Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Buying a business can be a great move but it takes a lot of due diligence investigation. Due diligence is often thought of as “finding the bad stuff” but it is also important so that you understand what it will take to operate the business after you own it. OJT (on the job training) is helpful but preparation is even better.

Buying a Business

Know what to research

Keep in mind that these magnificent 7 aren’t the only things you need to investigate but they are 7 that are often overlooked or short-changed when buying a business.

  1. Cash Cycle – understand the cash cycle from when you incur cost to when you collect cash. 10 days? 30 days? 60 days?  Think through the stages, when do you spend money? When do you collect money? Every business has a cash cycle, dissect the steps to make sure you understand when cash is expensed and when you receive cash. If you have 10% profit you have 90% you owe other people. You’ll need to fill the “cash gap” with financing or cash injections from other sources.
  2. Hidden Costs – know the “hidden” costs in the system, warranty, call backs, inventory losses, un-billable hours, and uncollected AR. Most business owners only think about these things at year end when the CPA does the business taxes but this effects your cash every day.
  3. Specialized Knowledge – know the specialized knowledge of the current owner. Technical knowledge? Craft knowledge? Relationship knowledge? Supply source knowledge? The employees will judge you beginning day 1. Make sure you know what they expect you to know.
  4. Cash Needs -know your cash per sales growth requirements; don’t grow yourself into poverty. For every dollar in sales you’ll need to have some dollars available to fund expenses and products until you collect the cash from the customer.
  5. Pricing – understand how the current owner prices products and services.  Markup? GM? Guesses? Competitive comparison?  Is there room for improvement? Does current pricing have anything to do with the market? Who has special deals?
  6. Insurance – understand the current insurance coverages and make sure your coverages reflect your risk tolerance levels. Get an insurance audit. Make sure you review every aspect of insurance you need. Often we find sellers are under insured. Getting proper insurance could effect the biz earnings and the amount you might be willing to pay to buy the business.
  7. Licenses – make sure you research the licenses, permits and compliance requirements needed to operate the business. Don’t assume the seller knows everything. Buying a business not in compliance with current requirements is risky business.

While you may be itching to simply sign on the dotted line..

Thinking about what businesses might be for sale?

STOP:  your preparation and due diligence will save you a great deal of  hassle and surprise. Buying a business takes time, thought and research. As an entrepreneur, this is just your first step in creating a successful business.

Diversify Your Business

Diversify Your Business

4 Ways to Eliminate Customer Concentration and Build Confidence with Prospective Buyers

It’s value suicide. A company with more than 15 percent of its revenue with one customer is at high risk of having the rug pulled out from under them.

As the owner of such company, it’s going to add difficulty when it comes time to sell.  And for any potential buyer, the risk is higher unless you can prove growth potential by finding more like customers, and fast.

If you are preparing your business for sale, you need to start to think like a buyer. If you have customer concentration issues, stop looking at the business as the operator and start looking at it from an opportunity and sustainability stand point—especially under new ownership. Remove yourself, your history and past knowledge from the business, because that is exactly what a buyer is going to get.

There’s no doubt that you worked hard at building long lasting customer relationships, especially with a major client. But in selling your business, it’s a red flag.  It’s risky. That client could leave shortly after you are gone. The buyer will always be fully aware of such risk and there’s no hiding it.

Here are some ideas on how to minimize that risk for the potential buyer and better position your business for a premium value:

Remove the Client Trap

You aren’t alone, a lot of business owners fall into this trap. It’s easier to please and upsell existing clients than it is to look for new business.  Start looking for “like clients”.  Every good client is a profile for another new client. Same size, same problems or same needs, figure out the key component and start looking for a new client that mimics your cash cow.

Ask for Referrals

Happy clients are also happy to refer you to others.  It’s the entire basis of the Net Promoter Score and why so many companies are using it not only to improve customer service but to prove viability of the business.  If you don’t ask for referrals, you won’t get them.  Stop by or give your best customer a courtesy call, let them know you are looking to grow your business and ask if they know of any other business that could utilize your services. If not now, ask them to keep you in mind.  In some cases, businesses offer a referral fee. This may or may not work for you, but it’s another option to reward the referring party.

Seal the Deal in Writing

When you have a customer or client who is a significant portion of revenue, get the deal in writing including the duration of the agreement. Although contracts can be nullified post-transaction, at least the contract minimizes the risk of them leaving and gives the new owner some peace of mind.

Remove Sole Dependency

Many times in key accounts like this, the customer has become dependent on you. They want to only work with you or negotiate with you.  Start to transition this responsibility with another team member now, even if you aren’t looking to sell right away. The customer needs to transfer their confidence from you, to the business. This will add even more assurance to the prospective buyer.

Minimizing risk is the number one thing you can do before listing your business on the market. The less risk there is, you can sell for more and sell faster. Customer concentration is just one area to reduce that risk. Keep reading our blog as we go through other areas to increase the salability of your company.

SBA Announces New Measures to Help Get Small Business Loans Into the Hands of Veterans

SBA Announces New Measures to Help Get Small Business Loans Into the Hands of Veterans

Release Date: 

Friday, November 8, 2013
Release Number:
Dennis E. Byrne (202) 205-6567
Internet Address:

WASHINGTON – The U.S Small Business Administration (SBA) today announced new measures to help get small business loans into the hands of veterans by setting the borrower upfront fee to zero for all veteran loans authorized under the SBA Express program up to $350,000.  This initiative will start on January 1 and continue through the end of the fiscal year.

“Our nation’s veterans are highly-skilled and highly-trained leaders in their communities,” said Acting SBA Administrator Jeanne Hulit.  “This initiative will set fees to zero for SBA Express loans to veterans up to $350,000, and is part of SBA’s broader efforts to make sure that veterans have the tools they need to start and grow a business.  As we honor our veterans and thank them for their service and sacrifice, let’s continue to identify ways to support them when they come home.”

Of all SBA loans that go to veterans, 73 percent are $350,000 and below.  The SBA Express Loan Program, which supports loans under $350,000, is SBA’s most popular loan delivery method, with nearly 60 percent of all 7(a) loans over the past decade being authorized through the program. Since the program’s inception, it has also been one of the most popular delivery methods for getting capital into the hands of veteran borrowers.

Building on SBA’s recent announcement that for the current fiscal year, fees on loans for $150,000 and under are set to zero, this policy announcement means that veteran borrowers will no longer have to pay an upfront fee for any loan up to $350,000 under the SBA Express program.  This new initiative will go into effect January 1 and extend for the duration of the fiscal year.  This will make the loans cheaper for the borrower, another way SBA is looking to serve small business owners as they look for ways to access capital.

Today’s announcement comes during SBA’s National Veterans Small Business Week, an initiative on the part of the U.S. Small Business Administration to reach out to veteran entrepreneurs and business owners.  During Veterans Small Business Week, SBA staff all across the country have been working with partner organizations on educational efforts, mentoring, and trainings to make sure veterans have the tools they need to start or grow their business.

SBA provides veterans access to business counseling and training, capital and business development opportunities through government contracts. In FY 2013, SBA supported $1.86 billion in loans for 3,094 veteran-owned small businesses.   And since 2009, the dollar amount of SBA lending support to veteran-owned firms has nearly doubled.

For more information about these and other SBA programs, visit the SBA website at, or contact your local SBA field office.  You can find contact information for your local SBA office at

Click Here for Information on SBA Small Business Loans available

Check here for Businesses Available 

Best Basic Accounting Book for Small Business Owners and Buyers

Best Basic Accounting Book for Small Business Owners and Buyers

I found this basic accounting guide and it’s the best I’ve seen at presenting basic small business accounting in an easy to follow manner.

This book is under 100 pages and under $10…if you’re a small business owner this could be the best $10 you ever spent.


Accounting Made Simple – Understanding Accounting Principles in Less Than 100 Pages

If you are considering buying a business or you own a small business and hope to sell it one day take the time to review this book and implement the simple solutions that will make your business more valuable.

When buying a business it’s important to understand accounting principles so that you can condut the proper due diligence. This book will help simplify the process and also help you prepare your financing when seeking a bank loan or support from investors.

Want to Know How a Business Appraiser Looks at Small Business Value?

Factors that Increase or Decrease Business Value
By: George D. Abraham
CEO & Chief Appraiser
Business Evaluation Systems
There’s a range of key factors that can affect the value of a business.  While some of these factors are outside of the owner’s control, steps can be taken to make the business as valuable as possible. Start planning well in advance and consider inserting an exit strategy into your original business plan. Then start implementing the factors that increase value and eliminate the factors that decrease the value.
Financial Statements
Just how good are your financials. Are they minimal or do they show an in-depth look at your business.  Can you easily track the flow of revenue and expenses flowing from the invoice to the financials to the tax returns?  Can your track the sales of your top 5 customers? Can you easily prove all of the perks you receive from the company?  Today’s accounting software easily lets you do all of this and much more.  When a buyer is interested in a company, the ease at which the owner can prove the financial performance of his or her business has a direct impact on value. Incomplete or inaccurate financials tells the buyer that no one is watching and tracking the Company’s performance and therefore the future performance (of real importance to the buyer) is unpredictable.  Value is created or destroyed by the ability to see the Company’s future.  The longer the buyer can see that the Company will perform in the future as represented, the more secure they are and less risk is perceived.  To the contrary, when the future is a guess, risk is increased and value is decreased
Obviously, small increases in revenues over the year’s shows a different picture than equally decreasing sales and the same is true with large increases and decreases.  The key to value is the owner’s ability to explain the precise reason.  Many times declining sales, if explained does not affect value as negatively as one might expect.  Retiring doctors decide to work less, firing unprofitable customers and price increases that result in increased earnings do not impact the value of the business as negatively as one may think.  Again, the key is the explanation of why revenues and/or earnings have dropped.
The big question is what would happen to the business if ownership changed.  Obviously, if the Company’s management and sales department are you, the owner, expect a decrease.  On the other hand, if the sales are made by the sales department and the Company has department managers that report to the owner, value increases.  Another factor is the longevity of the management team and in general all of the employees.  Have the managers and employees been with the Company for several years, or is constant turnover the norm?  These people have key knowledge of the internal workings of the Company, products and services and relationships with suppliers and customers.  A well trained (and cross trained) knowledgeable management team and employees with longevity greatly reduces risk to the hypothetical buyer and thus increases value.
When you look at your operation, do you see a busy, organized facility with well maintained equipment? A facility that is busy, appears to be unorganized, with dirty equipment, reflects the same image for the management and employees.  Well maintained, clean equipment and vehicles tells the buyer that regular service and good maintenance records are the norm and this increases value.  The opposite portrays, short lived equipment and vehicles with higher amounts of capital expenditures in the future that reduce earnings and lowers value.  One has to imagine that the kind of appearance the Company has, may represent the kind of customers it has.
In General
First impressions are important! A clean organized business with well maintained assets and good financials portrays a good well managed, solid business and reduces the risk level in buyers.  It reduces the depth of the financial due diligence process, questioning asset and inventory values and creates a more secure atmosphere for the buyer.
Good financials, formalized business and marketing plans, well trained and knowledgeable management and   employees with longevity add up to value.
Competition is always a risk to a buyer.  The more you know about your competitors and why they will not affect you is extremely important to a buyer.  If your company has intellectual property, valued or not, be able to explain (even better to calculate it) the advantages your company derives from it.  Start an exit plan a couple of years in advance, to address any of these factors that may pertain to your business.  A business owner that knows the strengths of his or her business and can reasonably prove it, has a large effect on the appraiser and the buyer.

Do you know yourself? Do you know your clients? What Kind of business owner are you?

I had a chance to meet with John Warrillow recently. He’s the author of an excellent new book that talks about business owners and how they think. It’s titled Built to Sell

If you have a dream of selling your business or growing your small business into a bigger business that one day can be sold, this book should help you.

If you’re a business owner, or hope to one day be a business owner, this book is important for you…if you are an advisor to business owners this book is critical!

What kind of business owner are you? What kind of business owners are your clients?

  • Mountain Climber
  • Freedom Fighter
  • Craftsperson

Take the time to figure it out, it could be worth a lot of money to you one day soon.

Give it a read, I’ll bet you’ll be glad you did.

Click here for the link to the book.