115 WAYS TO EARN MONEY WITH YOUR COMPUTER 1. Provide computer-based office management services for attorneys 2. Do word processing 3. Do medical billing for doctors 4. Do automated telemarketing 5. Manage a church 6. Start a computer user's group 7 Learn to win at blackjack 8. Bet on horse races 9. Bet on pro football 10. Sell computers from your home 11. Provide medical information management 12. Broker information 13. Trade stock by computer 14. Provide astrological services 15. Offer an interactive electronic newsletter 16. Produce book indexes 17. Provide a computer assisted booking service 18. Make stock market investment decisions 19. Do genealogical research 20. Manage a band 21. Manage a house or pet sitting service 22. Track precious gems 23. Sell information to Doctors 24. Analyze real estate investments 25. Support a small law practice 26. Write a book 27. Market collectables 28. Do psychological counseling 29. Prepare income tax returns 30. Provide economic consulting 31. Solve real estate financing problems 32. Do data base reasearch 33. Publish your own book 34. Design your own small business system 35. Crop management 36. Analyze farm expenses 37. Provide weekly printout of bowling league statistics 38. Make computer-generated portraits 39. Manage investment shelters 40. Manage construction costs 41. Produce computer utility products 42. Provide computer-aided financial planning 43. Sell life insurance 44. Support a small publishing business 45. Provide weekly printout of little league baseball statistics 46. Run a small pharmacy 47. Become a computer dealer 48. Interpret physical therapy test results 49. Manage a restaurant 50. Start your own yellow pages 51. Conduct computer assisted telephone interviewing 52. Stream-line executive activities 53. Provide commodities planning 54. Turn financial statements into financial pictures 55. Manage a museum collection 56. Support consumer education programs 57. Do freelance technical writing 58. Do multi-level direct mail marketing 59. Review specialty software 60. Become an engineering consultant 61. Provide sports information services 62. Produce products for hobbyists 63. Provide specialty-focused software services 64. Run a Multi-level, direct sales operation 65. Do litigation management 66. Manage a dairy farm 67. Provided automated debt collection 68. Provide date-base installation and instruction 69. Run a beauty school/beauty salon 70. Improve small business services 71. Broker used computers! 72. Telecommute 73. Enhance medical diagnosis and treatments 74. Create electronic marketing tools 75. Do independent software documentation 76. Teach people how to use micro computers 77. Become your own computer book publisher 78. Create computer-generated puzz1es and word games 79. Become a software consultant 80. Produce low cost computer graphics products 81. Develop software for children 82. Perform real estate inspections 83. Do software translations 84. Produce a computer controlled home security system 85. Automate conference registration 86. Create computer gifts 87. Enhance scientific products 88. Write software for use in the home 89. Manage a winery 90. Desisn and produce personal computer hardware or peripherals 91. Design publish and distribute software 92. Provide information vending machines 93. Start a software writing, cooperative 94. Develop smart scale real estate partnerships 95. Do property management 96. Do mortgage loan brokerage 97. Perform nonjudicial foreclosures 98. Develop mini-warehouse storage facilities 99. Sell instant signs 100. Start an advertising agency 101. Start a resume service 102. Manage a talent agency 103. Operate a referral service 104. Operating a mailing list service 105. Operate a typesetting service 106. Offer a legal forms service for the general public 107. Publish your own newsletter or help others for a fee 108. Operate a voice mail service 109. Start your own local classified newspaper 110. Provide a collection letter service 111. Offer a custom diet plan service 112. Start your own local real estate newspaper 113. Start an apartment rental newspaper 114. Provide a payroll service 115. Start a singles dating service Desktop Publisher Vital Information ------------------------------------------------------------------------------- Start-up Investment Low - $700.00 (If computer and printer is financed). Home-based operation. High - $4,000 - $10,000 Buy equipment and set up office. ------------------------------------------------------------------------------- Break - even time - 90 days to 6 months ------------------------------------------------------------------------------- Estimate of Annual Revenue and Profit Revenue $20,000 - $250,000 Profit (Pre-tax) $16,000 - $110,00 ------------------------------------------------------------------------------- An Exploding Market According to recent estimates by business consulting firms this market has grown from roughly 3 million in annual sales in 1985 to almost 3 billion in 1991, and there is no end in sight. One of the real opportunities and challenges of this business is the fact that there are still millions of clients out there that as yet do not even know that they need the services of a dekstop publishing service. Desktop publishers use computers, laser printers and sophisticated software program in the preparation of high quality graphic material. The price of the equipment used is continuing to come down dramatically, therefore the start-up estimates may be high. The quality of graphic material which can be produced in this manner is so high that only a professional can detect the difference between material designed by desktop publishing and material which has been typeset. The latter has a somewhat higher resolution which is not noticeable to the naked eye. Much of the material you see in newspapers such as USA Today and magazines was prepared through desktop publishing. Desktop publishers prepare graphic materials such as: brochures, flyers, full page advertisements, newsletters, books, proposals, forms and much more. Some desktop publishers will also perform word processing services for their clients. While some desktop publishers will prepare almost any kind of graphic material, many will specialize in one or more, such as newsletters. While prior computer knowledge is a plus anyone who has a desire to learn the operation of a computer can acquire the ability to become a desktop publisher. Quality laser printers which a few years ago sold for $4,000 to $7,000 can now be bought for under $1,000. The laser printer is the key element in making desktop publishing possible. The laser in the printer is activated to "paint" a picture of the computer file which was created through desktop publishing software. As such it acts as a photocopier, by scanning back and forth at high speeds while the drum containing the toner rotates back and forth. The toner is similar to that used in photocopiers. It is attracted to, or repelled from the imaged or 'un-imaged' areas of the drum. As it passes the rotating drum it is transferred onto a piece of paper. This is called "camera-ready" material. It is taken to a printer to be reproduced. To truly understand the continuing magnitude of this field, it is important to realize that until the invention of the laser printer, graphic material was either produced by graphic designers or typesetters in printing businesses. Since graphic designers were, and still are quire expensive their services were generally only available to the medium-sized and larger companies. The typesetter, on the other hand, who rarely had artistic ability prepared art-work for those who could afford the graphic designer. This material generally looked second class. Desktop publishing for the first time has made it possible for any size company to present itself with graphic material which looks every bit as good as the material that huge corporation use to sell their products and services. Who Are The Customers And How To Find Them Almost any size company and organization is a potential customer. Many of the large companies have down-sized their P.R. and Advertising Departments during this recession. And medium-sized and small companies rarely have the equipment or personnel to perform this very specialized work in-house. Potential customers are, for example: restaurants which require menu design, a painter who needs flyer to pass out, a legal firm which requires hundreds of different forms, a hotel which needs brochures, a writer who needs a cover design for his book, and we could add hundreds of other situations to this list. You should join one or more Chambers of Commerce in your community and surrounding communities and other organizations which allow you to meet potential customers. Advertising is both daily newspapers -business section, or in the classified section under "business Services" will be very worthwhile. As soon as feasible an ad in the Yellow Pages will give your business additional visibility. Advertising in other business related publications in your community will also be beneficial. Direct mail directed to businesses and organizations will also be highly beneficial in most businesses, once you have found your first few customers, especially the "first big one" it will be easier to find other clients. Word of mouth of a satisfied client will go a long way and it will be your most effective advertising. The quality and eye-appeal of your brochure and other sales material will be of vital importance. After all you are a desktop publisher and therefore your brochure should very professional looking. Clients will also want to see some work ("your portfolio") which you have prepared for clients. One of the best leads for new business will be the never ending flow of junk mail which you will receive from both local and out-of-town companies. Much of this material will not be very professional in appearance. You can gently and diplomatically suggest to a potential client how much more effective their sales campaign will be with professional looking material.. Since many potential graphic material is too expensive for their budget they will be pleasantly surprised when they learn from you that it can be prepared for $15 to $30 per page. Operating Your Business Most anyone without prior computer background, unless they are young enough to have had computer instructions in high school, will be initiated by computers. Yet slowly but surely computers are becoming as much a part of our lives as automobiles. And if you consider how little most people know about the operation of the automobile engine, but how well they can drive you will realize how easy it is to learn the operation of a computer. While books, operating manuals and even classroom instructions will be most helpful, the most effective way to learn is through practice. Basic knowledge of most software programs, including desktop publishing software can be acquired in about 20 hours. To become truly proficient will take about 2-3 months. This business lends itself well to be operated from your home. Since you will be receiving clients it is important that your home-office be presentable and well kept. As you business grows you can move to larger quarters in an office. Your initial expenses in addition to the equipment itself will pertain to basic office supplies, the preparation and reproduction of your sales material, advertising, postage and miscellaneous expenses. If at all possible get a second telephone line just for your office so you can insure it will always be answered professionally. An answering machine or telephone answering service will communicate with your clients in your absence. Owners of new businesses will spend the majority of their time, during the start-up phase on finding new business. Your new clients will be looking for quality graphic material which is prepared in a relatively short time span (generally from 2 to several days depending on the project - larger projects may take substantially more time), at a reasonable price. The cost of your services are determined by what your competition charges which is pretty well determined by general cost of living expenses in your community. It will be a good idea if you do some snooping around and visit some of your competitors as a "potential client". You will find their advertisements in local business publications and the Yellow Pages. Since you are selling a service most of your revenue will go to the bottom - line and will become profit to you. Operating expenses will be relatively small for general office supplies, paper, laser printer toner, etc. Of course, you may have to finance the purchase of your equipment over a period of time. If your credit is good, financing will be relatively easy to obtain through most computer stores. Since new computer equipment is becoming outdated at an ever increasing speed it is best to buy equipment on the lower end of the price range even if your budget can stand the higher outlay of capital. Small businesses and organizations will be requesting credit extension. Your care in granting this privilege is important. Nothing is more aggregating then selling a service "your time" and not get paid. It is not at all unreasonable to request payment up front with new and small business clients. Once you have granted credit to a business or organizations set down strict rules and stick to them. In general there rarely is justification to carry any client beyond 60 days. As you expand and require assistance to carry the work-load consider hiring "outside contractors" instead of employees. There are many individuals who have the knowledge and equipment to free-lance with desktop publishing. You will be saving the various benefits which are required to pay to employees and which average about 20 - 30% of salary. Resources Publications: Publish, P.C. World, Mac World are the best known publication. New ones are coming on the market on an on going basis. Organizations: Most of the major desktop publishing software programs sponsor user clubs/organizations throughout the country, such as Ventura Publishing. Education: Almost all colleges and university have an extensive curriculm in various computer instructions including desktop publishing. There are also various private instructions available thorough seminars, etc.,however, these tend to be quite expensive. For additional information helpful in setting up your new business, information about licenses, permits, the legal structure of your business, taxes, insurance and much more refer to the Business Start-Up Fact Finder Manual THE SURVIVAL TIPS FOR SMALL BUSINESSES You may be in Mail Order, Direct Mail, or you may be a local merchant with 150 employees; whichever, however or whatever---you've got to know how to keep your business alive during economic recessions. Anytime the cash flow in a business, large or small, starts to tighten up, the money management of that business has to be run as a "tight ship." Some of the things you can and should do include protecting yourself from expenditures made on sudden impulse. We've all bought merchandise or services we really didn't need simply because we were in the mood, or perhaps in response to the flamboyancy of the advertising or the persuasiveness of the salesperson. Then we sort of "wake up" a couple of days later and find that we've committed hundreds of dollars of business funds for an item or service that's not essential to the success of our own business, when really pressing items had been waiting for those dollars. If you are incorporated, you can eliminate these "impulse purchases" by including in your by-laws a clause that states: "All purchasing decisions over (a certain amount) are contingent upon approval by the board of directors." This will force you to consider any "impulse purchases" of considerable cost, and may even be a reminder in the case of smaller purchases. If your business is a partnership, you can state, when faced with a buying decision, that all purchases are contingent upon the approval of a third party. In reality, the third party can be your partner, one of your department heads, or even one of your suppliers. If your business is a sole proprietorship, you don't have much to worry about really, because as an individual you have three days to think about your purchase, and then to nullify that purchase if you think you don't really need it or can't afford it. While you may think you cannot afford it, be sure that you don't "short-change" yourself on professional services. This would apply especially during a time of emergency. Anytime you commit yourself and move ahead without completely investigating all the angles, and preparing yourself for all the contingencies that may arise, you're skating on thin ice. Regardless of the costs involved, it always pays off in the long run to seek out the advice of experienced professionals before embarking on a plan that could ruin you. As an example, an experienced business consultant can fill you in on the 1244 stock advantages. Getting eligibility for the 1244 stock category is a very simple process, but one with tremendous benefits to your business. The 1244 stock encourages investors to put equity capital into your business because in the event of a loss, amounts up to the entire sum of the investment can be written off in the current year. Without the "1244" classification, any losses would have to be spread over several years, and this, of course, would greatly lessen the attractiveness of your company's stock. Any business owner who has not filed the 1244 corporation has in effect cut himself off from 90 percent of his prospective investors. Particularly when sales are down, you must be "hard-nosed" with people trying to sell you luxuries for your business. When business is booming, you undoubtedly will allow sales people to show you new models of equipment or a new line of supplies; but when your business is down, skip the entertaining frills and concentrate on the basics. Great care must be taken however, to maintain courtesy and allow these sellers to consider you a friend and call back at another time. Your company's books should reflect your way of thinking, and whoever maintains them should generate information according to your policies. Thus, you should hire an outside accountant or accounting firm to figure your return on your investment, as well as the turnover on your accounts receivable and inventory. Such an audit or survey should focus in depth on any or every item within the financial statement that merits special attention. in this way, you'll probably uncover any potential financial problems before they become readily apparent, and certainly before they could get out of hand. Many small companies set up advisory boards of outside professional people. These are sometimes known as power Circles, and once in place, the business always benefits, especially in times of short operating capital. Such an advisory board or power circle should include an attorney, a certified public accountant, civic club leaders, owners or managers of businesses similar to yours, and retired executives. Setting up such an advisory board of directors is really quite easy, because most people you ask will be honored to serve. Once your board is set up, you should meet once a month and present material for review. Each meeting should be a discussion of your business problems and an input from your advisors relative to possible solutions. These members of your board of advisors should offer you advice as well as alternatives, and provide you with objectivity. No formal decisions need to be made either at your board meeting, or as a result of them, but you should be able to gain a great deal from the suggestions you hear. You will find that most of your customers have the money to pay at least some of what they owe you immediately. To keep them current, and the number of accounts receivable in your files to a minimum, you should call them on the phone and ask for some kind of explanation why they're falling behind. if you develop such a habit as part of your operating procedure, you'll find your invoices will magically be drawn to the front of their piles of bills to pay. While maintaining a courteous attitude, don't hesitant, or too much of a "nice guy" when it comes to collecting money. Something else that's a very good business practice, but which few business owners do is to methodically build a credit rating with their local banks. Particularly when you have a good cash flow, you should borrow $100 to $1,000 from your banks every 90 days or so. Simply borrow the money, and place it in an interest bearing account, and then pay it all back at least a month or so before it's due. By doing this, you will increase the borrowing power of your signature, and strengthen your ability to obtain needed financing on short notice. This is a kind of business leverage that will be of great value to you if or whenever your cash position becomes less favorable. By all means, join your industry's local and national trade associations. Most of these organizations have a wealth of information available on everything from details on your competitors to average industry sales figures, new products, services, and trends. If you are given a membership certificate or wall plaque, you should display these conspicuously on your office wall. Customers like to see such "seals of approval" and feel additional confidence in your business when they see them. Still another thing often overlooked: If at all possible, you should have your spouse work in the business with you for at least three or four weeks per year. The important thing is that if for any reason you are not available to run the business, your spouse will be familiar with certain people and situations about your business. These people should include your attorney, accountant, any consultants or advisors, creditors and your major suppliers. The long-term advantages of having your spouse work four weeks per year in your business with you will greatly outweigh the short-term inconvenience. Many couples share responsibility and time entirely, which is in most cases even more desirable. Whenever you can, and as often as you need it, take advantage of whatever free business counseling is available. The Small Business Administration published many excellent booklets, checklist and brochures on quite a large variety of businesses. these publications are available through the U.S.Government printing office. Most local universities, and many private organizations hold seminars at minimal cost, and often without charge. You should also take advantage of the services offered by your bank and local library. The important thing about running a small business is to know the direction in which you're heading; to know on a day-to-day basis your progress in that very direction; to be aware of what your competitors are doing and to practice good money management at all times. All this will prepare you to recognize potential problems before they arise. In order to survive with a small business, regardless of the economic climate, it is essential to surround yourself with smart people, and practice sound business management at all times. THE LAZY PERSON SECRETS TO OVER NIGHT WEALTH AND FAME There are so many simple, yet really sure-fire ways of acquiring wealth, it's a wonder everybody with even the least bit of ambition isn't already rich. When you come right down to it, the only things needed for anyone to make bundles of money are the long-range vision and the energy to put a money-making plan into force. One of the easiest methods of building wealth, and the one most often used by the "smart" people, is to furnish the expertise, equipment or growth capital to promising beginning business. Basically, you buy in as either a part owner or limited partner; then, as the business grows and prosper with your help, you reap your share of rewards. The beautiful part about this whole concept is that you can repeat this procedure over and over again. You can start out with, say marketing and sales leadership for small, garage-type business; then with your holdings and earnings from that business, invest in another, and keep doing this until you own a part of twenty-five to an unlimited number of businesses. Looking at the idea from a dollar return point of view, if you were getting $200 per month from 25 different business, your monthly income would amount to no less than $5,000 and that's not too bad for a fledgling millionaire. Look around your own area. With just a little bit of business sense and perception, you're sure to find hundreds of small businesses that could do better--perhaps even become giants-- with your help. Most small businesses need, and would welcome marketing, promotional, advertising, and sales help. If a quick survey of business turns you on with enthusiasm about the potential profits to be made with just a few changes that you can suggest, then you are on your way. Basically, you set up an appointment to see and talk with business owners about some ideas and help that could double or triple their profits. When you approach them in that manner, their almost certain to want to see you and hear want you have to say. In preparation for your meeting, set your ideas down on paper. Put them together in an impressive marketing or profit potential folio. Outline your ideas, the costs involved and the ultimate profit to be gained. Then, when you arrive for the meeting, be sure to look and act the part of a successful business person. A few pleasantries to break the ice, and begin with your presentation. Through your proposal, you must instill confidence that you can do all you claim for him. Guide him through the presentation to the ultimate profits---- all for a 10 or 20 percent limited partnership in the business, which really won't cost him anything. Of course, if he is reluctant to give up any part of his ownership, you come back with the idea of being hired as a consultant. Almost all small businesses need help of some kind. The owners get bogged down in a myriad of every day problems and things to do. They find there just are not enough hours in the day to handle everything that should be taken care of, and end up neglecting or putting off some of the things they should be doing to keep the business prosperous. As a result, the long struggle for business survival begins, with more than 60% of them selling out at a loss or just closing up shop. The other way to " cut yourself in" on a piece of someone else's business is to supply needed money. If you can come up with 10 or 15 thousand dollars, you can easily "buy into" some small businesses. Be sure to look the business ( and its market potential) over; but once you spot one that can really be a winner with just a little bit of operating cash or money for expansion, then start figuring! You can reach a never ending supply of such businesses to choose from, simply by running a small advertisement in your daily newspaper in the .Classified section under the heading of Business Opportunities Wanted. Such an ad might read: SUCCESSFUL BUSINESS EXECUTIVE LOOKING FOR NEW BUSINESS VENTURES. WILL CONSIDER BUY OUT OR PARTNERSHIP. PO BOX 123, CITY, STATE, ZONE By the same token, make it a habit to look through the Business Opportunities Available on a regular basis. Mark a few each day and follow up. Check them out, And see what kind of a deal is being offered. Remember, proper management and planning are basically the ingredients to success in business; and most small businesses just do not have these ingredients in the proportions needed to attain their greatest profit potential. Other people have done it, and more are starting up every day. There's no reason why you can't do it. In most cases little or no cash is needed. But with a little bit of action on your part, you could quickly become a multi-business owner, and very wealthy as well. PREPARE A BUSINESS PLAN THAT GUARANTEES BIG PROFITS Success in business comes as a result of planning. You have to have a detailed, written plan that shows what the ultimate goal is, the reason for the goal, and each milestone that must be passed in order to reach your goal. A business plan is written definition of, and operational plan for achieving your goal. You need a complete but success tool in order to define your basic product, income objectives and specific operating procedures. YOU HAVE TO HAVE A BUSINESS PLAN to attract investors, obtain financing and hold onto the confidence of your creditors, particularly in times of cash flow shortages--in this instance, the amount of money you have on hand compared with the expenses that must be met. Aside from an overall directional policy for the production, sales effort and profit goals of your product--your basic "travel guide" to business success--the most important purpose your business plan will serve, will be the basis or foundation of any financial proposals you submit. Many entrepreneurs are under the mistaken impression that a business plan is the same as a financial proposal, or that a financial proposal constitutes a business plan. This is just a misunderstanding of the uses of these two separate and different business success aids. The business plan is a long range "map" to guide your business to the goal you've set for it. The plan details the what, why, where, how and when, of your business--the success planning of your company. Your financial proposal is a request for money based upon your business plan--your business history and objectives. Understand the differences. They are closely related, but they are not interchangeable. Writing and putting together a "winning" business plan takes study, research and time, so don't try to do it all in just one or two days. The easiest way to start with a loose leaf notebook, plenty of paper, pencils, pencil sharpener, and several erasers. Once you get your mind "in gear" and begin thinking about your business plan, "10,000 thoughts and ideas per minute" will begin racing through your mind...So, it's a good idea when you aren't actually working on your business plan, to carry a pocket notebook and jot down those business ideas as they come to you--ideas for sales promotion, recruiting distributors, and any other thoughts on how to operate and/or build your business. Later, when you're actually working on your business plan, you can take out this "idea notebook" evaluate your ideas, rework them, refine them, and integrate them into the overall "big picture" of your business plan. The best business plans for even the smallest businesses run 25 to 30 pages or more, so you'll need to "title" each page and arrange the different aspects of your business plan into "chapters." The format should pretty much run as follows: Title Page Statement of Purpose Table of Contents Business Description Market Analysis Competition Business Location Management Current Financial Records Explanation of Plans For Growth Projected Profit & Loss/Operating Figures Explanation of Financing for Growth Documentation Summary of Business & Outlook for The Future Listing of Business & personal References This is a logical organization of the information every business plan should cover. I'll explain each of these chapters titles in greater detail, but first, let me elaborate upon the reasons for proper organization of your business plan. Having a set of "questions to answer" about your business forces you to take an objective and critical look at your ideas. Putting it all down on paper allows you to change, erase and refine everything to function in the manner of a smoothly oiled machine. You'll be able to spot weakness and strengthen them before they develop into major problems. Overall, you'll be developing an operating manual for your business--a valuable tool which will keep your business on track, and guide you in the profitable management of your business. Because it's your idea, and your business, it's very important that YOU do the planning. This is YOUR business plan, so YOU develop it, and put it all down on paper just the way YOU want it to read. Seek out the advice of other people; talk with, listen to, and observe, other people running similar businesses; enlist the advice of your accountant and attorney--but at the bottom line, don't ever forget it has to be YOUR BUSINESS PLAN! Remember too, that statistics show the greatest causes of business failure to be poor management and lack of planning--without a plan by which to operate, no one can manage; and without a direction in which to aim its efforts, no business can attain any real success. On the very first page, which is the title page, put down the name of your business-ABC ACTION--with your business address underneath. Now, skip a couple of lines, and write it all in capital letters: PRINCIPAL OWNER--followed by your name if you're the principal owner. On your finished report, you would want to center this information on the page, with the words "principal owner" off-set to the left about five spaces. Examples: ABC ACTION 1234 SW 5th Ave. Anywhere, USA 00000 PRINCIPAL OWNER: Your Name That's all you'll have on this page except the page number -1- Following your title page is the page for your statement purpose. This should be a simple statement of your primary business function, such as: We are a service business engaged in the business of selling business success manuals and other information by mail. The title of the page should be in all capital letters across the top of the page, centered on your final draft--skip a few lines and write the statement of purpose. This should be direct, clear and short--never more than (2) sentences in length. Then you should skip a few lines, and from the left hand margin of the paper, write out a sub-heading in all capital letters, such as: EXPLANATION OF PURPOSE. From, and within this sub-heading you can briefly explain your statement of purpose, such as: Our surveys have found most entrepreneurs to be "sadly" lacking in basic information that will enable them to achieve success. This market is estimated at more than a 100 million persons, with at least half of these people actively "searching" for sources that provide the kind of information they want, and need. With our business, advertising and publishing experience, it is our goal to capture at least half of this market of information seekers, with our publication. MONEY MAKING MAGIC! Our market research indicates we can achieve this goal and realize a profit of $1,000,000 per year within the next 5 years... The above example is generally the way you should write your "explanation of purpose," and in subtle definition, why you need an explanation. Point to remember: Keep it short. Very few business purpose explanations justify more than a half page long. Next comes your table of contents page. Don't really worry about this until you've got the entire plan completed and ready for final typing. It's a good idea though, to list the subject (chapter titles) as I have, and then check off each one as you complete that part of your plan. By having a list of the points you want to cover, you'll also be able to skip around and work on each phase of your business plan as an idea or the interest in organizing that particular phase, stimulates you. In other words, you won't have to make your thinking or your planning conform to the chronological order of the "chapters" of your business plan--another reason for the loose leaf notebook. In describing your business, it's best to begin where your statement purpose leaves off. Describe your product, the production process, who has responsibility for what, and most importantly, what makes your product or service unique--what gives it an edge in your market. You can briefly summarize your business beginnings, present position and potential for future success, as well. Next, describe the buyers you're trying to reach--why they need and want or will buy your product--and the results of any tests or surveys you may have conducted. Once you've defined your market, go on to explain how you intend to reach that market--how you'll these prospects to your product or service and induce them to buy. You might want to break this chapter down into sections such as..publicity and promotions, advertising plans, direct sales force, and dealer/distributor programs. Each section would then be an outline of your plans and policies. Moving into the next chapter on competition, identify who your competitors are--their weakness and strong points--explain how you intend to capitalize on those weaknesses and match or better the strong points. Talk to as many of your "indirect" competitors as possible--those operating in different cities and states. One of the easiest ways of gathering a lot of useful information about your competitors is by developing a series of survey questions and sending these questionnaires out to each of them. Later on, you might want to compile the answers to these questionnaires into some form of directory or report on this type of business. It's also advisable to contact the trade associations and publications serving your proposed type of business. For information on trade associations and specific trade publications, visit your public library, and after explaining what you want ask for the librarian's help. The chapter on management should be an elaboration on the people operating the business. Those people that actually run the business, their job, titles, duties, responsibilities and background resume's. It's important that you "paint" a strong picture of your top management people because the people coming to work for you or investing in your business, will be "investing in these people" as much as your product ideas. Individual tenacity, mature judgment under fire, and innovative problem-solving have "won over" more people than all the AAA Credit Ratings and astronomical sales figures put together. People becoming involved with any new venture want to know that the person in charge--the guy running the business knows what he's doing, will not lose his cool when problems arise, and has what it takes to make money for all of them> After showing the "muscle" of this person, go on to outline the other key positions within your business; who the persons are you've selected to handle those jobs and the sources as well as availability of any help you might need. If you've been in business of any kind scale, the next chapter is a picture of your financial status--a review of your operating costs and income from the business to date. Generally, this is a listing of your profit & loss statements for the six months, plus copies of your business income tax records for each of the previous three years the business has been an entity. The chapter on the explanation of your plans for the future growth of your business is just that--an explanation of how you plan to keep your business growing--a detailed guide of what you're going to do, and how you're going to increase your profits. These plans should show your goals for the coming year, two years, and three years. By breaking your objectives down into annual milestones, your plan will be accepted as more realistic and be more understandable as a part of your ultimate success. Following this explanation, you'll need to itemize the projected cost and income figures of your three year plan. I'll take a lot of research, an undoubtedly a good deal of erasing, but it's very important that you list these figures based upon thorough investigation. You may have to adjust some of your plans downward, but once you've got these two chapters on paper, your whole business plan will fall into line and begin to make sense. You'll have a precise "map" of where you're headed, how much it's going to cost, when you can expect to start making money, and how much. Now that you know where you're going, how much it's going to cost and how long it's going to be before you begin to recoup your investment, you're ready to talk about how and where you're going to get the money to finance your journey. Unless you're independently wealthy, you'll want to use this chapter to list the possibilities and alternatives. Make a list of friends you can approach, and perhaps induce to put up some money as silent partners. Make a list of those people you might be able to sell as stockholders in your company--in many cases you can sell up to $300,000 worth of stock on a "private issue" basis without filing papers with the Securities and Exchange Commission. Check with a corporate or tax attorney in your area for more details. Make a list of relatives and friends that might help you with an outright loan to furnish money for the development of your business. Then search out and make a list of venture capital organizations. Visit the Small Business Administration office in your area--pick up the loan application papers they have--read them, study them, and even fill them out on a preliminary basis--and finally, check the costs, determine which business publications would be best to advertise in, if you were to advertise for a partner or investor, and write an ad you'd want to use if you did decide to advertise for monetary help. With listing of all the options available to your needs, all that's left is the arranging of these options in the order you would want to use them when the time come to ask for money. When you're researching these money sources, you'll save time by noting the "contact" deal with when you want money, and whenever possible, by developing a working relationship with these people. If your documentation section, you should have a credit report on yourself. Use the Yellow Pages or check at the credit department in your bank for the nearest credit reporting office. When you get your credit report, look it over and take whatever steps are necessary to eliminate any negative comments. Once these have been taken care of, ask for a revised copy of your report and include a copy of that in your business plan. If you own any patents or copyrights, include copies of these. Any licenses to use someone else's patent or copyright should also be included. If you own the distribution, wholesale or exclusive sales rights to a product, include copies of this documentation. You should also include copies of any leases, special agreements or other legal papers that might be pertinent to your business. In conclusion, write out a brief, overall summary of your business- when the business was started, the purpose of the business, what makes your business different, how you're going to gain a profitable share of the market, and your expected success during the coming 5 years.. The last page of your business plan is a "courtesy page" listing the names, addresses and phone numbers of personal and business references--persons who have known you closely for the past five years or longer--and companies or firms you've had business or credit dealings with during the past five years. And, that's it--your complete business plan. Before you send it out for formal typing, read it over once a day for a week or ten days. Take care of any changes or corrections, and then have it reviewed by an attorney and then, an accountant. It would also be a good idea to have it reviewed by a business consultant serving the business community to which your business will be related. After these reviews, and any last-minute changes you want to make, I'll be ready for formal typing. Hire a professional typist to type the entire plan on ordinary white bond paper. Make sure you proof-read it against the original. Check for any corrections and typographical errors--then one more time--read it through for clarity and the perfection you want of it. Now you're ready to have it printed and published for whatever use you have planned for it--distribution amongst your partners or stockholders as the business plan for putting together a winning financial proposal, or as a business operating manual. Take it to a quality printer in your area, and have three copies printed. Don't settle for photo-copying..Have it printed! Photo-copying leaves a slight film on the paper, and will detract from the overall professionalism of your business plan, when presented to someone you're trying to impress. So, after going to all this work to put together properly, go all the way and have it duplicated properly. Next, stop by a stationery store, variety store or even a dime store, and pick up an ordinary, inexpensive bind-in theme cover for each copy of your business plan. Have the holes punched in the pages of your business report to fit these binders and then slip each copy into a binder of its own. Now, you can relax, take a break and feel good about yourself..You have a complete and detailed business plan with which to operate a successful business of your own. A plan you can use as a basis for any financing proposal you may want to submit..And a precise road-map for the attainment of real success. Congratulations, and my best wishes for the complete fulfillment of all your dreams of success!!! BARTERING, AN ALTERNATIVE TO SPENDING MONEY Bartering is not negotiating! Bartering is "trading" for a service, or for the goods you want. In essence, bartering is simply buying or paying for goods or services using something other than money (coins or government printer paper dollars). Thus defined, bartering has been around much longer than money as we know it today. Recent estimates indicate that at least 60 percent of companies on the New York Stock Exchange use the principles of bartering as a standard business practice. Congressmen barter daily to gain support for their pet projects. U.S. aircraft manufacturers barter with foreign airlines in order to close sales on million dollar contracts. Perhaps you have experienced at one time or another in your life a friend saying, "Okay, that's one you owe me..." Basically, that's bartering. The reason bartering enjoys renewed popularity in times of tight money is simply that it is the "bottom-line" method of survival with little or no cash. In times of high interest rates, cash in anyone's pocket is indeed a very precious commodity, and bartering is even more popular. Bartering affords booth the individual and the established business a way to hold onto cash while continuing to get needed goods and services. In addition to saving a business borrowing costs, bartering can improve its cash flow and liquidity. For anyone trying To operate a successful business, this is vitally important, and for individual families in these times, it makes possible the saving of cash funds for those purchases where cash is necessary. To start and successfully operate a bartering club, YOU MUST THINK IN TERMS OF A BANKER. After all, that's precisely the reason for your business - to receive and keep track of people's deposits while lending and bringing together other people wanting or needing these deposits. So your first task is to round up depositors. As a one-man operation, you can start from your home with nothing more than your telephone and kitchen table, but until you get helpers you'll either be very small or very busy (probably both). You can run a small display ad in your local newspaper. A good ad would include the following ideas: NEW BARTERING CLUB! Trade your expertise and/or time for the merchandise or services you need. We have the traders ready - merchandise, specialized skills, buyers too! Call now and register. ABC BARTERING (123) 456-7890 When respondents to this ad call, you handle them just as a banker handles someone opening a new account. You explain how your club works: Everyone pays a membership fee of $100 to $300, and annual dues of $50 to $100. The depositor tells you what he wants to deposit, perhaps $150 worth of printing services, and what he's looking for in return - storage space for his boat over a three month period. If you have a depositor with garage space for rent and needing printing services, you have a transaction. But let's say you have no "perfect match" for this depositor. On your list of depositors you have a dentist who's offering $500 worth of dental work for someone to paint his house. A woman with a garage to rent in exchange for dental work for her children. An unemployed painter willing to paint houses in exchange for a side of beef, and a butcher who wants to trade a side of beef for advertising circulars. Remember, when a new member joins your club, he makes a deposit and states his wants or needs. In the above example, you have a typical bartering club situation. Your service is to spend or line up those deposits to match the wants or needs of the club members. An affinity for people and a good memory are vital to this kind of business, especially if you're running a "one-man show". Generally, when you have a buyer for one of your depositors, you notify him or her right away with a phone call. You simply tell her that Club Member A wants to rent your garage. She tell you fine, but she doesn't want any printing services. You simply tell her to hang on because you are currently in the process of contacting the dentist who will do the work on her kids' teeth. And so it goes in the operation of a bartering club. Some of the larger bartering clubs (with several thousand members), simply list the deposits and wants or needs on a computer, and then invite their members to come in and check out the availability for themselves. Others maintain merchandise stores where the members come in to first look at the computer listing, and then to shop, using credit against their deposits. The smaller clubs usually publish a weekly "traders wanted" sheet and let it go at that. These methods all work, but we've found that instead of leaving your members to fend for themselves or make their own trades, the most profitable system is to hire commission sales people to solicit (recruit if you will) new members, specifically with deposits to match the wants and needs of your present members. These sales people should get 20% of the membership fee from each new member they sign, plus 3 to 5 percent of the total value of each trade they arrange and close. This percentage, of course, to be paid in club credits, spendable on merchandise or services offered by the club. You'll need a club charter, a board of directors or officers, and in many areas, a city or county license. Check with your city or county clerk for more information on these requirements. You should also have a membership contract, the original for your files and a duplicate for the member. In most cases you can write your own, using any organization membership contract as a guide, or you can have your attorney draw one up for you. You'll also need a membership booklet, or at least an addenda sheet to your contract, explaining the rules and bylaws of your club. It's also suggested that you supply your members with consecutively numbered "club membership identification cards" for their wallets or purses. Some clubs even give membership certificates suitable for framing. You can pick these up at any large stationery house or commercial print shop. Two things are important to the make up of the membership package you exchange for membership fees: 1. It must be as impressive as you can make it 2. It must be legal, while serving your needs almost exclusively. Basically, you should have at least 100 members before you begin concentrating on arranging trades. As stated earlier in this report, the easiest way to recruit new members is to run an ad in your newspapers, and perhaps even on your local radio stations as well. Follow up on these inquiries with a direct mail package, which would typically consist of a brochure explaining the beauty and benefits of being a member of your bartering club, a sales letter, and a return reply order form. After you've sent out the direct mail piece, be sure too follow up by phone, and if necessary, make a call in person as any other sales person would do. Another way of recruiting new members is via the Amway Introduction Party Program. Allow a certain number of club credits for each party a club member arranges for you. Insist on at least 10 couples for each party, and then as the "Attraction of the Evening," you or one of your salespeople give a motivation-benefits available recruiting talk. Be sure you get the names, addresses and phone numbers of everyone attending, and be sure that everyone leaves with your literature. If all those in attendance at these parties do not join, the follow up on them, first by phone and then with personal sales presentations. Once you've got them interested in your club, do not let go or give up on them until you have signed them as members. Another thing - take a page from the Party Plan Merchandiser's Handbook, and look for those who would be most likely to want to promote a similar party for you. Offer them an item of merchandise they might be particularly interested in, and club credits if they'll not only join, but also stage a party for you. A bit more expensive, but just as certain of success are free seminars. Rent a large meeting room, advertise in your local papers, and then put on a hard-sell recruiting show. Such a plan is very similar to the party plan idea, but on a larger scale. An inside tip: Whenever you stage a recruiting party or seminar, always "pad the audience" with your own people, who will of course lead the way for those you're trying to recruit. As stated earlier, you can start operations out of your home, but working out of your home has a number of growth inhibiting factors. After a certain period of time, the growth of almost any kind of business is retarded when it’s operated out of a home. So just as soon as you possibly can afford to, move into an office of some sort. Keep your eyes open and consider the feasibility of sharing an office with an insurance agent or real estate broker. Check your newspaper classifieds for businesses willing to share office space or to rent desk space or other office amenities. This is the kind of business that demands an image of success. You just can't keep people from "dropping in" when you're operating strictly on a local basis. And when you attempt to hire sales people, a place of business to work out of is just as important to them as how much commission they're going to receive. Image is super important, so don't neglect it! Ideally, you should have one salesman for every 50,000 people in your area. Run an ad in your local newspaper, and also list your needs with your state's employment service. Hire ONLY commission salespeople. Give them a percentage of the membership fee for each new member they sign, plus a small commission on each trade deal they close. Assign each of your people specific territories, and insist that they call on potential commercial accounts ranging from the "hole in the wall" rubber stamp shop to magazine publishers and commuter airlines. There's plenty of business available in every city or metro area in the country. Encourage your sales people to be creative and imaginative when calling on prospects. Then, be sure that you keep an open mind and listen to their wild trading proposals (some "wild" proposals have been known to become "wildly" successful)! Schedule "open discussion" sales meetings every morning before your sales people "hit the bricks". Have each of them report on their selling efforts from the day before, and present to you a written list of prospects they plan to call on today. Set up sales motivation workshops to be held at least once a month, and at least once a week schedule a motivational speaker or play one of the widely available success/inspirational tapes as a closing feature of your morning sales meetings. Stock sales success books and encourage your people to borrow them, take them home and read them. Your sales people will make you rich, but only if you turn them on and keep them flying high with personal motivation. Should you or should you not accept installment payments from new members? Yes, by all means! But only when you've got their signature on a contract drawn up for your benefit and deemed legally binding by your attorney. What about bank cards? Yes indeed! In fact, you'll find that your capability of handling bank cards will double or even triple your sales. Precisely how much are you going to need in actual start-up costs? We should estimate a least $500 for your printing and legal fees, unless you can trade charter memberships in your club for these services. Timewise, you're going to be putting in 18-hour days, and 7-day weeks, until you get those first 100 people signed up. And there won't be any money for salary of long- deserved vacations from these first 100 members you sign. You'll need it all for advertising, membership packets and office set-up. However, if you can really work at it, you should be home free in six weeks or less. Then you can set up your office, hire a couple of girls to handle the paperwork, and take on a salesperson or two. Reputation and success in matching offers to wants will be just as important as image, so give it your all. Don't give up; stand behind the implied, as well as the real promises you make to your members. A couple of final notes: Should you offer a guarantee of satisfaction? Only so long as it makes money for you, and you can back it up. There's not a person in business anywhere who enjoys refunding a customer's money. But don't forget that the existence of your business depends on service. The more you project an image of a "people pleaser," the greater success you're going to achieve. This is definitely not a business for someone who doesn't enjoy "waiting on" people. You've got like people, enjoy helping them, and want the inner satisfaction that comes from selling new ideas. This is definitely a growth business. Bartering Clubs in metropolitan population areas of 300,000 or more are reporting incomes of over a million dollars. The average in cities of 100,000 population is about $150,000 per year. Actually, no experience or special training is required. The operation of a Bartering Club is equally suited to women or men. Both do equally well as salespeople. It's a business that fills a need, and a kind of membership program people will stand in line to be a part of, once they've been introduced to the benefits. This is the plan. It's going to take your time and effort to get organized, but after your initial work to establish this business, you can become quite wealthy in a relatively short time. Read over this plan again; determine if this is "the one" for you, and then go all out. It's up to you, and all it takes now is action on your part. One of the best of all the available sources of ongoing help and knowledge about bartering is a quarterly publication entitled Bartering News. Write and ask for a sample copy. The address is: Bartering News P.O. Box 3024 Mission Viejo, CA 92690 A BOOKKEEPING SYSTEM THAT WILL SAVE YOU MONEY One of the most important, least understood and appreciated aspects of any business, is its bookkeeping or accounting system. And, because very few people know much about the reasons for a bookkeeping system, most people are frightened by the thought of the work involved in setting up such a system, and the drudgery of daily maintenance. There's really nothing complicated to bookkeeping - it's as simple as keeping a daily diary and/or maintaining your personal checkbook. At the bottom line, it's simple a matter of recording your deposits - your incoming monies - and keeping a record of the money you spend. So, the first thing you need to do is open a business account for your extra-income business or endeavors. Generally, this is simply a matter of asking the new accounts teller at a local bank for a business account registration card. Fill this card in, and with the small registration fee, send it in to the appropriate commissioner, and from there, open your new business account - complete with imprinted checks. Drop by a local stationery store and pick up a loose leaf notebook, and a supply of paper. We've always picked up a supply of index tabs at the same time - either to separate the months or the accountability sections for each item we sell. Assuming that you want to make it as simple as possible, while at the same time keeping it as efficient as is necessary - here's what you do and how you do it. On the first page in your notebook, write on the top line and in the middle of the page: Monday, January 1st, 1994 or whatever day you officially start your business. Then, as your orders come in - if by mail, as you open your mail - jot down starting from the left side of page, the amount you received - dash - for what - from whom, and their address. The page might look like this: Monday - January 1st, 1994 $3 - Tax-Saving Report - Jim Sloan, 97301 $6 - Tax-Saving & Dating Report - Steve Nelson, 30261 $3 - 5-Letters P/Day Report - Gloria Watson, 63222 $10 - Easy Money - Bob Elliott, 42134 $10 - How To Sell Books by Mail - Dave Sasseen, 11301 TOTAL INCOME: $3...EXPENSES: None That's all there is to it, and emphatically, all it is to recording what you receive and what you spend. The next entry, immediately under the first day's entry, might look like this: Tuesday - January 2nd, 1994 $60 - Deposit$11 - Check to Printer $11 - Consulting Manual - H.P. Barnum, 33351 $3 - Tax-Saving Report - Rulon Collins, 21265 $3 - Seminar Promoter's Report, Kim Novak, 90631 $7 - H/B Business Ideas Report - Charles Johnson, 97620 $10 - Hong Kong Directory - Robert Carpenter, 89401 $2 - Money Getter's Guild Member - Glen Brinks, 83801 $15 - How To Steal $1,000,000 Free Publicity - Joe O'Malley, 77919 $20 - New Release Program - Nancy Hall, 82109 TOTAL INCOME: $7...+EXPENSES: $11...DEPOSIT: $60 And then, carry on with this recording of the money you deposit, receive and spend each day with similar entries for each day of the week - every day Monday through Saturday for each week. It's simple, uncomplicated, and a positive record of your business activity. Then at the end of each month transfer this daily diary information to one of the low cost bookkeeping registers that your tax consultant or accountant can work from. These people won't work from your daily diary, and will not transfer the information you record in it to a formal bookkeeping register without charging you a small fortune. It's not that big of a job, and if you do it after the close of business on the last day of each month, it won't take you but just a very few minutes. Then, of course, when you're ready to file your taxes, you simply give your bookkeeping register to whoever is going to do your taxes, and you're home free. The bookkeeping register you'll need can be any simple columnar notebook - we use an "Ekonomik Register, Form RL-17" available in a number of different styles and sizes form Ekonomik Systems - PO Box 11413 - Tacoma, WA 98411. All you really need is some sort of notebook with a number of columns marked off, a title written at the top of each column, and a record of the money received for each day relative to the product or service each column represents. Then at the end of each month, you can simply add the totals from each column and you'll instantly know how much money you took in form each of your offers. Beyond the date column, will be your record of expenses or money spent. Again, you should title each of the columns you'll be entering figures into, and then record your expenditures for items falling into those categories. Then at the end of each month, it's a simple matter to add the totals from each column and know exactly where you stand relative to profit or loss - how much you took in compared to how much you spent. Bookkeeping and/or accounting is very simple and should not scare you. Just keep it simple, and up-to-date. BUSINESS SURVIVAL TIPS FOR THE 90'S You may be in Mail Order, Direct Mail, or you may be a local merchant with 150 employees or more; whichever, however or whatever, you've got to know how to keep your business alive during economic recessions. Any time the cash flow in a business, large or small, starts to tighten up - the money management of that business has to be on the ball. Some of the things you can do and should do, include protecting yourself from expenditures made on sudden impulse. We've all bought things or services we really didn't need, simply because we were in the mood, or perhaps due to the flamboyancy of the advertising, or even because of the persuasiveness of the sales person. Then we sort of "wake up" a couple of days later and find that we've committed business funds to hundreds of dollars for an item or service that's not really essential to the success of our own business. If you're incorporated, you can eliminate these "impulse purchases" by including within your by-laws a clause that states: "all purchasing decisions over a certain amount are contingent upon approval by the board of directors." This will give you a chance to consider any "impulse purchases" a second time after you've had a chance to think about the need for your purchase. If you're business is a partnership, you can tell whoever it is that attempts to sell you something, that all purchase decisions are contingent upon the approval of a third party. In reality, the third party can be your partner, one of your department heads or even one of your suppliers. If your business is a sole proprietorship, you don't have much to really worry about because as an individual you have three days to think about your purchase, and then to nullify that purchase if you think you really don't need it or can't afford it. Especially in times of emergency, be sure that you don't "short-change" yourself on professional services. Anytime you commit yourself and move full-speed ahead without fully investigating all the angles, and preparing yourself for all the contingencies that may arise, you're skating on thin ice. Regardless of the costs involved, it always pays off in the long run to seek out the advice or experienced professionals before embarking on a plan that could ruin you. As an example, an experienced business consultant can fill you in on the 1244 stock or Sub-Chapter S advantages. A very simple process, but one with tremendous monetary benefits to businesses. The 1244 status encourages investors to put equity capital into your business because in the event of a loss, amounts up to the entire sum of the investment can be written off in the current year. Without the "1244" classification, any losses would have to be spread over several years, and this of course, would severely lessen the attractiveness of your company's stock. Any business owner who has not filed as a 1244 corporation, has in effect, but himself off from 90- percent of his prospective investors. Particularly when sales are down, you must be "hard-nosed" with people trying to sell you luxuries for your business. When your business is booming, you undoubtedly spend more time allowing different sales people to show you new models of equipment or a new line of better- looking supplies, but when your business is down, skip the entertaining frills and concentrate on the basics. Great care, however, must be taken to maintain courtesy and allow these sellers to consider you a "friend," and call back at another time. Whoever maintains your company's books should reflect your way of thinking, and generate information according to your policies. Thus, you should hire an outside accountant or accounting firm to figure your return on your investment, as well as the turnover on your accounts receivable and your inventory. Such an audit or survey should focus in depth on any or every item within your financial statement that merits special attention. In this way, you'll probably uncover any potential financial problems before they arise. Many small companies set up advisory boards or outside professional people. These are sometimes known as Power Circles, and once in place, the business always benefits, especially in times of short operating capital. Such an advisory board or power circle should include an attorney, a certified public accountant, civic club leaders, owner/managers or businesses similar to yours, and retired executives. Setting up such an advisory board of directors is really quite easy because most people you ask will be honored to serve. Once your board is set up, you should meet about once a month and present material for review. Each meeting should be a discussion of your business problems and an input from your advisors relative to possible solutions. These members of your board of advisors should offer you advice as well as alternatives, and provide you with objectivity. No formal decisions need to be made either at your board meetings nor as a result of them, but you should be able to gain a great deal from the suggestions you hear. It should be that most of your customers have the money to pay at least some of the money they owe you, immediately. To keep them current and the number of accounts receivable in your files to a minimum, you should call them on the phone and ask for some kind of explanation why they're falling behind. If you develop such a habit as a standard part of your operating procedure, you'll find your invoices will magically be drawn to the front of their piles of bills to pay. Do not be hesitant nor too much of a "nice guy" when it comes to collecting money. Something else that's a very good business practice, but which hew business owners do is to methodically build a good credit rating with their local banks. Particularly when you have a good cash flow, you should borrow $100 to $1,00 from your banks every 90-days or so. Simply borrow the money - place it in an interest-bearing account - and then pay it all back at least a month or so before it's due. By doing this, you'll increase the borrowing power of your signature, and strengthen your ability to obtain needed financing on short notice. This is a kind of business leverage that will be of great value to you if or whenever your cash position becomes desperate. By all means, you should join your industry's local and national trade associations. Most of these organizations have a wealth of information available - everything from details on your competitors, to average industry sales figures, to new products, services and trends. If they give you a membership certificate or wall plaque, you should display these conspicuously on your office wall. You customers like to see such "seals of approval" and place additional confidence in your business when they see them. Still another thing often overlooked - if at all possible, you should have your spouse work in the business with you at least 3 to 4 weeks per year. The important thing is that if, for any reason, you are not available to run the business, your spouse will be familiar with certain people and situations about your business. These people should include your attorney, accountant, any consultants or advisors, your major suppliers and creditors. The long-term advantages of having your spouse work four weeks per year in your business with you, greatly outweigh the short-term inconvenience. Whenever you can, and as often as you need it, you should take advantage of whatever free business counseling is available. The Small Business Administration has many excellent booklets, checklists and brochures available on quite a large variety of businesses. They also have management and financial assistance programs that can definitely benefit just about any small business. Most local universities, and many private organizations hold seminars at very minimal costs, often without charge. You should also take advantage of free services offered by your bank and local library. You may feel no great need for continuing education courses, but if you learn even one new bit of information that will be of ultimate benefit to you or your business, the little time spent at a seminar or in a night course, will be a wise investment. The important thing about continuing education courses, but if you learn even one new bit of information that will be of ultimate benefit to you or your business, the little time spent at a seminar or in a night course, will be a wise investment. The important thing about running a small business is to know the direction in which you're heading - to know on a day-to-day basis, your progress in that direction - to be aware of what your competitors are doing - industry trends and sales figures for businesses comparable to the size of yours - to practice good money management at all times - and to prepare yourself to solve your problems before they arise. Generally speaking, times are always tough for small businesses. In order to survive with a small business, regardless or the economic times, it is essential that you surround yourself with smart people, and practice sound business management at all times. Be sure that if you are doing well now, you will continue to be successful in the future. CHECK LIST FOR GOING INTO BUSINESS Summary Thinking of owning and managing your own business? It's a good idea--provided you know what it takes and have what it takes. Starting a business is risky at best; but your chances of making it go will be better if you understand the problems you'll meet and work out as many of them as you can before you start. Here are some questions and work-sheets to help you think through what you need to know and do. Check each question if the answer is YES. Where the answer is NO, you have some work to do. Before You Start How about You? Are you the kind of person who can get a business started and make it go? (Before you answer this question, use worksheet number 1.) Think about why you want to own your own business. Do you want to badly enough to keep you working long hours without knowing how much money you'll end up with? Have you worked in a business like the one you want to start? Have you worked for someone else as a foreman or manager? Have you had any business training in school? Have you saved any money? How about the money? Do you know how much money you will need to get your business started? (Use worksheets 2 and 3 to figure this out.) Have you counted up how much money of your own you can put into the business? Do you know how much credit you can get from your suppliers--the people you will buy from? Do you know where you can borrow the rest of the money you need to start your business? Have you figured out what net income per year you expect to get from the business? Count your salary and your profit on the money you put into the business. Can you live on less than this so that you can use some of it to help your business grow? Have you talked to a banker about your plans? How about a partner? If you need a partner with money or know-how that you don't have, do you know someone who will fit--someone you can get along with? Do you know the good and bad points about going it alone, having a partner, and incorporating your business? Have you talked to a lawyer about it? How about your customers? Do most businesses in your community seem to be doing well? Have you tried to find out whether stores like the one you want to open are doing well in your community and in the rest of the country? Do you know what kind of people will want to buy what you plan to sell? Do people like to live in the area where you want to open your store? Do they need a store like yours? If not, have you thought about opening a different kind of store or going to another neighborhood? (Questions continue after Worksheets No. 1 and 2.) Worksheet No. 1 Under each question, check the answer that says what you feel or comes closest to it. Be honest with yourself. Are you a self-starter? * I do things on my own. Nobody has to tell me to get going. * If someone gets me started, I keep going all right. Easy does it. I don't put myself out until I have to. How do you feel about other people? * I like people. I can get along with just about anybody. * I have plenty of friends--don't need anyone else. Most people irritate me. Can you lead others? * I can get most people to go along when I start something. * I can give the orders if someone tells me what we should do. * I let someone else get things moving. Then I go along if I feel like it. Can you take responsibility? * I like to take charge of things and see them through. * I'll take over if I have to, but I'd rather let someone else be responsible. * There's always some eager beaver around wanting to show how smart he is. I say let him. How good an organizer are you? * I like to have a plan before I start. I'm usually the one to get things lined up when the group wants to do something. * I do all right unless things get too confused. Then I quit. * You get all set and then something comes along and presents too many problems. So I just take things as they come. How good a worker are you? * I can keep going as long as I need to. I don't mind working hard for something I want. I'll work hard for a while, but when I've had enough, that's it. * I can't see that hard work gets you anywhere. Can you make decisions? * I can make up my mind in a hurry if I have to. It usually turns out O.K., too. * I can if I have plenty of time. If I have to make up my mind fast, I think later I should have decided the other way. * I don't like to be the one who has to decide things. Can people trust what you say? * You bet they can. I don't say things I don't mean. I try to be on the level most of the time, but sometimes I just say what's easiest. * Why bother if the other fellow doesn't know the difference? Can you stick with it? * If I make up my mind to do something, I don't let anything stop me. * I usually finish what I start--if it goes well. If it doesn't go right away, I quit. Why beat your brains out? How good is your health? * I never run down! * I have enough energy for most things I want to do. * I run out of energy sooner than most of my friends seem to. Now count the checks you made. How many checks are there beside the first answer to each question? How many checks are there beside the second answer to each question? How many checks are there beside the third answer to each question? If most of your checks are beside the first answers, you probably have what it takes to run a business. If not, you're likely to have more trouble than you can handle by yourself. Better find a partner who is strong on the points you're weak on. If many checks are beside the third answer, not even a good partner will be able to shore you up. Now go back and answer the first question. Worksheet No. 2 Estimated Your estimate Your estimate What to put in Monthly of monthly of how much column 2 Expenses expenses based cash you need (These figures are on sales of to start your typical for one kind $_____________ business of business. You will per year (See column 3) have to decide how many months to allow Item for in your business) ---------------------------------------------------------------------------- Column 1 Column 2 Column 3 Salary of owner-manager $ $ 2 times column 1 ---------------------------------------------------------------------------- All other salaries & wages 3 times column 1 ---------------------------------------------------------------------------- Rent 3 times column 1 ---------------------------------------------------------------------------- Advertising 3 times column 1 ---------------------------------------------------------------------------- Delivery Expense 3 times column 1 ---------------------------------------------------------------------------- Supplies 3 times column 1 ---------------------------------------------------------------------------- Telephone and Telegraph 3 times column 1 ---------------------------------------------------------------------------- Other Utilities 3 times column 1 ---------------------------------------------------------------------------- Insurance Payment required by insurance company ---------------------------------------------------------------------------- Taxes, incl. Social Security 4 times column 1 ---------------------------------------------------------------------------- Interest 3 times column 1 ---------------------------------------------------------------------------- Maintenance 3 times column 1 ---------------------------------------------------------------------------- Legal and other professional fees 3 times column 1 ---------------------------------------------------------------------------- Miscellaneous 3 times column 1 ---------------------------------------------------------------------------- Starting Costs You Have to Pay Only Once Leave column 2 blank ---------------------------------------------------------------------------- Fixtures and Fill in worksheet equipment 3 and put total here ---------------------------------------------------------------------------- Decorating and Talk it over with a redecorating contractor ---------------------------------------------------------------------------- Installation of Talk to suppliers from fixtures & equipt who you buy these ---------------------------------------------------------------------------- Starting Suppliers will help inventory you estimate these ---------------------------------------------------------------------------- Deposits with Find out from public utilities utility companies ---------------------------------------------------------------------------- Legal and other Lawyer, accountant, professional fees and so on ---------------------------------------------------------------------------- Licenses and Find out from city offices permits what you have to have ---------------------------------------------------------------------------- Advertising and Estimate what you'll use promotion for opening ---------------------------------------------------------------------------- Accounts receivable What you need to buy more stock until credit customers pay ---------------------------------------------------------------------------- Cash For unexpected expenses or losses, special purchases ---------------------------------------------------------------------------- Other Make a separate list and enter total ---------------------------------------------------------------------------- Total Estimated Cash You Need To Start Add up all the numbers in column 2 ---------------------------------------------------------------------------- Getting Started Your building * Have you found a good building for your store? * Will you have enough room when your business gets bigger? * Can you fix the building the way you want it without spending too much money? * Can people get to it easily from parking spaces, bus stops, or their homes? * Have you had a lawyer check the lease and zoning? Equipment and supplies * Do you know just what equipment and supplies you need and how much they will cost? (Worksheet 3 and the lists you made for it should show this.) * Can you save some money by buying second hand equipment? Your merchandise * Have you decided what things you will sell? * Do you know how much or how many of each you will buy to open your store with? * Have you found suppliers who will sell you what you need at a good price? * Have you compared the prices and credit terms of different suppliers? Your records * Have you planned a system of records that will keep track of your income and expenses, what you owe other people, and what other people owe you? * Have you worked out a way to keep track of your inventory so that you will always have enough on hand for your customers but not more than you can sell? * Have you figured out how to keep your payroll records and take care of tax reports and payments? * Do you know what financial statements you should prepare? * Do you know an accountant who will help you with your records and financial statements? Your store and the law * Do you know what licenses and permits you need? * Do you know what business laws you have to obey? * Do you know a lawyer you can go to for advice and for help with legal papers? Protecting your store * Have you made plans for protecting your store against thefts of all kinds--shoplifting, robbery, burglary, employee stealing? * Have you talked with an insurance agent about what kinds of insurance you need? Buying a business someone else has started * Have you made a list of what you like and don't like about buying a business someone else has started? * Are you sure you know the real reason why the owner wants to sell this business? * Have you compared the cost of buying the business with the cost of starting a new business? * Is the stock up to date and in good condition? * Is the building in good condition? * Will the owner of the building transfer the lease to you? * Have you talked with other business owners in the area to see what they think of the business? * Have you talked with the company's suppliers? * Have you talked with a lawyer about it? Making It Go Advertising * Have you decided how you will advertise? (Newspapers--posters--handbills--radio--mail?) * Do you know where to get help with your ads? * Have you watched what other stores do to get people to buy? The prices you charge * Do you know how to figure what you should charge for each item you sell? * Do you know what other stores like yours charge? Buying * Do you have a plan for finding out what your customers want? * Will your plan for keeping track of your inventory tell you when it is time to order more and how much to order? * Do you plan to buy most of your stock from a few suppliers rather than a little from many, so that those you buy from will want to help you succeed? Selling * Have you decided whether you will have sales clerks or self-service? * Do you know how to get customers to buy? * Have you thought about why you like to buy from some sales clerks while others turn you off? Your employees * If you need to hire someone to help you, do you know where to look? * Do you know what kind of person you need? * Do you have a plan for training your employees? Credit for your customers * Have you decided whether or not to let your customers buy on credit? * Do you know the good and bad points about joining a credit-card plan? * Can you tell a deadbeat from a good credit customer? A Few Extra Questions * Have you figured out whether or not you could make more money working for someone else? * Does your family go along with your plan to start a business of your own? * Do you know where to find out about new ideas and new products? * Do you have a work plan for yourself and your employees? * Have you gone to the nearest Small Business Administration office for help with your plans? If you have answered all these questions carefully, you've done some hard work and serious thinking. That's good. But you have probably found some things you still need to know more about or do something about. Do all you can for yourself, but don't hesitate to ask for help from people who can tell you what you need to know. Remember, running a business takes guts! You've got to be able to decide what you need and then go after it. Good luck! Worksheet No. 3 List of Furniture, Fixtures and Equipment -------------------------------------------------------------------------------------------------- Leave out or add items¦ If you plan to ¦ If you are going to pay by ¦ Estimate of the to suit your business.¦ pay cash in full ¦ installments, fill out the columns¦ cash you need for Use separate sheets to¦ enter the full ¦ below. Enter in the last column ¦ furniture, fixtures list exactly what you ¦ amount below and ¦ your downpayment plus at least one¦ and equipment. need for each of the ¦ in the last ¦ installment. ¦ items below ¦ column. +-----------------------------------¦ ¦ ¦ Price¦ Downpayment¦ Amount of each¦ ¦ ¦ ¦ ¦ installment ¦ ----------------------+------------------+------+------------+---------------+-------------------- Counters ¦$ ¦$ ¦$ ¦$ ¦$ ----------------------+------------------+------+------------+---------------+-------------------- Storage shelves, ¦ ¦ ¦ ¦ ¦ cabinets ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Display stands, ¦ ¦ ¦ ¦ ¦ shelves, tables ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Cash register ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Safe ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Window display ¦ ¦ ¦ ¦ ¦ fixtures ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Special lighting ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Outside sign ¦ ¦ ¦ ¦ ¦ ----------------------+------------------+------+------------+---------------+-------------------- Delivery equipment ¦ ¦ ¦ ¦ ¦ if needed ¦ ¦ ¦ ¦ ¦ -----------------------------------------------------------------------------+-------------------- Total Furniture, Fixtures, and Equipment (Enter this figure also in ¦ worksheet 2 under "Starting Costs You Have To Pay Only Once." ) ¦$ -------------------------------------------------------------------------------------------------- Buying and Selling a Small Business By Verne A. Bunn About This Book Going into business for oneself can be a great adventure--or a great disaster. Which it will be depends a great deal on how well the prospective owner prepares through investigation and analysis of the situation he or she is about to enter. In some ways, the person who buys a going business has an advantage over the one who starts from scratch. For one thing, there are more facts to work with--if the buyer knows where to find them and how to use them. These are the principal problems taken up in Buying and Selling a Small Business. What should the prospective buyer of a small business--or the seller--know before the buy-sell decision is made? Where can this information be found? How can the buyer or seller correlate and interpret the data? How does he or she apply the data to negotiating a buy-sell transaction? This volume, now in second edition, does not pretend to give complete or specific answers. In some cases professional help is necessary, and in all cases the answers depend on many variables. Rather this booklet is intended to serve as a guide to areas needing investigation and to suggest some approaches that may be helpful. The buyer of a small business faces more problems--and more difficult ones--than the seller. Because of this, Buying and Selling a Small Business may appear to give more attention to the buyer than to the seller. However, it is important for the seller to know how the buyer is likely to approach the negotiations; and wherever specific problems for the seller do come into the picture, they are discussed separately. This booklet is issued as part of the management publications program of SBA's office of Management Information and Training. Based in SBA's Kansas City Regional Office, the author, Verne A. Bunn, administers the Agency's management assistance programs for several states. He acquired his wide knowledge of small business in a variety of ways, including experience as a counselor of small business owners as well as university research and teaching. Contents Part 1. The Buy-Sell Transaction 1 A Small Business Is Bought and Sold 2 The Flow of Decisions in a Buy-Sell Transaction Part 2. Sources of Information for Buy-Sell Decisions 3 Sources of Market Information 4 Sources of Financial Information 5 Sources of Legal Information Part 3. The Buy-Sell Process 6 Determining the Value of a Business 7 Negotiating the Buy-Sell Contract 8 Financing and Implementing the Transaction Part 4. Using Financial Statements in the Buy-Sell Transaction 9 Income Statements and Balance Sheets 10 Adjustments to the Financial Statements 11 Analyzing the Financial Statements Part 5. Analyzing the Market Position of the Company 12 The Market 13 The Company 14 The Sales Forecast Part 1 The Buy-Sell Transaction Chapter 1 - A Small Business Is Bought and Sold IS THERE A SMALL-BUSINESS OWNER who has never considered selling his business? Probably not. Is there an individual with some money, talent, or an urge for independence (often only the last) who hasn't thought about owning his own business? The number of small businesses actually bought and sold, however, represents only a small fraction of those who have felt these urges. To many people, the desire to buy or sell is only a passing thought. Others find various ways to solve their problems or satisfy their ambitions. But sometimes an individual doesn't follow through because he finds the prospect of buying or selling a business too baffling. The objective of this manual is to describe the process of buying and selling a small business and to establish some guidelines. It will not remove the difficulties, but it will make them more manageable. A Look at the Buy-Sell Process It will be helpful to take a detailed look at what happens when a business is bought or sold. First, consider some of the thoughts that go through the minds of the buyer and seller during the decisionmaking process. THE SELLER: (Before the transaction) Shall I sell my business? What is it worth? How can I find a buyer? (During the transaction) How much shall I tell this guy about my business? Will he raise his offer? What terms shall I insist on? (After the transaction) Should I really have sold? I wonder if I could have got more money. Wonder how the business is getting along. THE BUYER: (During the transaction) Shall I buy this business? I wonder why he really wants to sell. How much can I afford to pay? Where can I get the rest? How far will he reduce his price? (After the transaction) Now that I've bought it, which new idea shall I try first? Should I have known that would happen? It's going to work out just fine--isn't it? These are typical thought patterns. They mark the flow of decisions in the transaction. They also reflect the doubts and hesitancy involved in the decisionmaking. A Step-by-Step Account The following step-by-step description of buying and selling a grocery store is basically the story of an actual case. To make it more typical of all buy-sell transactions, some questions and problems from other cases have been worked into the account. Bill Smith wants to buy. Bill Smith had worked several years in grocery stores in Whitton, a city of 400,000. He had started as a carry-out boy and progressed through every job in a store operation. Bill was anxious to own his own store. He and his wife were in their early forties and eager to establish a business of their own. They had saved about $16,000, and Bill was confident that he knew enough about grocery stores to handle the operation. His wife planned to take care of the bookkeeping. The Smiths had followed up many leads from the classified section of the newspaper. In every case, they found the business either too run down to salvage or too large to finance. Bill had also talked to a few real estate agents who specialized in business properties. But the agents' listings had not turned up anything that interested the Smiths. In August, Bill learned from a food salesman that Sam Brown was trying to sell his store. Sam's Market was a small store on the other side of town. It had been operating for many years. Sam Brown wants to sell. Sam Brown had been thinking about selling his business for several months. He was reluctant to do it because the store had been established by his father. Yet he was finding the long hours he had to spend in the store a real hardship. Furthermore, during the last 4 years, business had declined from a high of $400,000 gross sales to less than $200,000. The main reason for the decline in sales, in Sam's opinion, was the competition from several new supermarkets in his area. Finally, he was concerned about a space of about 1,100 square feet at one end of the building in which the store was located. Sam owned the entire building and had been unable to find a tenant for this space for more than 3 months. Now a discount paint company had offered him a local franchise. Sam believed he could use the vacant space for this operation and handle the business with much less effort than he was putting into the grocery store. If he could sell the grocery business and lease that part of the building to the new owner, he would have a comfortable arrangement. The transaction. After talking to the salesman, Bill called Sam and expressed an interest in the store. They arranged several meetings to discuss the situation. Bill learned that Sam wanted to sell in order to take advantage of the paint-store opportunity. When Sam announced that he was asking $50,000 cash and $600 a month rent, the conversation went like this: BILL: Could I spend some time with your books? SAM: I can't let you do that. Most of my personal affairs are in those books. Besides, I don't want to be giving away everything about my business to someone who might be a competitor someday. BILL: But I have to have something to go on! SAM: Well, you ask me what you think you need to know, and I'll tell you--if I can. During the discussions that followed, Bill learned the following facts about the store: The modern fixtures and equipment had cost $60,000 new. Now 6 years old, they had a depreciated value of $30,000. The inventory had a wholesale cost of $20,000. Gross sales were running about $16,000 a month with a gross margin between 14 and 16 percent. In the past, annual sales had been as high as $400,000. The 3,900 square feet of store space appeared well organized. From this information and his observation of the store, Bill figured that he could increase sales to $40,000 a month within a year by more aggressive sales promotion--handbills, radio spot announcements, an extra large neon sign, and more personal service. This meant, in Bill's opinion, that inventory would need to be enlarged to $24,000. To better the profit, which had been averaging 2-1/2 percent of gross sales including Sam's salary, Bill believed the average markup should be raised from 18 percent to 20 percent. An additional increase in profit could be realized, according to Bill's analysis, if he reduced the staff by one full-time and one part-time clerk. Bill was unable to borrow the difference between his $16,000 savings and Sam's asking price of $50,000. Several banks turned him down before one agreed to lend him $20,000 at 11-1/2 percent interest with monthly payments over 5 years. Sam refused Bill's offer of $36,000 but offered to carry part of the price. After several more discussions, agreement was reached on the following terms: 1. $24,000 cash. 2. $22,000 unsecured note, payable monthly over 5 years at 12% interest. 3. $400 a month rent. Bill planned to use the $12,000 cash left from the bank loan to increase inventory and provide working capital. The store changed owners about September 1. Bill discovered that the inventory was worth only $16,000 at wholesale cost. He immediately used $8,000 to increase his shelf stock. Sales during the first few months increased to $30,000 a month, and Bill felt sure he could reach his goal of $40,000 a month. Profit, however, was running only 2 percent of gross sales in spite of Bill's attempt to increase margins and reduce costs. A sad ending. Six months later, the doors were closed on Bill's Market. The remaining $12,000 inventory was sold to a wholesale outlet for $10,800. The fixtures were sold for $16,400. Bill was trying to find a way to pay his debts and forget the loss of his life's savings. Four months later, Sam still had not been able to rent the space formerly occupied by the food store. He had little prospect of recovering his loan to Bill, and he had lost over $4,000 in rental income. He was undecided what action he should take. The Big Question Bill and Sam each thought he had received a fair value. But the final result showed that neither one had made a right decision. Both lost savings and income. What went wrong? How do you go about buying or selling a business? An important question? To the Bills and Sams--past, present, and future--few questions could be more important. A difficult question? Either buying or selling a business requires personal, financial, and management decisions. At no steps along the way are the decisions easy to make. But it will be helpful to establish the basic steps or elements in a buy-sell transaction and then to examine each of these elements. Chapter 2 - The Flow of Decisions in a Buy-Sell Transaction BUYERS AND SELLERS both seek answers to the same question: "What is this business worth?" Most people see the worth of a business as the total value of equipment and fixtures, inventory, and buildings and land. Important, certainly, but the sum of these values does not equal the value of the business. Bill probably paid a fair price for equipment, fixtures, and the like. But did his price of $40,000 reflect the value of Sam's Market? Obviously not. What, then, is the value of a business? For both buyer and seller finding the answer to this question is the most difficult and at the same time the most important step in the buy-sell process. But this final decision reflects many other decisions made while the transaction is being considered. In other words, the buy-sell process is a flow of decisions. It would be impossible to point out every decision that must be made, but the basic ones are as follows: Motivation: a decision to attempt the sale or purchase of a business. Contact: a decision on how to find a buyer (or seller) for a business with specified characteristics. Information: a decision on what information must be gathered or given to buy or sell a business. Sources: a decision on how, where, and at what cost the needed information can be obtained. Analysis: a decision on the meaning, importance, and reliability of the information gathered. Value: a decision on what the business is worth. Price: a decision on how much money to take or give for the business. Financing: a decision on how to pay or receive the purchase price. Contract: a decision on the form and content of the contractual relation. Implementation: a decision on how and when to effect transfer of ownership. Motivation What leads an owner to sell his business? It may be any of a large number of reasons: a personal health problem, a business disagreement, overextension of the company's activities, a desire to retire from business. The possible reasons are many and varied. For Sam, the motivating factor was change. He found his sales decreasing in spite of his extra effort, competition increasing, empty building space impossible to rent. In other words, both internal and external factors had brought changed conditions that affected the business unfavorably. Changed conditions should be analyzed carefully before a business owner accepts them as reasons for selling his business. The following questions can serve as a guideline for this analysis: 1. Have changes actually occurred in my business? 2. Are the causes of the changes beyond my control? 3. Are the causes of the changes within my control? It would be unfortunate for a owner to sell his business because of changes he could control if, by such control, he could recapture a successful and satisfying operation. Every owner, therefore, should examine closely his motives for wanting to sell the business. What makes an individual want to buy a business? Again, motivations will cover the whole range of human desires, from simple economic gain to social ladder climbing. Bill's prime motivating factor was the desire to expand a special skill into a business of his own. Bill thought he knew enough about grocery stores to handle one of his own. But he didn't. This factor of a special skill represents one of the dominant reasons for wanting to buy a business. It is a natural motive, but, perhaps because of its natural appeal, it can be a dangerous motive. A business must be managed. An operating skill does not always lead to managing ability. In fact, it often encourages a business owner to spend his time operating instead of managing. Planning for the future, organizing resources, staffing the business with competent people, directing the coordination of people and operations, controlling results--these are the functions of management. Consequently, an individual with a skill seeking to buy a business in which to apply the skill should check his motivation by asking questions such as the following: How important is management ability in this business? Occasionally, a business that is unique and very simple almost manages itself. But if the business is in a competitive field, management ability is probably the most important requirement for success. Do I have the ability to manage successfully? Effectiveness with people (customers and employees), eagerness to tackle difficult problems and make decisions, and intelligence about general business operations are key ingredients in management ability. Can I learn how to manage this business? Most people can learn to manage if they recognize the need. This requires room to make mistakes, however, and the self-discipline to undertake self-improvement programs. Contact Assuming that motives have been examined and that both seller and buyer are still interested, the next step is to get the two together. But there seems to be no "best way" to find a seller or a buyer for a business. From the seller's point of view, the task of finding an interested buyer is the more difficult one, but there are many avenues to explore other than running advertisements in newspapers. He should ask himself these questions: Have I told my employees and other business associates that I intend to sell the business? Have I taken advantage of the broadcasting ability of salesmen who call on businesses similar to mine, of association meetings, of other trade contacts? This informal advertising requires the same kind of information more formal advertising does. Business associates, trade contacts, and friends should be told the asking price, the terms, the anticipated return. Without this knowledge, a potential buyer can hardly be expected to respond positively. He needs to know in advance how the offer relates to his financial ability. From the buyer's point of view, finding opportunities is relatively easy. The difficulty lies in locating a business he can analyze confidently. When he deals with unfamiliar firms, he is haunted by a desire for more information and suspicious about the information he does receive. A buyer seeking a seller should consider the following points: Have I asked people I deal with about persons who might be considering selling a business? Have I considered approaching businesses with which I am familiar about the possibility of a purchase? Kinds and Sources of Information At this stage, the buyer and the seller must decide what information about the business to seek or give. In the case of Sam's Market, information was brought out about three factors: 1. The nature of the business in the past. 2. Present condition of the business. 3. Relation of the past and present to future expectations. Bill's approach was proper, but the information he gathered was meager support for decision making. Some of the information a careful buyer will want may take a lot of money or time to gather. He must decide what sources of information are essential and which ones he can leave untapped. Bill, for instance, might well have inquired about local economic conditions. Full information, it is true, would have required a costly analysis, but consider what information he could have got from easily available sources: 1. Sales in the market had declined more than 50 percent. 2. Sam had been unable to rent commercial space in the building in which the market was located. 3. New supermarkets were operating in the same area. 4. Banks hesitated to gamble on the future of the market. Bill might also have developed information about the future trend of the business, but that would have required time. He should have known the following facts about his financial program, however: Available funds $36,000 Use of funds: Payment to Sam $24,000 Planned increase in inventory 4,000 Advertising 1,000 Display sign 1,000 30,000 ------- ------- Available for working capital $6,000 Expected new income per month (3% of $30,000) 900 Probable expense: Payment to bank $265 Payment to Sam 295 Sam's salary ? Bill had enough information available to know (1) that his sales expectations were too optimistic and (2) that even if he reached his sales goal, he would not be able to satisfy the cash demand on the operation. What happened could have been predicted. Analysis The word "predict" is important. The buyer should be able to follow through the steps listed below and predict with some confidence the future of the business. What factors affect sales? How will these market factors behave? Therefore, what sales can I expect? What makes up the cost of sales? How will these cost factors apply to expected sales? Therefore, what gross profit can I expect? What expenses are required to run this business? How will expenses develop under my ownership? Therefore, what net profit can I predict? What assets will the business need and possess? What is the condition of these assets? Therefore, what asset improvements will I have to make? What credit does the business assume? What is the condition of the credit position? Therefore, what changes, if any, can occur in the debt structure? How much cash do I have? How much cash will the business generate? Therefore, what will be my available-cash position? What immediate cash outlay must I make? What will be the cash needs of the business? Therefore, what cash outgo will be necessary? What will be my net cash position as things now stand? What additional cash resource, if any, must I have? Therefore, what financing plan shall I use? Value A business had a purpose. That purpose is to provide a satisfactory return on the owner's investment. Consequently, determining value involves measuring the future profit of the business being sold. A seller often thinks of value as representing the money he has invested through his years of ownership. A buyer is tempted to consider value as a fair price for tangible items such as equipment and inventory. These factors are important, but they have value only to the extent that they contribute to future profits. An owner may have invested $40,000, the tangible assets may have a current worth of $20,000, but it is the profit potential that establishes the value of the total business. Assuming that a reliable estimate of future profit is made, how much is to be paid for each dollar of profit potential? This computation is discussed in chapter 6, but the general approach is suggested by the following questions: What am I buying (or selling)? A business, or a building full of equipment and inventory? What return would I get if I invested my money elsewhere--in stocks, bonds, or other business opportunities? What return ought I get from an investment in this business? Price It might seem that the price to be paid or received for a business would simply be equal to the value. However, value refers to what a business is worth; price refers to the amount of money for which ownership is transferred. There is usually a difference between price and value because the buyer and seller differ as to how much the business is worth. The price will represent negotiation and compromise. Here are two suggestions for fruitful negotiation: * Discussion between buyer and seller should focus on the future profit performance of the firm. Since expected profit is basic to determining value, it can be a valuable point for negotiation. * Every profit projection includes some assumptions and risks. Generally, the less firmly based the assumption and the more apparent the risk, the less value an expected profit can support. Consequently, identifying and analyzing risks involved in future operations can make discussions between buyer and seller more significant. These two points will help bring negotiations about value toward a mutually acceptable price. Financing When the price has been settled, the question of how to finance it remains. Financing a buy-sell transaction involves these five factors: 1. The amount of capital required. 2. The type of capital required. 3. The specific uses to which the capital will be put. 4. The length of time needed to pay back the capital source from the business operation. 5. The sources of available capital. How much? Bill's failure after buying Sam's Market illustrates a common problem--underestimating the amount of capital required to purchase a business. Capital must be available not only to pay the purchase price but also for (1) funds to operate until the business is generating cash, (2) funds to meet unexpected expenses, and (3) funds as a reserve to allow for errors in expectations. A buyer must think beyond the purchase price to determine the amount of capital he needs. Unless he does he will find his resources embarrassingly and probably disastrously wanting. Here are some questions that must be asked about his capital needs: Do I have enough capital to pay the purchase price? Do I have enough capital to support 1 to 3 months' operations--such as payroll and other cash expenses--while the business reaches a self-supporting stage? Do I have some extra capital to cover needs I may have overlooked (perhaps 10 to 15 percent of the purchase price? Types of capital. There are two basic types of capital: (1) equity capital--investment in the business by the owner or owners, and (2) debt capital--borrowed capital that must be repaid. Equity capital is often called risk capital. Those who furnish the equity capital are expected to take the primary risks of failure and to reap the benefits of success. The equity capital provides a margin of safety for a lender. The greater the amount of equity capital, other things being equal, the easier it is to get debt capital. The primary source of equity capital is the personal savings of the buyer of the business. Although many small businesses are incorporated, the sale of stock is seldom a source of capital for the small business. Few buyers, however, have enough personal savings to finance the purchase of a small business without any debt financing. An individual may borrow money for the purchase of a business by obtaining a personal loan, by borrowing against insurance policies, or by refinancing the mortgage on his home. These debts are not direct debts of the business, but the debts of a small business and the personal debts of the owner cannot be completely separated. Banks are the principal institutional source of debt capital for small businesses. The seller as lender. In the sale and purchase of Sam's Market, the buyer's savings plus a bank loan were not enough to finance the purchase. Bill (who needed more financing) and Sam (who wanted to sell his business) reacted in a manner quite common in the financing of the sale of a small business. Sam agreed to accept payment of part of the purchase price over an extended period of time. The seller is sometimes a source of capital to the buyer of a small business, as in Bill's case. A happy circumstance if it is handles properly. Before jumping at the chance, however, the buyer should ask himself these questions: Is there a good reason why commercial lenders would not approve my loan request? Is the seller so interested in getting out from under the business that he will take an unwise risk? Am I sure the business is as good as it looks? Can the business support the debt payments to which I am obligating myself? In the light of Sam's experience, the seller, too, should pause long enough to answer some questions before he accepts an extended payment plan. How serious will it be if the buyer is unable to make his payments? What security do I have to protect my position? How capable of operating my business successfully is the buyer? .Contract and Implementation Every step so far in this discussion has involved forecasting. From motivation to finance, the buyer and the seller must anticipate characteristics, developments, and problems that may develop. The contract between the parties embodies the resulting basic agreements about the business and the relation between buyer and seller. A "good" contract is meaningless if the earlier steps in the process have been carried out carelessly or not at all. Part 2 Sources of Information for Buy-Sell Decisions Chapter 3 - Sources of Market Information TWO BASIC QUESTIONS face the prospective buyer or seller of a small business when he starts to gather information for his decisionmaking: "What kinds of information do I need?" "Where can I get this information?" The information needed can be grouped into three general types: (1) market information, (2) financial information, and (3) legal information. The purpose of this chapter and of chapters 4 and 5 is to identify still further, within these groups, the kinds of information the buyer or seller should look for and some sources of that information. Not all of the sources listed will apply equally to all kinds of businesses. The buyer or seller will have to determine for himself the extent to which the specific types of information will help him reach a sound decision. Some difficulty may arise in the information-gathering stage because of poor records, unavailability of some information, lack of cooperation, and the like. The seller has the advantage as far as internal data are concerned. He has free access to his own records; the buyer does not. If the buyer needs internal information to reach a decision, it should be made available to him. He should insist on seeing the company records and be wary of any seller who refuses to give him the information he needs. Either seller or buyer may have to spend considerable time and effort digging out the information. The sources suggested below, however, should help him gather the basic types of information needed in the decisionmaking process. Importance of Market Information The first and most logical step in buying or selling a business is to conduct a market analysis. A market analysis is a study of the present position of the business within its market area and of probable future patterns. It should include the growth pattern of the business being sold, the state of the market, the nature and extent of competition--all factors, in fact, that will show the present market position of the business or that will affect its future. A market analysis should indicate whether the purchase or sale of the business should be considered further. It will help the seller decide what valuation to place on the business for sale purposes. It will help the buyer decide how much he should pay, and it will also give him a clearer picture of just what he is buying. A market analysis has the added value of making it possible to develop more accurate sales forecasts. It places greater emphasis on fact and less on hunch and guesswork. The specific nature of the business being bought or sold will determine much of the market information needed. A manufacturing business with problems of marketing and distribution will need information not necessarily pertinent to a retail or service business, with its more localized market. The following areas of market information are designed to suggest sources that may be useful to the buyer or the seller in analyzing the market of the business. Sales Information An investigation should be made of the sales history of the company. At least 3 years' sales should be examined and preferably 10 years'--or the entire sales history of the company if it is a new one. The manner in which the records are kept will determine to a large extent the availability of sales information. Many small businesses keep little in the way of sales records--often only what is necessary for tax purposes. Others have bookkeeping systems designed by business-machine manufacturers, trade associations, or professional accounting services. The more standardized the procedure, the more useful the information is likely to be for market analysis. Most States now have sales taxes, and this may provide a useful source of information. Whether or not a business is required to keep sales-tax records depends largely on the type of business and the State requirements. Sales-tax laws are not uniform, and what is required in one State may not be required in another. If most of the business is done on a credit basis, accounts receivable may give useful sales information. If this source is used, the market investigation should be concerned only with the amount of credit sales and not with the effectiveness of the collection of accounts receivable. Ingenuity and common sense can often turn up sources of sales information. In one case, for example, sales for a self-service laundry were determined by using water capacity per machine, city records of the amount of water consumed by the business, and price per load. Regardless of where the sales information comes from, the purpose of gathering it is basically the same--to identify the pattern or trend of sales over the past and to use this information to project or estimate sales for the period ahead. Such an investigation is especially useful in determining the value of the business above the value of the assets. Cost of Goods Sold A study of the cost of goods sold is also important in determining the market position of the business. Cost of goods sold is the cost of merchandise purchased by the business for resale, including freight and other charges. The difference between sales and the cost of the goods sold is called gross margin or gross profit. The higher the cost of goods sold in relation to sales, the lower the gross margin--and the net profit. Many factors, both within the company and in the market of which the business is a part, affect the cost of goods sold. An investigation should be made to determine the following: 1. Average rate of stock turnover, particularly as compared to the normal or typical rate for similar businesses. 2. Extent to which invoices are being discounted. Paying invoices in time to earn the cash discount will increase both gross margin and net profit if the discount is recorded as a reduction in the cost of goods sold. A direct increase in net profit will result if the discount is shown as "other income." 3. Freight costs to determine whether incoming transportation charges are in line. Among the records to be studied are vendor invoices, records of merchandise payments to vendors, shipper receipts or bills of lading, and records of past physical inventories. Sales-Effort Records This information has to do with how much it costs in selling effort to produce a given volume of sales. It involves two types of costs: (1) advertising costs