Buying a business

Eric Tyson, MBA is a nationally-recognized personal finance counselor, writer, and best-selling author of Personal Finance For Dummies. Jim Schell is an accomplished serial entrepreneur, nonprofit founder, and executive. He spent twenty-five years as an entrepreneur and thirty years as a nonprofit founder and executive. Eric and Jim are co-authors of Small Business For Dummies.

Introduction 1

About This Book 1

Foolish Assumptions 3

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part 1: Deciding to Buy a Business 5

Chapter 1: Preparing to Buy a Business 7

Figuring Your Financial Fitness 8

Assess your financial position and goals 8

Measuring your net worth 9

Telling good debt from bad debt 10

Reducing debt 10

Buying insurance 12

Planning for the long term 12

Shrink your spending 14

Build up your cash reserves 14

Stabilize income with part time work 15

Assessing and Replacing Benefits 16

Retirement savings plans and pensions 16

Health insurance 17

Disability insurance 18

Life insurance 18

Dental, vision, and other insurance 20

Social Security taxes 20

Time off 21

Understanding Your Time and Financial Commitments to Buy 21

Stepping Toward Buying a Business 22

Enlisting Help from Top-Notch Professionals 23

Start with free/low-cost industry resources 23

Finding and interviewing reputable professionals 24

Estimating the Cost of Your Search and Business Acquisition 25

Calculating a down payment amount 25

Tallying search expenses 26

Finding funding 27

Chapter 2: Is Buying a Business for You? 29

Understanding Why to Buy a Business 30

To reduce start-up hassles and headaches 31

To lessen your risk 32

To increase profits by adding value 32

To establish cash flow 33

To capitalize on someone else’s good idea 34

To open locked doors 34

To inherit an established customer base 35

Knowing When You Shouldn’t Buy 35

You dislike inherited baggage 35

You’re going to skimp on inspections 36

You lack capital 38

You think you’ll miss out on the satisfaction of creating a business 38

Recognizing Prepurchase Prerequisites 39

Business experience and training 39

Down payment money 41

Do You Have the Right Stuff? 42

Getting started with the instructions 42

Answering the questions 43

Scoring the test 45

Analyzing your results 46

Part 2: Picking the Business That Fits Your Situation 49

Chapter 3: Determining Your Niche 51

Why You Don’t Need a New Idea to Be Successful 52

Choosing Your Business 54

Consider your category 54

Take advantage of accidental opportunities 56

Inventory your skills, interests, and job history 56

Narrow your choices 59

Go in search of fast growth 60

Take advantage of government resources 62

Chapter 4: Finding the Right Business to Buy 65

Defining Your Business-Buying Appetite 66

Generating Leads 68

Perusing publications 68

Networking with advisors 69

Knocking on doors 69

Enlisting business brokers 70

Considering a Franchise 73

Franchise advantages 74

Franchise disadvantages 75

Evaluating Multilevel Marketing (MLM) Firms 76

Being wary of pyramid schemes 77

Finding the better MLMs 78

Checking Out Work-from-Home Opportunities 79

Chapter 5: Evaluating a Business to Buy 81

Examining Owners’ and Key Employees’ Backgrounds 82

Finding Out Why the Owner Is Selling 84

Surveying the Company Culture 87

Deciding on Terms 88

Inspecting the Financial Statements 89

Interpreting the profit and loss statement 90

Reviewing the balance sheet 95

Understanding key ratios and percentages 101

Uncovering Lease Contract Terms 106

Evaluating Special Franchise Issues 106

Thoroughly review regulatory filings 107

Evaluate the franchiser’s motives 107

Interview plenty of franchisees 108

Understand what you’re buying and examine comparables 109

Check with federal and state regulators 110

Investigate the company’s credit history 110

Analyze and negotiate the franchise contract 110

Part 3: Negotiating Terms and Sealing the Deal 113

Chapter 6: Figuring Out How Much the Business is Worth 115

Exploring Valuation Methods: Multiple of Earnings and Book Value 116

Getting a Professional Appraisal 118

Tracking Businesses You’ve Explored That Have Sold 119

Tapping the Knowledge of Advisors Who Work with Similar Companies 119

Consulting Research Firms and Publications 120

Turning to Trade Publications 120

Enlisting the Services of a Business Broker 121

Chapter 7: Financing Your Deal 123

Outsourcing Financing 123

Taking advantage of seller financing 124

Banking on banks 124

Getting money from nonbanks 126

Financing Yourself: Bootstrapping 131

Chapter 8: Preparing a Purchase Offer 133

Writing a Letter of Intent or an Indication of Interest (IOI) 134

Drafting an Indication of Interest (IOI) 134

Writing a Letter of Intent (LOI) 135

Developing Purchase Offer Contingencies 135

Allocating the Purchase Price 137

Doing More Due Diligence 138

Think about income statement issues 139

Consider legal and tax concerns 140

Part 4: Managing a Smooth Transition 141

Chapter 9: Moving into Your Business 143

Getting Important Things Down on Paper 144

Considering the Business Entity 145

Sole proprietorships 145

C corporations 147

S corporations 153

Partnerships 155

Limited liability companies (LLCs) 155

Gaining Insight from Others 157

Chapter 10: Business Owner Basics 159

Minding the Details of Business Ownership 160

Buying insurance 160

Paying federal, state, and local taxes 163

Negotiating leases 163

Maintaining employee records 164

Getting licenses and permits 165

Signing the checks 165

Outsourcing: Focus on What You Do Best 166

Surveying the most commonly outsourced tasks 166

Figuring out what to outsource 168

Simplifying Your Accounting 169

Introducing some common systems 170

Choosing the system that’s right for you 177

Controlling Your Expenses 178

Looking at fixed and variable expenses 179

Understanding zero-based budgeting 181

Managing Vendor Relationships 182

Dealing with Bankers, Lawyers, and Other Outsiders 184

Bankers 184

Lawyers 186

Tax advisors 189

Consultants 189

Governments 190

Chapter 11: Handling Regulatory and Legal Issues 191

Navigating Small-Business Laws 192

Complying with Small-Business Regulations 194

Complying through licensing, registrations, and permits 194

Protecting ideas: Nondisclosures, patents, trademarks, and copyrights 202

A business prenup: Contracts with customers and suppliers 206

Laboring over Employee Costs and Laws 207

Part 5: Creating a Growth Trajectory 209

Chapter 12: Keeping and Attracting Superstar Employees 211

Motivating Top Performers to Stay 212

Revisiting the Compensation Plan 214

Reviewing the types of compensation 215

Creating a compensation plan that works for your business 216

Introducing Changes to Employee Benefits 217

Including insurance and other benefits 218

Seeing the real value in retirement plans 222

Deciding whether to share equity 224

Bringing in New Talent 228

Training: An Investment, Not an Expense 232

Parting Company: Firing an Employee 233

Designing Flexible Organization Charts 236

Valuing Employee Manuals 238

Characterizing Successful Employers 240

Flexibility: The bending of rules 241

Accountability: Where the buck doesn’t get passed 242

Follow-up: The more you do it, the less you need it 243

Chapter 13: Keeping Your Customers Loyal 245

Retaining Your Customer Base 246

Getting it right the first time 246

Continuing to offer more value 247

Remembering that company policy is meant to be bent 247

Learning from customer defections 249

Recognizing and practicing customer service 251

Dealing with Dissatisfied Customers 255

Listen, listen, listen 256

Develop a solution 257

Expanding Your Customer Base 258

Marketing defined 259

Mastering the key elements of marketing 260

Part 6: the Part of Tens 261

Chapter 14: Ten (or So) Ways to Learn from the Experiences of Others 263

Utilize Mentors 264

Network with Peers 264

Form a Board of Advisors 265

Find a Partner 266

Join a Trade Association 267

Locate a Small Business Development Center 269

Give SCORE a Try 269

Tap into Small-Business Information 270

Chapter 15: Ten Ongoing Tax Jobs 271

Keeping Track of Your Small Business Revenues and Costs 272

Separating Business from Personal Finances 272

Documenting Expenses and Income in the Event of an Audit 273

Keeping Current on Income, Employment/Payroll and Sales Taxes 274

Reducing Your Taxes by Legally Shifting Income and Expenses 276

Ensuring a Complete and Accurate Tax Return 277

Tracking Tax Information on Your Computer or Smartphone 278

Deciding When to Stash and When to Trash 278

Replacing Lost Business Records 279

Index 281