A like you do for payroll or utilities, therefore the deduction in the expenses is not real dollars but actually a tax deduction. Unfortunately (or fortunately) this does not adjust for a fair managers salary. Most business book the owners salary as "what's left" after all expenses and this number can swing wildly from year-to-year.

EBITDA+OC - This is the best definition but the least used. It's EBITDA as described above PLUS the owner's compensation. This is the real comparison number that should be analyzed when investigating the profitability of a business.

Run Your Business Like It IS For Sale...It Is!

Operating a business for the benefit of the business owner - today..... is different than operating a business that is building value and will one day be sold for a nice profit.

Do you want to be able to sell your business when you no longer want to own it?

Here's what you need to start doing NOW!!

1. Keep your books accurately. A buyer will pay you a multiple of the earnings you can PROVE. You will not be paid for earnings that you can't prove.
2. Make sure your employees are paid in accordance with all federal and local laws.
3. Get rid of any lawsuits that may be haunting you.
4. Make certain your insurance policies are up to date.
5. Make sure your business name is properly registered and protected with local agencies.
6. Pull a Security interest report and get rid of any old UCC-1 filings (remember the copier you leased, then bought, 5 years ago? The UCC-1 was probably never released by the secured party (a UCC-3 form will release the lien).
7. Limit the number of family members working in the business.
8. Fully document, in writing, all important systems and processes in the business. This is difficult and time consuming but will help you get a much higher price when you sell the business.
9. Get rid of unused assets - excess inventory, old equipment, etc.
10. Most importantly - You may not know when you'll need to sell the business so do the above NOW, so you can respond to any opportunities that might come your way.

The best advice..."Run your business like it's always for sale, because it is."

Facts Regarding Franchises!

According to the International Franchise Association (IFA):

• Total U.S. franchise sales in 2000 were over $1 trillion.
• Nearly 50% of all domestic retail sales were from franchised businesses.
• U.S. franchisors are doing business in over 70 industries.
• 1 in 12 U.S. business establishments is a franchise.
• A new franchise opens every 8 minutes of every business day.
• There are approximately 3,300 franchisors and over 500,000 franchise units.
• The total number of people employed by franchising is 8 million, with an average 8 to 14 employees per franchised business.
• Franchised businesses create more than 170,000 new jobs each year.
• Franchising is the backbone of the U.S. economy.
• According to the U.S. Commerce Department, fewer than 5% of franchises were terminated on an annual basis.
• In a study by Arthur Anderson & Company of 366 franchise companies, nearly 97% were still in business after 5 years.
• In contrast, a study by the U.S. Small Business Administration revealed that 62.2% of all new businesses FAILED within their first 6 years of business.

Have you considered a franchise?

Franchising is the happy medium…
It’s your business but the system is there to support you!

Franchising has advantages!

• Proven systematic approach
• Formal training
• Group purchasing power
• Marketing expertise
• Proven product or service
• Greater variety of choices and location flexibility
• Some franchises offer financing

Business franchisors offer to their franchisees the license or right to sell its goods or services and/or use its business techniques. The franchisees usually pay an initial fee to acquire this right, and thereafter pay a percentage of their gross sales to the franchisor throughout the term of their franchise contract. In return for these payments, franchisees gain privileges, including the right to sell a proven and recognized product or service, to use the franchisor's business practices, and to receive initial training and ongoing support. Franchisees usually have an advantage over their non-franchisee competitors since they have the rights to use the franchisor's brand names, trademarks, copyrights, trade secrets, patents, uniform logos, storefronts, and interiors.

Q: Why would I want to buy a franchise?
A: Franchises have the highest success rates and the lowest failure rates of any business in North
America today! Over 95% of all franchises are still in business after five years because they all come with built-in proven success formulas used by franchisees across the country. When you purchase a
franchise you will receive on-going support for the life of the franchise. By on-going we mean marketing, training, and management support guaranteed by your agreement with the franchisor.

Q: Why should I pay royalties?
A: Royalties are the magic that makes the formula work. What would it cost you to hire a management, marketing, advertising and customer support team? The answer is... a lot more than the typical owner would ever spend! How much would you put back into the business? You certainly couldn't hire this group for under 10% and the vast majority of all royalties are between 4 and 8%. The wonder of royalties is that instead of the individual owner footing the bill to run his or her business the expense is shared with all of the franchisees within the organization.

Q: How much money can I make?
A: This is the most frequently asked question and franchising allows the buyer the perfect way to get the answer. The franchisor will supply to the prospect a complete list of their franchisees with names and phone numbers and they will require the prospects to call as many of these franchises as possible. This is wonderful because it allows the buyer to ask all of the "real questions", such as: How much money can I make? How long did it take you to get your business up and running? Were there any surprises that I need to know about? What is the franchisor really like and any other questions that you can think of. Many franchisors have printed earnings claims in their UFOC documents but they will still insist that all interested buyers call the franchises and get the "real answers".

Use YOUR 401(k) or IRA Rollover Assets to Finance YOUR Franchise or Business Start-up!

Although not obvious to many, pension, profit sharing, 401(k), 403(b) other retirement plan and rollover IRA money may be used to fund your own franchise or business start-up. This can be done without distribution, taxes, penalties, or the use of loans. Now you can use your retirement money to invest in a sure thing…Invest in YOURSELF! These transactions are within the clear letter of the law.

There are many rules separating future retirees from the funds held in a trust today and awaiting them at retirement. Distributions are taxed as ordinary income – upwards of 50%. Early distributions, prior to age 591/2 add a 10 percent penalty tax. The Employee Retirement Income Security Act of 1972 (ERISA) has an ironclad “anti-alienation” clause – this means that the future pension may not be used as collateral for a loan. If it is so pledged, it is deemed to be a distribution, therefore taxed. There is an exception for “participant loans” but these are limited to the lesser of 50 percent of the vested account balance or $50,000 and must be amortized over five years or less with quarterly interest and annual principal payments. Loans may not be rolled into or allowed in an IRA account.

Sunbelt Business Brokers has formed a strategic alliance with a company that has developed a way to legally move money locked in 401(k) or other IRA rollover accounts directly into a new or established business without distributions, taxes, penalties, or the use of loans. The money may be used for franchises, property, equipment, or working capital.

If you have funds that are locked in a retirement fund, we can access those funds to help you realize your dream of buying a business through our relationship with this company.

What will I need to be considered for SBA loan assistance?

Even though the SBA-qualifying standards are more flexible than other types of loans, lenders will
generally ask for certain information before deciding to use an SBA loan program. Generally, lenders
will need the following documentation to evaluate your loan request:

• Business profile - A document describing type of business, annual sales, number of
  employees, length of time in business and ownership.
• Loan request - A description of how loan funds will be used. Should include purpose, amount
  and type of loan.
• Collateral - Description of collateral offered to secure the loan, including equity in the business,
  borrowed funds and available cash.
• Business Financial Statements - Complete financial statements for the past three years and
  current interim financial statements.
• Personal Financial Statements - Statements of owners, partners, officers and stockholders
  owning 20% or more of the business.

The strength and accuracy of your financial statements will be the primary basis for the lending
decision, so be sure that yours are carefully prepared and up-to-date.

The most important documents in your financial statements are:

• Balance sheets from the last three fiscal year-ends.
• Income statements revealing your business profits or losses for the last three years.
• Cash flow projections indicating how much cash you expect to generate to repay the
  loan.
• Accounts receivable and "payable aging" breaking your receivables and payables in to
  30-, 60-, 90- and past 90-day old categories.
• Personal financial statements from you and your business partners listing all personal
  assets, liabilities and monthly payments, as well as your personal tax returns for the past
  three years.

Source: www.sba.gov/financing/preparation/requirements.html

Major Catagories of Businesses & Their Personality Characteristics

Seven Main Categories of Businessess

1) Manufacturing / Distribution
2) Service
3) Retail
4) Restaurant / Food
5) Coin-Operated Businesses
6) Gas Stations / Convenience Stores

Below are the personality characteristics for each:

1) Manufacturing / Distribution
    a. Don’t deal directly with the public
    b. Deal with many employees
    c. Shorter hours

2) Service
    a. Deal with the public (outgoing personality required)
    b. Must maintain quality
    c. May need special training
    d. May need to keep “emergency” hours

3) Retail
    a. Deal with the public (outgoing personality required)
    b. Long hours
    c. Open six or seven days a week
    d. No break for holidays

4) Restaurant / Food
    a. Deal with the public (outgoing personality required)
    b. Long hours
    c. Must be a taskmaster (manage and supervise closely)
    d. May have to handle difficult customer problems (drinking too much)

5) Coin-Operated Business
    a. Long hours
    b. Will have to handle difficult customer problems (loitering is common)
    c. Few employees
    d. Lots of cash on hand

6) Gas Stations / Convenience Stores
    a. Deal with the public (outgoing personality required)
    b. Long hours
    c. Must be a taskmaster (manage and supervise closely)
    d. Will have to handle difficult customer problems (loitering is common)

Why Buy a Franchise?

Buying a franchise offers you the opportunity to be in business for yourself, but not by yourself. The most significant benefit to franchising is the reduced level of risk. This comes from a franchise system's brand recognition and proven method of doing business. The franchisor is there to provide support with all the different functions of the business. They have seen the issues that can arise in their business and know how to deal with any problems effectively.  Franchisors provide extensive initial training and support so you are well prepared to handle whatever comes. They can also provide advertising and marketing support to help you build your business faster.

Fanchise Consultant vs. dealing with franchise companies direct?

The service is free to you. A Franchise Consultants will save you time, money, and headaches. Your franchise fees will not be greater if you choose to use this service versus going direct.  Understanding what a potential franchisee is looking for in a business opportunity is essential before beginning the search.  A Business Intermediary has already screened out many opportunities leaving you with many of the safest and most attractive franchise opportunities.  With over 3000 franchise opportunities, this is a task that would take many months for someone outside the industry.

How can this service be FREE?

The consumer pays nothing for this services. The Consultant is paid a fee by franchisors who value the consultation and screening processes. They pay a referral fee since the process yields a higher quality match between the potential franchisee and the franchise concept due to the time spent to work with the individual to find the right match. You pay exactly the same fees with any franchise company whether you work with an Business Intermediary or not. This provides a win-win scenario for both parties the franchise candidate and franchisor.

How to find the right franchise?

It is importnat to find a franchise opportunity that will meet each individual’s specific needs. To do this effectively, you must first evaluate your skills, interests and your needs. Here are a series of detailed questions that you must be prepared to answer:

• What are your reasons for wanting a business of your own?
• Will you be involved on a full-time or an absentee owner?
• Will you be doing this alone or with partners?
• Have you ever owned a business of your own?
• How do you feel about managing people?
• What hours do you like to work?
• Where do you want you business to be located?
• How much capital do you have to start a business?
• What is your timeframe in wanting the business to open?
• Do you want to own a single unit or multiple units?

With answers to these questions, you can begin to evaluate franchise opportunities. This process will also help an intermediary match you with a few franchise opportunities that they are currently working with that they have already done some preliminary screening for you.  They have probably carefully pre-screened hundreds of companies from all areas of franchising including companies of all types from food, service, retail, and distribution covering both B2B (business-to-business) and B2C (business-to-consumer) sales.

The process of sorting through hundreds of franchise opportunities can be a long, confusing, and exhausting process. Many people spend months sorting through companies without ever finding an opportunity that has what they really want in a business. A Business Intermediary can assist you in this process.

If you cannot intelligently defend your business pricing strategy, then you are gambling with your money!

Business valuations are one of the most important steps when planning for the future of your business.  If you are not going to do it right than you might as well take your money to Vegas and bet it all on red or black at the roulette wheel.

Common Reasons for Business Valuation

Succession planning
Estate, Gift and Tax planning
Buying or selling a business
Personal Financial Planning
Bank Financing Requirement
Partnership/Shareholder Disputes

In each of these cases, getting the business wrong can have a great impact on your financial well being.  Value it too low and you leave money on the table.  Value it too high and you may never complete your succession plan or sale wasting precious time and resources.  That is why I recommend every business owner get a professional third party valuation before beginning any process that is dependent on the value of your business.



Steps in a Business Valuation Process:

Step 1:  Review your Business Valuation options; get all your questions answered and determine which valuation product best suits your needs.

Step 2:  Review the services agreement, the client questionnaire and the list of required supporting documentation.  Make sure you understand what is, and is not, included in the valuation as what you are responsible for.

Step 3:  Complete and sign all forms, compile all necessary financial/supporting documentation, and submit the packet for review by a Business Intermediary.

Step 4:  A Business Intermediary should review the packet for completeness, recast the financial information, and analyze your operations to ensure that nothing has been missed.

Step 5:  The Business Intermediary then submits the packet along with an initial analysis to a Valuation Analyst for final preparation of the valuation.

Step 6:  The Valuation Analyst presents a draft of the final report to the Business Intermediary for review and sign-off.

Step 7:  Once final report has been reviewed and accepted by the Business Intermediary, it will be shared and reviewed with you.

The Price of NOT DOING IT RIGHT is TOO EXPENSIVE

Eugene Loj gives us this perspective on the perils of paying someone other than the best to get the job done.

Next time you want to try a new marketing strategy, value your business, or sell it think twice before passing over the expert becasue you think the price is too high.  Remember anyone can hang a FOR SALE sign in the window.  It is almost impossible to undue the damage and reclaim value once it is gone.