business part 2

why's is projected cash flow so important

- Provides a schedule of receipts and payments of accounts. - Shows you can pay for day-to-day operations. - Shows the lender you have the cash to make loan payments. - Provides a format for planning the most effective use of cash. - Helps plan for of unexpected changes in circumstances.

get the word out

- Spread the word that you are a potential buyer. - Contact everyone you can in your chosen industry. - Ask people in your network to help you with your search. - Advertise your needs in trade journals - Check out the Internet. - Send letters of inquiry to potential sellers. - Knock on doors. - Don't rush. when sharks smell blood in the water they go for the jugular

formal financing

- banker other - Angels: rich people with money - Suppliers: suppliers who give you time to pay off - Customers: customers that give deposits Leasing - Employees & employers - Micro-lending programs: a program that gives money to help entrepreneurs - -Government programs - Venture capitalists they gamble with money worse than angel when it comes to control - Cooperative partnerships strategic partnering your network

PRO Debt Financing

- don't have to give up control - term is limited - can be acquired from multiple lenders - information required is straight forward

cons of debt financing

- take on more than company needs - misapplying funds in a way that makes to repay loans -- use to much for regular expenses --or invest it (which you shouldn't do) and you - cannot pay them back - not properly servicing debts

5 financial tables

1. Application of Funds (start-up funding) 2. Opening Balance Sheet 3. Projected Cash Flow 4. Projected or Pro Forma Income Statement 5. End of Period or Year-End Balance Sheet

There are two ways to get inside the business:

1. Contact the owner yourself, or 2. Get assistance from a business broker. If you are serious about buying a business, use the services of a business broker. Brokers have the expertise and knowledge you'll need. insider: EMPLOYEE, LAWYERS, BANKERS, SUPPLIERS

start up expenses

1. General Start-up Costs Organizational costs Prepaid Expenses Opening Inventory/Office Supplies 2. Leasehold Improvements Carpeting, mirrors, light fixtures, etc. 3. Equipment Costs Tables, chairs, desk, filing cabinet, etc. 4. Cash Reserve Fund Total cash on hand immediately before the business opens (Table 10.2).

investigate the business from the inside

1. Get assistance from a business broker or financial advisor. If you use a broker, remember the broker represents the seller. 2. Study the financial history. tax returns for 5 years 3. Compare what your money could do elsewhere. 4.Evaluate the tangible assets. i.e equipment, inventory (good shape, can you actually sell it), and state of equipment (replace, repair) 5. get a noncompetition covenant (they cannot set up the same business near you 6. Talk to insiders. 7. Analyze the seller's motives. i.e good reason : want to retire, they are sick, they have multiple business, problems at home, partnership not going well not good reason: the area is going down, young family been moving out,

infromal sources of financing

1. boot strapping : self-financing 2. Family and friends (love money)

franchise systems

1. business format : strict i.e timmy 2. dealership relationship : more lenient i.e property guys

Franchise network

1. direct franchising : franchisee deals directly with the franchisor 2.master franchising : franchisor sells the rights of an area or territory to a franchisee

Indirect Distribution

1. wholesale 2. franchise

Distribution Channels

2 broad channel options: 1. Direct distribution (Retailing) 2. Indirect distribution

Franchise business accounts for how much of retail stores

40%

proprietorship ratio

= owner investment / total assets (greater than .5= you own at least 1/2 the assets)

debt-to-equity ratio

= total liabilities/ owner's equity ( should be less than 1, you have enough equity to meet all debts

Balance sheet

A balance sheet is a snapshot of the financial position of your business at a certain period of time what it owns and owes opening and closing balance sheet opening: before it opens closing : 1. assets 2. liabilities 3. equity

Direct franchisor

A business arrangement in which a franchisee deals directly with the franchisor.

Master Franchisor

A business arrangement or network in which a franchisor sells the rights of an area or territory to a franchisee who is normally required to sell (or establish) and service a specified number of franchises in a specified time period within its area.

Franchise : Customer satisfaction & brand loyalty

A consistent standard of service and product. A sense of security and familiarity. A perception that the owner is close by and ready to help.

projected (pro forma) cash flow

A financial statement which helps you control the money that comes into your business (receipts) and the money that is spent. (disembursement)

franchisor

A firm that sells the rights to do business under its name and continues to control the business.

Personal balance sheet

A personal balance sheet is a list of the market value of assets (what you own) and liabilities (what you owe) that will show your net worth. A personal balance sheet: will tell you where you are with money now will indicate your borrowing capability

dealer relationship franchise:

A type of franchise in which the franchisee buys the right to distribute a franchisor's product or service. Example: Home Hardware or PropertyGuys.com and coke

business format franchise

A type of franchise in which the product, method of distribution, sales and management procedures are highly controlled. Example: Tim Hortons, McDonalds

how to calculate personal balance

A= L+ E E = A-L

income statement

An itemized statement of sales (or revenues) and corresponding expenses over a period of time. Normally for a 1 year period (sometimes on a quarterly basis) **PROFIT IS NOT CASH Major elements of an income statement include: - sales (no cash from yet) - cost of goods sold - gross profit (sales -cost of goods) - operating expenses - other expenses - net profit (before tax)

why does a balance sheet balance

Assets = Equity + liability

Franchise : The franchisee expects to receive:

Brand-name recognition Support from the corporation (franchisor) Training Financial support A business template—a proven plan and business strategy Purchasing power Corporate monitoring and assistance Less risk of failure National/regional promotion Additional units—an opportunity to grow the more units = the more likely the franchise the more likely they will get choice spots

five steps to creating cash flow

Calculate your opening balance Calculate projected sales for each month (using the unit method or sales method) Forecast receipts (cash sales or receivable collected items) Forecast disbursements (variable : inventory or fixed : rent) Summary of cash flow

before start business take a look at

Check out your health and medical insurance needs. Apply for additional credit cards or increased limits. Apply for a personal line of credit—which will depend on the four Cs (capital, character, capacity and collateral). - Capital : do you already have some type of savings - Character : credit history - Capacity : they take a look - whether or not you are a good bet and how much you do on a regular basis and how much you are asking for how much you make on a monthly basis monthly expenses - Collateral : anything can they cease they look at other assets : house, car etc Explore the possibility of a home-equity loan or home-equity line of credit.

Why not to franchise (a lot of entrepreneurs don't)

Comparable knowledge of industry and business as franchisor Franchise name not important in fitness not a lot of brand loyalty Unwillingness to pay franchise, royalty and advertising fees Concern over losing individuality Lack of control

If you're asked to put down a deposit

Deposit the money in an escrow account. Make your offer subject to the approval of a financial analysis of the business.

Investigate the business from the outside

Does the business fit into the framework of your industry overview? Diagram the area. Take some photographs of the exterior. Ask around. Interview neighbors and the customers. Check out future competition. (how much work do you need to do to make the business more and more competitive ) Check with local authorities. Know when you need outside help. The first step is to gather as much information as you can from the exterior. Studying the business from the outside will tell you whether you should go inside and probe more deeply (Action Step 58, page 348). Don't take sellers at face value. Talk with suppliers. Count your time as a cost of doing business. Look at each deal from the viewpoint of what it would cost to hire a competent manager and staff at market rates.

Earning-assets valuation-valuation

Doesn't care about loan a business valuation approach that takes into consideration both earning potential and asset value

Process of purchasing franchise

Explore franchising Contact and pre-qualification Application Franchisor contact and review Franchise agreement provided Negotiate terms Agreements signed and business begins

Factors to consider

Factors to consider: - Hungry seller what is there motivation are and really what the motivations i.e want to spend more time with wife = means that they want to sell fast = good reason but if they sell it because the business is not doing well - Fixtures and equipment - Training and support -Established customer base and supplier relationships - Good location - Knowledgeable employees especially if the business depends on a skill i.e buy a gym because the trainers that are working there have a lot of certification if you want to do it based on knowledgeable employee - Existing permits and licenses know the permit and licenses are transferable to you (lawyer to check ) - Evidence of financial results : cash flow statements, tax returns, deposit statement - Technology : is there a way to bring down cost by making it more technologically savvy

Franchise : what the franchisor asks from you

Franchise fees Royalty fee Profit on items sold to franchisee Volume rebates Advertising fees Growth and market penetration (the big one) - they do it without putting out any money

informal source of financing : family and friends

Having a banking relationship with your parents & friends is fraught with potential problems Consider asking them to co-sign loans Tread lightly and carefully what to think about Do not accept more money than your lender can afford to lose Put everything in writing Make it a business loan Include in the loan a provision for repayment Discuss your company's goals and any potential problems Get independent advice

Key factors for making a decision about your credit are (in order of importance):

How you pay your bills. (35%) - act of paying your bills Amount of money you owe and the amount of available credit. 30% - owe on credit card: car loans, home equity etc Length of credit history. 15% longer your have credit the better Mix of credit. 10% - credit cards, mortages, car loans New credit applications. 10% - how many applications your are filling out

Equity financing

If you invest money in a business and expect a portion of ownership in return, this is called equity financing or ownership investment. better for long term - you are giving control

Debt financing

If you lend money to a business and expect to be repaid the full amount plus interest, this is called debt financing. better for short temr

prepare and protect yourself

If you're ready to buy: Prepare for negotiations Your goal is the lowest price with the best possible terms. Be prepared to negotiate the value of good will. Get a non-competition covenant. Get professional help before you sign anything

risk tolerance

List your expenses: Will your new business be able to support your lifestyle? Assess your risk tolerance: How much money are you willing to lose?. Have you considered the risk tolerance of your family members? list lifestyle : ride a bike ,use public transport family members : do you have a spouse? do you have kids? you're risk tolerance ? : you will start losing money before you start making money ?

term loan

Loan used for medium(2-5 years) to long term (5 year +) financing fixed assets such as equipment , furniture, expansion, and renovation 75% of value of building or property pay back with a fixed rate (stays the same) or floating rate (changes with prime rate)

main tips when buying a business

Main thing: Above all, obtain legal & financial advice before you sign any contract. - Determine which type of entrepreneur you are. - Fall in love with the business not the deal. - Stay true to your business values and vision. - Make sure you purchase a business you know how to run. - Look for a retiring entrepreneur who will stay on to help you.

financing for start ups? are from ?

Most start-up businesses rely heavily on informal or owner-based financing like: Personal savings and loans Personal lines of credit "Love money" from family and friends Start-ups are less likely to use formal types of financing such as: Commercial loans Commercial credit cards Leasing

The contract

Once negotiations have ended the details should be spelled out in a contract. include : 1. An agreed upon closing date 2. Clear definition of what is being transferred. 3. Details of commitments being assumed . 4.Adjustments in price to cover transactions occurring between the signing of the offer and the closing date of the agreement 5. Guarantees by the seller of the truthfulness of the information provided 6. Clause limiting the ability of the seller to compete. 7. Responsibility of seller to maintain operations until closing date. 8.Penalties incurred by seller of provisions not met 9 Amount of security deposit to be held in escrow. Amount of time funds to be held and terms and conditions to be satisfied for release 10. How disputes will be resolved

possible financial advisors

Possible financial advisors Accountant Banker Financial advisor Successful Entrepreneur

Types of Debt Financing

Shareholders loans Canada Small Business Financing (CSBF) loans Operating loans (Line of Credit) Term loans

Types of Equity Financing

Sole proprietorship or partnership : it is the owner's personal investment is the equity financeb Owner's personal investment Incorporated business Common shares Preferred shares Convertible debentures

Meet the banker

Some strategies: Make your banker part of your team Try not to surprise your banker Invite your banker to your business Respect the banker's rules Have an up-to-date plan Get ready for collateral, personal and spousal guarantees Understand the banker's discretionary limits

franchisee

The individual operator who is licensed to operate under the franchisor's rules and directives.

debt or equity or some combination?

The trick is to find the right balance between debt and equity—one that will satisfy the needs of: You the owner The business - could do equity if you want to expertise or loan from bank if you only need money

Franchise agreement

You will likely be required to sign a contract that could be 50 pages long. This contract lays out the system, rules and regulations that you will be bound by. Do not deposit any money until you have consulted with a lawyer and accountant.

liquidity

___ ratios measure the number of dollars of liquid assets available to cover each dollar of current debt. Two basic ______indicators are the current ratio (current assets/current liabilities =greater than 2) = higher the ratio = higher the liquidity the quick ratio (most liquid assets /current liabilities = greater than 1)

Canada Small Business Financing loan

a loan guaranteed by the federal government under the Canada Small Business Financial Act - startup (90%)

escrow company

a neutral third party (usually a lawyer) that holds deposits and deeds until all agreed on conditions are met

Franchising

a special kind of distribution system in which one company/individual (the franchisor) grants the right to sell its products/services to another company/individual (the franchisee)

Ability-to-pay valuation-price

a valuation approach based on the ability of the business to pay off business loan and provide a reasonable return on the owner's investment over a specific period Doesn't care about: value and assets

current assets

assets or holding of the business that can be converted into cash or consumed in the production of income in a short period of time (Usually one year) i.e cash account receivables office inventory supplies prepaid expenses: 1st month of rent and insurance other current assets: security or note payable

pro of equity financing

can add up expertise and contacts funds never need to be replaied

other assets

cannot be assigned a fixed value i.e franchise free, organizational fees, government registration fees pre-start-up legal and accounting fees

in an income statement : profit is not

cash

con of equity

danger of incompatibility difficult to terminate relationship

long term liabilities

debts and financial obligations that are due after one year mortgages and liens payable loans from shareholders equipment loan

Common Shares

equity investments that confer part ownership of the company but are not as safe as preferred shares should the company fail

Preferred Shares

equity investments that confer part ownership of the company earn investors dividends at a fixed rate, and are safer than common shares

application of funds

expenses you pay before starting your business

Franchise fee

fee paid by a franchisee for the rights to represent the franchisor in a given geographic area for a specific time (5-10 years)

what else can you do with a lot of money

invest (might make more money)

unsecured credit

is credit extended to a borrower on the promise to repay the debt with no collateral or guarantee.

Convertible debentures

loans that can be exchanged for common shares at a stated price and are better protected than common and preferred shares lend the company money with terms to pay me back if **complex why? the reason they are some situation if the value of share will rise over a period of time the money you lent them and you want to convert it into shares starts off as a loan i.e invest 10k and you have to pay me back in next 5 years with this return, when i do the loan it is $10 per share if the price reaches $25 per share I want to covert 10k into the equivalent amount of shares 400 shares you get sometimes when it continues to grow you make more money

fixed assets

long-term holdings (more than a year) holdings or assets of a business that are used to earn revenue or produce products or services equipment m furniture leasehold improvement land and building autos and trucks other fixed assets

why to buy a business ?

main reason is money

operating loan (line of credit

money lent to help finance short-term business needs, such inventory and accounts receivable prime rate = lowest rate of interest 75% of short term business needs

Royalty fee

on going obligation to pay the franchisor a % of the gross sales

current liabilities

outstanding debt that is expected to come due within one year of the date of the balance sheet i.e account payable (owe supplier) short-term loans (contracts) LONG TERM (only current portion) other current; a line of credit and monthly mortgage payment

shareholder loan

owner investment in form of a loan - to get money from bank + more secure

most important statement in financial business plan

projected cash flow

Solvency

ratios measure the ability of a company to meet its long-term obligations. the higher the ratio the higher the risk to creditor or lender proprietorship ratio = owner investment / total assets (greater than .5= you own at least 1/2 the assets) debt-to-equity ratio= total liabilities/ owner's equity ( should be less than 1, you have enough equity to meet all debts

credit

refers to the money loaned or the ability to borrow money. A lender will need to review your credit history and will probably request a credit report.

bootstrapping

relying entirely on one's efforts and resources 1. self financing 2 getting family and friends to volunteer 3. preselling to customers 4. battering (exchange of services) 5. supplier financing

Negotiate the price

remember that the price is coming from one perspective how to negotiate a price : - Asset based valuation-price : determined by the assets of the business - Ability-to-pay valuation-price : by ability of business to cover loan obligations and buyer's investment over a specified period of time - Earning-assets valuation-valuation : take into account both asset value and earning potential

Wholesaling

selling of products to retailers for resale to the end user

goodwill

the dollar value obtained when you subtract the value of the tangible asset from the purchase price

Equity

the dollar value of the business owes the owner could be the cost of equipment you put into the business or sweat equity i.e the plumbinLiquidity ratios measure the number of dollars of liquid assets available to cover each dollar of current debt. Two basic liquidity indicators are the current ratio and the quick ratio.g or electrical work you are doing yourself

Liabilities

the dollar value of what the business owes to parties other than the owner current long term

assets

the dollar value of what the business owns types current fixed other assets

Asset based valuation-price

the purchase price of the business is determined in large part by the assets of the business Doesn't care about: earning potential most common - adjusted book value: the book value amended to reflect the market values -book value = owner equity or total assets - liabilities

Tangible assets

things your business owns that you can see and touch such as real estate equipment inventory

angels

wealthy individuals from the informal venture capital market who are willing to risk their money in someone else's business good: give you money and usually experience and you don't have to give money back bad: they are coming in and taking part of your business, personality stress could get into the way need to make sure that they have the right skills to help you and do you mesh

10 redflags

"I've got two sets of books "I usually take a few dollars every week. Save on the HST. So the real cash flow is much better than it looks "I have a couple of buyers interested . So the first one in gets the deal" "Think of all the goodwill you're buying" "If I had more time I could do a lot better" "My staff has been robbing me blind. So the numbers are much lower than they really are. With good management, a lot more money can be made "We don't need lawyers and accountants here. It's not that much money 8. "Slip me a few dollars under the table, and I can drop the price" 9. "I want all cash for the business" 10. "It's not a lot to pay for this business. You're not risking much money, but the payoff can be massive."

Crowdfunding

"the activity or process of raising money from a large number of people, typically through a website, as for a project or small business." Benefit of asking large number of people to donate a small amount Still requires a well thought out plan Added benefit of generating validated early adopter "traction" from the crowd

current ratio (working capital)

(current assets/current liabilities =greater than 2) = higher the ratio = higher the liquidity working capital = current assets - current liabilities

Quick Ratio (Acid Test)

(most liquid assets /current liabilities = greater than 1) to check if they can pay current debts by taking only the most liquid assets

Dealing with a broker

- A business broker is a normally a real-estate broker who specializes in representing people who want to sell businesses. - A broker can be very helpful in playing a third-party role in negotiations. - Remember, however, a broker has a responsibility to represent the seller and is not paid unless he or she sells something. - You should network your business contacts to locate a competent broker. Ask brokers for referrals from their former clients and quiz their business knowledge.-

how to buy and how not to buy

- Analyze everything about a business, using every tool & business guru you can. i.e accountant goes through all the books - Do not buy for emotional reasons. if you do have an emotional investment get someone who doesn't have an emotional investment look at it - The best deals are seldom advertised. - Consider running your own advertisement. and use it as 2ndary research

the 4 C's

- Capital : do you already have some type of savings - Character : credit history - Capacity : they take a look - whether or not you are a good bet and how much you do on a regular basis and how much you are asking for how much you make on a monthly basis monthly expenses - Collateral : anything can they cease they look at other assets : house, car etc