How Much Should You Spend on a Business?

The aim of this article is to give you some basic thoughts to enable you to decide how much you should be prepared to invest in a business. There are two aspects that need to be covered: • Deciding how much it is right in your circumstances to consider investing. • Assessing how much of your own money will be needed to ensure your business venture is well funded. In order to give yourself the best chance of success, it is clearly vital to ensure that you are on a sound financial footing from day one. There is nothing difficult about working out a sound structure for your finances - it is all down to common sense and, as long as you give this subject the time and thought it deserves, you should have no difficulty in avoiding arguably one of the biggest causes of business troubles: inadequate or inappropriate finance. In business, as at home, there is nothing worse than forever struggling to make ends meet. You do not want to find yourself held back at critical times by lack of adequate funds. By ensuring that you are well funded, you can avoid the sort of situation where, for example, you know that more business is there for the taking, but you can't afford the extra stock; or where stock has to be run down because the rent is due. It is important to be certain that not only is your business well funded, but also that your domestic financial resources are adequate at the same time. So often a good business, possibly soundly funded at the outset, runs into difficulty later because the owners have had to draw out too much money from the business to enable them to meet domestic commitments. Assessing your own circumstances Everybody's circumstances are different, so there is no magic formula. Nevertheless, the key issue is this. However carefully you may have investigated the business you eventually buy, you might find that there is not initially as much available cash to bring home as you had thought there would be. There could be any number of reasons for this, not all bad ones. Maybe due to special circumstances there is a surge in trade and additional investment in stock is needed. Good news, but it might leave you short of cash for a while. On the other hand, you may take over at a bad time or at first you may not do as well as you could have done due to inexperience. As already stated, it is vital to ensure that you are on a sound footing from day one. If you are short of financial resources right at the beginning things can only go from bad to worse, because somehow you will never recover, at least not for a long time. It is, therefore, essential to ensure that you have reserves in your domestic finances to enable you to survive in case of need without drawing on the business for a while. How much do you need in reserve? Again, there is no hard and fast rule, but enough to enable at least three months' domestic spending to be covered without drawing on the business at all is probably a sensible amount. Obviously you hope not to need to draw on it, but it will give you great peace of mind to know that this cash reserve is there. If your spouse/partner is working, that income (if secure) may reduce the reserve you consider to be necessary. Assessing the needs of the business As you will be aware, some of the funding for the business can be arranged via debt, but some of your own resources will be required. How to arrange finance in detail is covered in a later chapter, but at this stage you have to consider how much of your own money is likely to be needed. When you come to look at a specific business you must consider the financial needs in great detail, especially if it is a seasonal business where the needs are likely to vary greatly throughout the year. In such cases a detailed cash flow projection will be required and, if you are not experienced in accounting matters, professional assistance will be necessary. However, at this stage just work out a rule of thumb to enable you to know the price of business you are able to consider. The detailed workings can be done later when you have a particular business in mind. As a rule of thumb, assume that, if it is a leasehold business, you will need to find a third of the total costs of buying the business and the stock from your own resources. If it is a freehold business assume twenty per cent, because you can normally use the freehold as security for borrowing, thus enabling you to obtain a higher percentage by way of loan.

Analyzing And Assessing The Business

One of the most important steps you will take towards buying a business will be to make a sound judgement on the viability and true worth of what you are buying. In a sense, you must play the part of a good detective and uncover the truth about the business you are buying. The first assessment you must make in evaluating a business for sale is to review its history and the way
it operates. It is important to learn how the business was started, how its mission may have changed since its inception and what past events have occurred to shape its current form.

You should also understand the business's methods of acquiring and serving its customers and how the functions of sales, marketing, finance and operations interrelate.The business's financial statements, operating documents, and practices should be also be reviewed thoroughly.

EVALUATION

The following are the main sources you should use to evaluate a business for sale:

Ask to take a look at the balance sheet of the business. This should give you records for accounts receivable, inventory, marketable securities, real estate, machinery and equipment, accounts payable, accrued liabilities, notes payable and mortgages payable.

Check the income statement. The potential earning power of the business should be analysed by reviewing profit and loss statements for the past three to five years. The business's earning power is a function of more than bottom-line profits or losses. The owner's salary and fringe benefits, non-cash expenses, and non-recurring expenses should also be calculated.

Check the financial ratios. While analysing the balance sheet and the income statement, sales and operating ratios should be calculated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, accounts receivable turnover, inventory turnover and sales/accounts receivable. Look for trends in the ratios over the past three to five years.

Find out the situation with the business's leases, personnel, marketing, patents, taxes, legal issues and competitors.

These factors for evaluating a business have to be carefully scrutinised and weighed. Seek out professional assistance if needed to interpret the significance of the information. In most instances, all of the business records should be made available to you. In some cases, however, certain information may be withheld until a bona fide offer, contingent upon obtaining that information, has been made.

Everything About Buying A Website

If you have been looking online to buy a website, and haven't found one that is worth considering, then you need a better way to go about this process! First, you need to adjust your thinking. Keep in mind that a website for sale listing will only give you a snapshot of the business. These listings cannot outline everything about the website.

First step. Looking through the business listings.

If you spend your time searching endlessly for a website you'll probably give up with no results. This is a common reason why 90% of the people who begin the search to buy a website never complete a transaction. If you want to participate in the tremendous wealth being generated by the internet, then you need to make the transition from "looker" to "buyer".

Communicating with the seller is critical to the business buying process. It is the best way to gain focus and clarity on the right business for you. Starting today, when you look at a listing, I want you to do the following:

Contact the seller or intermediary
Sign the necessary confidentiality agreements
Ask your key questions when they contact you
If satisfied, immediately arrange a phone call with the seller
Make it your goal to communicate with at least five websites over the next 30 days. I can assure you that by doing so you will feel completely rejuvenated about the buying process.

From these exchanges of information you will be able to either eliminate or pursue each business. As you communicate with more sellers, you will become clearer about what you want and don't want in a website. With this clarity, when that right website presents itself you'll be able to pounce right on it and get a deal in place.

Before making a decision to purchase a website, a buyer should understand his or her objectives to make sure those objectives can be met by purchasing a particular website. Surveys of people purchasing websites reveal similar responses. Surprisingly, making money is not at the top of the list. Here is a list of the typical answers, in their order of importance:

I want to control my own destiny.
I would be happier if I worked for myself.
My current work does not take advantage of my skills and abilities.
I want to make a lot of money.

An existing website has a historical track record (good or bad) which can be used to evaluate the website. An existing website has usually shown there is demand for its products or services, and it should have, among other things, detailed financial records. Sometimes, a seller of a website will agree to help to train a new owner. These are important factors because many websites tend to fail during the early stage of their development. On the other hand, there can also be disadvantages to buying an existing website. A buyer will be assuming an established website culture and infrastructure which may make implementing changes more difficult. Also buyers will generally have to pay a premium for an existing website.

A buyer should only consider a website he or she will feel comfortable owning and operating. The time and effort which will be required is an important consideration as is how much the buyer can afford to pay for the website. The amount of cash the buyer needs to regularly take out of the website is very important, especially if the website is to be the buyer's only source of income. Because many experts believe you should not purchase a website unless you can make it better, it is helpful if a buyer has some definite ideas on how to improve the purchased website.

The availability of outside financing will depend upon the asset base of the website, its operating history, collateral availability and projected cash flow - the same issues considered in all business lending.

Sometimes the seller will simply make up an inflated asking price to determine if there is any interest in his website at the inflated price. Other times, the seller will obtain a professional valuation of the website.

The answer to this question depends a great deal upon your appetite for risk. If the purchase price represents a significant amount of money to you, then it is a good idea to retain an attorney to review the necessary legal documents. It is important that the attorney you hire be familiar with business acquisitions to be as effective as possible during the process.

Typically, confidentiality is very important to a seller. It can be damaging to a website if it is known that it is for sale. Customers may not be interested in buying from a website that is up for sale and competitors could use the information to their advantage.

What is due diligence?

Due diligence is a systematic process for acquiring and analyzing information to help a buyer or seller to determine whether or not to proceed with a proposed business transaction. The information obtained relates to all aspects of the website to be purchased. Due diligence should include both quantitative information, such as sales and other financial data, and qualitative information, such as an assessment of the existing website, security systems, existing relationships with suppliers and customers and other matters. Sometimes the information to be reviewed can be quite technical or industry specific. It is important that the person doing due diligence have a complete understanding of the information being reviewed.

The seller has imposed an unrealistic time frame for the transaction.
The seller has withheld key information.
The explanation for selling the website is not logical.
The financial statements seem “to good to be true”.
The seller has presented any information that is significantly misleading.
The seller is not willing to be available after the sale.

The price paid for the website was significantly over market value.
The due diligence procedures were not adequate.
A previously dependent asset was unable to survive without support (i.e. sales to related parties or below market debt financing)
A change in business environment created unexpected problems.

Buy An Existent Business or Start Up Your Own Business

How to Get a Loan To Buy A Small Business.