Copyright 2011 The Streetwise Guide
Smashwords Edition
mailto:thestreetwiseguide@gmail.com
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About Streetwise Guides
Streetwise, adj. Having the shrewd resourcefulness needed to survive in an urban environment
You can have all the business qualifications in the world, but without knowing your way around the rough and tumble of business you will have little chance of success. There are myriad stories of MBA graduates, global marketing managers, ex heads of multi nationals, highly qualified academics, experienced accountants and lawyers who have tried to run their own business and failed miserably. Conversely, there are far more stories of individuals who have left school in their teens and built up very successful businesses. Some of these have become household names - Richard Branson, Charles E. Culpepper, George Eastman, Henry Ford, Soichiro Honda, Ray Kroc, John D. Rockefeller, Vidal Sassoon.
A survey of 500 UK business owners and managers (of businesses with more than 50 employees) by The Institute of Leadership and Management found that only 32% had a university degree, 12% left school under the age of 16 and 7% did not even leave school with a basic school certificate.
What these individuals lacked in formal education they made up for with their streetwise skills. However many of those would have learnt those skills the hard way, struggling for the first few years as they learnt the street fighting rules that you often need in business to survive and prosper.
The Streetwise Guides will give you those skills. They will teach you how to work the system to your advantage. They will reveal the secrets and expose much of the hypocrisy in the business world, especially when dealing with bankers, accountants, lawyers and other business professionals. They will also teach you how to do business with the big end of town. They will show you the strengths and weaknesses of the Corporate World and teach you how they think so that you understand how best to deal with them, whether as a customer, supplier, creditor or debtor.
The Streetwise Guide authors always welcome feedback and can be contacted on
mailto:thestreetwiseguide@gmail.com
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Chapter 1 Introduction
So you want to buy a business?
Everyone dreams of owning their own business at some time or other during their life, usually just after a job application has been turned down, or they have received their redundancy cheque, or that bastard of a boss has given them a particularly bad day.
But few people end up owning one.
Why is this? There are thousands of businesses for sale, as 30 minutes on the internet will show you. Many of them do not require much money and most of them take many months if not years to sell.
The reason so few people do not realise their dream of buying a business is the existence of a number of myths that have grown up over the decades about buying a business. These myths state that:
•Buying a business is complicated.
•Buying a business needs lots of cash.
•Buying a business needs lots of experience.
•Buying a business needs lots of professional advice.
•Buying a business is very risky.
This book will explode those myths. It will show you how buying a business can be simple, safe and lots of fun, and that it is not restricted to consenting adults with bevies of advisers.
“But why Buying AND Selling?” we hear you ask. Simple answer. If you are buying a business, you need to know all the tricks that sellers use to get rid of lemons. If you are selling a business, you need to know all the angles to ensure that you receive the best possible price.
Tricks and angles is what this book is all about. For it is tricks and angles that will make all the difference between buying a bargain or buying a lemon. When you come to sell your business, it is tricks and angles that will ensure you get the best price.
And it is important that you always keep in mind the sale of your business. Running a business is fun, but hard work. Most of your focus will be on the financial rewards from the day to day running of the business, but often the greatest financial reward comes from selling the business.
Too often a business sale is a last minute decision. Sometimes brought on by financial reasons. Sometimes for personal reasons. More often because you just do not plan ahead. Those are the times when bargains can be bought. If you want to get the best price for selling your business then you need to plan at least 2 years ahead. That gives you time to get all the ducks lined up so that buyers just cannot resist your offer.
To try to ensure that you don't become too confused by a two-pronged approach, you will find that the body of this book is written primarily from the point of view of the buyer. A seller's story, cunningly disguised as a blockbuster of sex, intrigue, deviousness and desperation, finishes the book.
This book is not a ‘belts and braces’ (For ‘belts and braces’ read ‘accountants and lawyers’) approach to buying or selling businesses. This is a ‘streetwise guide’. The focus is on doing as much of the deal yourself as possible. For three reasons:
1. You learn – not just about the business you are looking at, but business in general.
2. It is cheaper up front – you don’t pay for accountants and lawyers until you really have to.
3. It is more fun.
The last is most important. You need to have fun when buying a business, and fun when running it. That is why we stress the importance of buying a business that is involved in something you enjoy.
This is also a ‘cheeky’ book. Valuing a business is a mixture of art and science, emotion and facts. Your emotional state and the emotional state of your seller or buyer. The interpretation of the facts that are used to draw up the financial information. The book will talk about how to control your and other’s emotional state when buying or selling and how to ensure the financial facts are interpreted to your best advantage.
Finally, The Streetwise Guides and its publishers offer all care but no responsibility if you follow advice from this book and it does not work out. Very little in business is black and white. Just many shades of grey. You have to decide on the decisions you make. In particular as to how much professional advice you receive. People do regularly run businesses without receiving any professional advice from either lawyers or accountants. We would encourage you to use them as little as possible but, at the end of the day, it is your family’s finances that are at stake. You have to decide whether you want full belts and braces or just a bit of string to stop your pants falling down.
The book is divided into six parts:
Part I will look at starting points. We will look at attitudes, for it is your attitude more than anything else that will determine whether or not you end up fulfilling your dream or simply become yet another “What if?” person, spending the rest of your life thinking “ What if I had bought that franchise?". “What if I had sold the house and bought that charter yacht?”. “What if I had moved on that company?”. We will look also at goal-setting, where to start, where to look and how much to spend. And we will address that thorny question of whether you should buy an existing business or start something up from scratch.
Part II will look at specific types of business for sale, whether or not they may be suitable for you and, if so, what specific things you need to look for if buying one. We will look at retail, manufacturing and processing, wholesaling and importing, the service industry, business to business selling, franchises and the ubiquitous 'get rich quick' schemes and scams. We will also look at spotting a bargain business and buying that potentially greatest of bargains, the insolvent business.
Part III will cover the number-crunching aspects of buying a business. In particular: valuations and valuers, some of the more blatant fiddles some sellers use, and the more subtle bits of creativity that you need to look out for in balance sheets. This part may be of particular interest to those of you looking at selling your business - for obvious reasons!
Part IV is all about 'the little people'; the sales agents, accountants, lawyers, bankers and other little leprechauns who can make or break the deal for you. These 'little people' can cause you big problems and they are often the cause of a good deal being stuffed up. So, we will see how these people tick and how you can motivate them to ensure that your deal goes through with the minimum of fuss and the minimum of fee!
Part V is about 'doing the deal'. What to negotiate on, how to do it and what skills you need to make sure you are a better negotiator than they are. We will also look at buying limited liability companies, tax losses, signing of contracts, payment terms and the various techniques for minimising your risk. We wrap this section up with a case study of a client buying a $1.3 Million business with only $100,000 cash.
Part VI is, arguably, the most important part of the book - what to do after you've bought it. The immediate action you take on buying a Business can dramatically affect its success or failure. In the first month, you may have to change the culture, address unprofitable areas, motivate the staff and retain customers. You also have to learn how to deal with the outgoing owners and their influence on the business.
So read on, learn, make money and have fun!
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PART I Starting Points
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Chapter 1 – where to begin
A very common state when people first think of buying a business is confusion, They start to look in the paper and are swamped with advertisements and 'opportunities of a lifetime',
So they seek advice from friends. “DVDs mate. That's what you want to get into, especially the dirty ones” “No” says the guy next to him at the bar “Buy a wrecking yard. It's all cash in the back pocket and you can fiddle the stock”
Very helpful! Then they start talking to 'experts'.
They approach accountants: “Well, in my considered opinion, Ms Jones, I would recommend a wrecking yard - you have the advantages of good cashflow and flexible accounting options”
They approach brokers: “Now, I have a client who has made a lot of money from worms.” (Possibly by employing them, you think!)
Sometimes, god save us all, they ask their bank manager:
“Well, that's difficult to say. Why don't we discuss it over lunch? You paying?” Everyone will offer different advice and all from completely the wrong point of view. You see, they'll all look at it from the point of view of which is the best business to make money from.
But if you look at a business simply as a way to make money you increase your risk of failure and are headed for a potentially miserable life. (Very few people get rich deliberately, and most of those who do become real miserable buggers!) This may seem a strange thing to say. Surely business is all about making money? Not so.
Does It Look Like Fun?
Business is about having fun and making money. In that order.
If you are unhappy in your work, you won't enjoy doing it and you won't do it to the best of your ability. Just like a real job. So, before you start looking at different businesses to buy you must first get out a piece of paper and draw a line down the middle.
On the left-hand side you write down all the things you like doing: reading, long trips in the country, travelling, photography, sex. On the right -hand side you write down all of the things you don't like doing: seeing bank managers, forced conversations at parties, public speaking, driving in heavy traffic etc.
This list should also help identify all the things that you are good at. Most people enjoy what they are good at but it is a little pointless buying a bricklaying business just because you are a good brickie if you actually hate laying bricks. You will probably be more successful at something you are less skilled at but enjoy more.
Put the piece of paper to one side and leave it for a few days. Then take it out again and look at what you have written. Do you really like sex that much? Add some more things to your list.
Now give it to your partner for their opinion and feedback: “No, you don't like sex that much!” You change it again.
This then becomes your business-buying bible. Every time you look at a business, check it against your list and see how it scores. Would there be some fun in this business, or would it all be drudge? It may be, for example, that if you love reading and solitary hiking and hate meeting people, it would be unwise to buy a public relations firm.
You don't have to have all ticks and no crosses. But make sure you can live with your crosses and still stay happy.
You will find that this process narrows down your field of interest and makes it easier to zero in on the right type of business for you.
So where should you look for your type of business?
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Chapter 2 – where to look
You have to look anywhere and everywhere. In newspapers, real estate agents' windows, magazines, trade magazines and, especially, the internet. As well as looking everywhere you should also ask everywhere - in the pub, the coffee shop, at work. Ask your customers, your suppliers. Even ask your bank manager. You can also ask accountants, lawyers, valuers, in fact anyone and everyone you know.
The Direct Approach
If you manage to narrow your quest to a certain industry or specific type of business you can try the direct approach.
You may think that DVD rental shops should be a good cheap buy or decide that the town desperately needs a coffee shop that sells 'real' coffee. You may think that repair of cars with electronic management systems is where the fun can be had.
So pick a business, then just walk in the door, say hi, and ask the owner if they want to sell.
Or you could ring around a few and see if they have anything for sale. If you want to maintain a lower profile you could send a mailer to everyone, and if you really wanted to stay low you could get a friendly lawyer to write on your behalf, keeping your name confidential until they show their colours.
You may think that approaching them first is a poor tactical move as it makes you seem too keen. In some situations you would be right. But if they turn out to be unrealistic in their terms and price then you simply walk away. At least you will know something about a potential competitor once you do find the right company to buy in that industry.
But you may also find the odd bargain this way. If you approach people before they have had time to attract other buyers you may be able to walk away with an absolute steal.
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Chapter 3 – what to spend
Next you have to work out how much you are going to spend.
This is the $64,000 question, the obvious answer to which is, of course, as little as possible.
Unfortunately, human nature being what it is, we always tend to look for the biggest, bestest, most impressive whatever it is that we have decided to buy. The six-figure profit figures tempt us, as does the new BMW that the current owner has just bought. We visualise ourselves stepping into that very owner's shoes, with the same lifestyle, making the same money - and more, because we are so enthusiastic.
Now we know the world is full of international gurus preaching 'visualise to realise' but, though that might work for a few individuals, for most of us common sense and reality must always come before day dreams and calamity.
The big advantage of spending as little as possible is of course that it reduces your risk. If all goes well you can use the money that you haven't spent later, by expanding or buying another business to add on to it.
It is clearly impossible to be specific on exactly how much you should spend. It depends how much money you have, what the business is worth and what other risks there are associated with it. But there are some rules of thumb.
Rules of Thumb
1. Always keep back 50 per cent of your liquid cash to cover unforeseen problems after purchase. If you have been left $100,000 by Great Aunt Bertha, then put $50,000 under your mattress for a rainy day and go shopping with the other half. The objective is to ensure that you have a ready source of cash to enable you to fight your way out of any trouble within the first year or two.
2. If you are borrowing money on other assets, always borrow twice as much as you need and keep the excess stashed away in a different bank. You only need to do this for, say, a year, or until you are confident the business has been a good purchase, then you can repay the excess you borrowed. You may think this is daft. Why borrow more than you need, just to put it on deposit somewhere else and end up paying more interest than necessary? And it is daft, because banks are daft. The banks will happily lend you the money when all is going smoothly, but as soon as you hit problems they turn you down flat, or impose horrendous terms on the additional borrowings. The trick is to get the money out of the banks when you get the chance - which normally means when you don't need it! It could save your bacon.
3. When borrowing, maximise borrowings against the assets of the new business. It is tempting to borrow everything against your house because it is easy and cheaper. But it is much better in the long run to use finance companies to borrow as much as you can against specific assets and minimise your house borrowings. You will sleep better and your spouse will be much happier!
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Chapter 4 – get your head right
If you are buying a business, you need to be negative when negotiating with the seller in order to get the best possible deal, but positive in yourself about the potential in the business.
Many people who look at a business don't buy it because they can't handle being negative and positive at the same time. They try so hard to find the negatives in the business (to ensure they don't buy a lemon and to screw the price down) that they talk themselves out of buying it and walk away.
One haulage company was looking at buying another haulage company. The buyer, Tony, being a haulage company man, prided himself on his negotiation skills and his ability to 'screw people to the wall'. So he dug out everything that could possibly go wrong with the seller's business.
Tony and his accountant worked out that the company for sale couldn't possibly make any money in the next year, even though it had made $300,000 a year profit for the last two years. They offered $200,000 for the business, which was approximately half what the trucks alone were worth.
Needless to say the seller told him politely where to go and simply did not sell. The next year he made $400,000 profit.
Tony could have bought the business for $400,000, being the value of the trucks, and got his money back within 12 months.
Some buyers, on the other hand, become so positive that the opposite happens.
Julie and Bryan had a dream. They dreamt of running a boutique fashion shop in a high-class suburb. They also had a house and $100,000.
They found a shop and fell in love with it. They loved the window display. They loved the interior decor. They loved the owners - 'simply wonderful, darling'. Everything about the shop was 'simply wonderful'.
True, sales were down, the lease seemed a bit dear and some of the stock in the storeroom seemed to have been around a year or two. But, they could soon fix that. After all, this was their dream!
They got fleeced: lost their cash and lost their house.
Then there are the ones who get it right.
Alex was a mechanic: who earned $20,000 a year. He had no savings. His credit cards had $3000 credit available. He had a few private customers who came to him at home and he wanted his own business.
A local repair shop went broke. It specialised in LPG work and was one of only two in town. The receiver put it up for sale. Alex had no money but he asked anyway. The receiver wanted $20,000 for the equipment, $30,000 for the stock and $20,000 for the licence. Alex walked away.
But Alex asked around town and found out who the landlord was.
He spoke to the landlord. The landlord did not want an empty building. Alex waited.
Two months later the business was still for sale. Alex went to see the receiver again. The price was now $15,000 for the equipment and $10,000 for the licence. Stock was still $30,000. Alex spoke to the landlord again. The rent was overdue. Alex pounced.
He offered $10,000 for the equipment, nothing for the licence and said he would pay for the stock as he sold it.
The receiver was not impressed. Then, suddenly the receiver received an eviction notice from the landlord (what a coincidence!). The receiver took Alex's deal.
Alex financed it by raising the $10,000 by hire purchase on the equipment. His credit card paid his costs and the first month's rent.
He made $50,000 profit in the first year and now races jet boats!
This book will show you how to buy a business the Alex way.
It's not that Alex was particularly smart, but he was patient and always kept an open mind. And those are the two techniques you need to buy a business:
•Patience to wait until the right one comes along.
•An open mind to see how to buy it creatively and with minimum risk.
You also need reasonable negotiating skills. And if you have some money it is certainly a help!
Thinking to Sell
Now that you've bought it you need to plan for selling it.
For most people, selling a business is not a planned decision. They become ill, they hit 45, they need the money for a divorce settlement. Very few people plan their sale.
Rush Rush Rush
So they rush it. Pull out last year's accounts. Come up with a price off the top of their heads and contact a broker. The broker then works hard on getting the selling price down (they always like an easy job), prepares a 10-page memorandum of sale and sticks an ad on the web.
People come and look at it. Many are time-wasters. The rest find things wrong that they were not told about in the first place. The seller gets more depressed every time another potential buyer says 'no thank you'. The broker works on this and the price comes down more and more.
Eventually an Alex comes along and steals it.
This doesn't always happen. Sometimes a Julie and Bryan turn up and the seller laughs all the way to the bank. But not often.
This is how it's done properly.
Dave and Joe had bought a small engineering company for $100,000 five years previously. Now they were both about to hit 40. They were sick of dirty fingernails and wanted out. So they planned it.
The first thing they did, using last year's figures, was to appoint a broker and put the company quietly for sale to a few companies they knew would be interested but negative (they had no intention of selling it at this stage). They used these buyers to rip their company apart and tell them everything that was wrong with it. One of these buyers offered $500,000. They withdrew the company from sale.
They then went through the list and spent 18 months minimising the impact of these problems. At the same time they screwed down overheads for all they were worth and cranked up prices and sales. They stopped doing cash deals and cut back on family perks through the company to further increase profits. They revalued their assets and restructured them to maximise the goodwill value in the company and minimise the tax.
Then they sold it - to the first company they approached - for $2 million.
That is how you make money.
That is why you need to know all the tricks of selling a business if you are buying. That is also why you need to know all of the tricks of buying a business when you are selling.
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Chapter 5 – buying v building a business
This book is all about buying a business. But what about simply starting one up from scratch?
The answer is that you can start one up from scratch but buying an existing business is nearly always easier and safer. As long as you do it right.
“What is that you said? Buying a business is easier and safer? But the dangers! The unknowns! The crooks who are out there! The money you have to fork out!”
True, there are dangers; true, there are crooks out there; and also true, you normally have to fork out more cash up front when buying a business than when building one up from nothing. .
But there are not as many dangers or crooks as you imagine and the cash you expend up front is often better protected than cash spent starting up a new venture.
Building up a business from scratch can, in fact, be painful and costly. Time for another story.
Derek was an engineer. He worked for a big company. He was a very good engineer, but he was not earning much money.
So, to help buy presents for his kids at Christmas he bought a second-hand lathe and a bit of brass and started making doorknobs in his back shed. He made 100 and took them down to the local hardware shop. They liked Derek's knobs and paid him what he asked for them - in cash.
Derek was happy, and so were his kids.
A few weeks after Christmas the hardware shop rang Derek and asked if he could make them some more. The owner also asked if he would make an extra 100 for his cousin, who had a hardware shop in the next town.
So, instead of working overtime, Derek worked in his back shed and made more and more knobs.
You can probably work out the next few years of Derek's story for yourself. He packed in his job, took on staff, bought some more machinery, signed a lease on a factory and made more and more doorknobs.
On the face of it, a classic rags-to-riches story. Derek certainly did make more money than when he was employed and his standard of living increased over that time. But so did his borrowings to help pay for his expansion.
Derek survived longer than many. Eight and a half years, to be precise. His business came close to going broke twice and survived. Unfortunately it did not survive the third time. Nor did his house, which by then had been mortgaged to the bank.
Now this is not to say that you can't succeed by building up a business from nothing, but, as we will see, the risks in buying an existing business (the right way) are far less.
The statistics support this. Speak to any accountant, economist or government statistician - even a mate in the pub - and they will all cite you similar figures. Fewer than 20 per cent of brand-new businesses last longer than three years. If that is not bad enough, many of those that survive beyond three years are simply the walking wounded and close down in the following two years. Of those that survive beyond five years, many by then have new owners.
It is these new owners who often make most of the money from a new business. They let the originator take all the initial risk, develop the business, find out what works and what doesn't, and then they come along and relieve them of it for very little money - and very little risk.
After all, where is the risk in taking over an existing business? The main risks, of product development, staff recruitment, price structuring, marketing policies, over- trading, trialling new machinery etc have all been borne by the person who started up the business in the first place.
The only risk you are left with is the risk of being unable to get your money back if you've been conned, or hitting problems if you've been over-optimistic in your assessment of how much money you can make from it. But this financial risk is not difficult to minimise if you know how - and this book will show you.
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Chapter 6 – the right time to buy
One of the hardest decisions you have to make when buying a business is knowing at what stage in the business cycle you should buy.
Most buyers would prefer to buy after a series of good historic profitability figures. But this can be a fatal mistake.
All businesses are cyclical: they have their good times and their bad. By buying after a series of good historic figures you may, almost by definition, be buying either at the top of the cycle or, at the very least, a good way up the scale. From the top, the only way is often down. This is not always the case, some businesses do make money year in, year out but not many. Most of the rest go through waves of good and bad. It is rare for any business to go for five years without hitting some major problem or needing some restructuring. If you buy a business with three to four years of good results, you may have only another 12 to 18 months of good trading before you hit problems.
The other extreme is then to buy at rock bottom, and some people specialise in buying companies that are on the verge of bankruptcy. They usually make a killing and later on in the book we will look in more detail at buying insolvent companies.
More realistically, you should be buying at the beginning of a good cycle or just before the end of a bad one. This way you end up buying a business with possibly poor historic profit figures but good projected ones for the future. It also means that you direct all of your efforts and attention at determining future profitability, something you are likely to skimp over if you are besotted with three years of good historic data.
By buying at or near the bottom of a cycle you are also going to pay a lot less money. Companies with good historic profit figures generally command high prices. Companies with poor historic results can often be purchased for minimal cash and, more important, minimum risk.
You do have to beware of 'your best business friend' - your accountant - in this cyclical aspect. Most accountants feel uncomfortable is advising a client to buy a business with poor historic profitability. It means that they have to look at the future of the business and that is something that many accountants do not like and are not very good at.
This means that you have to involve your accountant in some detail in the purchase.
Don't be bone idle about this. It is very easy to throw a set of accounts at your accountant, ask a few questions and then buy the business on the basis that it will continue to perform as well as it has for ever and ever.
Amen.
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PART II
Specific Types of Business
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Chapter 7 – where do you see yourself?
The first time you search on the internet can be quite depressing. There are hundreds of businesses of all kinds for sale. So let's try to categorise them to see which may be best for you.
Virtually every business can be categorised as one of four types:
1. Retail;
2. Manufacturing and processing;
3. Importing and wholesale; or
4. Service industry and business-to-business selling.
In this section we will look at each type, their strengths and weaknesses, and what sorts of skills and attitude you need to make them work.
We will also look specifically at that most common of business formats, franchising, and briefly examine some of the different types of get-rich-quick schemes that abound to tempt you.
Finally, in this section we will look at that most attractive option, the bargain business, and how to know it when it stares you in the face.
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Chapter 8 – buying a retail business
This is by far the biggest category of businesses offered for sale - there seem to be thousands of them. Corner shops, service stations, motels, supermarkets, boutiques, hairdressers, pubs ...
A retailer's potential marketplace can be huge. If it's a local shop or pub it is anyone who lives or travels within range. If it's a service station it is everyone who drives past. If it's a motel it is anyone in the country and if your motel is in a major tourist spot it can be anyone in the world.
But customers are unpredictable.
Retail is a highly 'reactive' business. To achieve sales and therefore profit, you rely mainly on people walking in, or driving past the front door. True, you can do things to encourage people to come in. You can stage a pretty window display, have an open fire, some nice music and so on. You may even do some advertising. But at the end of the day the number of customers who come in is generally out of your control.
Story time again.
Doug bought a dairy. Six months after he bought it the council imposed parking restrictions outside his shop. His turnover halved. He closed the doors.
A few years later he decided to try again. He bought another one, this time being sure of parking restrictions. After six months his only opposition on the other side of the road closed down. His turnover doubled. He went motor racing on all the money he started to make.
Then there was Jenny.
Jenny bought a motel. Some 50 per cent of her customers came from overseas. The exchange rate worsened. Her business dropped by 25 per cent.
And this is one of the big negatives with retail: unpredictable customer behaviour.
The Landlord Factor
The second big negative is the property owner you pay your rent to - unless you are rich enough to be able to buy the building that houses your retail business as well as the business itself. And if you are you should just buy the building and let someone else take all the risk with the business.
There is a love/hate relationship between property owners and retailers. Each loves to hate the other. Property owners accuse retailers of being small-minded dreamers who have no commercial common sense. Retailers accuse landlords of being penny-pinching, evil, mercenary, devious little toads.
Both are correct to a greater or lesser extent.
Retailers can be naive when it comes to commercial reality. Retail generally attracts individuals who have little business experience because it is something they can understand and therefore feel confident about.
Landlords can be evil little sods because they make money by juggling figures with little regard for individuals. And many of them have poor cashflow because they have borrowed heavily to buy the building in the first place or to refurbish it after they have bought it. Even the large institutional property owners can be just as bad at screwing their tenants.
There are three things that tend to turn property owners into evil beings:
1. Every dollar of rental income they receive may be needed to pay for borrowings, property management, repairs, improvements and their new Merc.
2. Every dollar increase that they can obtain in annual rent can increase the value of their property by up to 20 times that dollar.
3. In the popular locations, there is rarely a shortage of new retailers to fill a vacant shop if you walk out.
If you are renting a shop in a poor retail complex then you may not have these problems. But this normally means you also don't have as many customers passing your shop window.
If you are renting a shop in a good retail area then you can be on a wicked treadmill - all in the landlord's favour. This is because rent levels increase in line with the number of customers and the success of the shops in the building. Therefore the more successful you are, the higher the rent will rise. The end result is that retail rents tend to increase at a pace just sufficient to mop up all the extra profit you are making. This can apply to all types of retail, including pubs, service stations and massage parlours.
It's not quite as simple as that. Very good operators can beat the system and make a fortune from retailing. But for every good retailer there are dozens of average ones - and you could be one of them!
If you are serious about retailing then, as your lease is such a major element of your potential success or failure, you should read a couple of good books on commercial property investment and have a good talk with some successful property investors. That way you will get to know the enemy a little better and reduce your risk.
Those, then, are the negatives of retailing. So what about the positives?
Simplicity
Retailing is easy to understand. That is the main reason why it is so popular.
As young kids everyone plays at being 'shopkeeper'. You put a pretty tablecloth on the dining-room table, get out all the cans of food, put prices on them and happily sell them to your cat.
A retail business is no different - except you sell to people, not cats. But this is where some people are disappointed.
You remember how you loved your cat, no matter what it did wrong? Well, you have to adopt the same approach to your customers. For this reason retailing is only for people who like people/customers. Not only must you like people but you must also have patience, be tolerant of other people's foibles and love to small talk until the cows come home. If you do then you will have lots of fun and should make some money as well. If not, look elsewhere.
Good Cashflow
The other big plus of retailing is all that lovely cash coming across the counter every day. Now, this is not to tempt you into fiddling your taxes. In fact fiddling your taxes by not declaring all your income is one of the dumbest moves you can make.
The good thing about all this cash is that you can put it in your bank account and sit on it until you need to pay some bills. This is called having good cashflow. And good cash flow is good for any business. Good cash flow also means that you don't need as much money to buy the business in the first place.
You will also find that for many retail operations, you can purchase stock on consignment. This means that you don't have to pay for it until you have sold it - which is also good for cashflow, and limits the amount of cash you need to buy the business in the first place.
In summary, retail is the most popular type of business to buy because it is easy to understand and has good cash flow. However, it can also be unpredictable and you are often at the whim of the landlord who can make or break you.
Buying Retail Businesses
So you know all that, and you're keen. How should you go about buying a retail business?
When you are looking at buying a retail operation you should look (obviously) at those where you can minimise the disadvantages and maximise the advantages.
The most difficult aspect is keeping the customers coming in the door in sufficient numbers. The surest method is to pay for prime retail space that has thousands of shoppers passing each second - but that means you end up with a potentially crippling lease.
And here is the conundrum (what a wonderful word!). Getting in the customers without getting a crippling lease. Here are some suggestions:
1. Minimise your dependency on passing trade. Try to choose retail operations that have an established customer base and/or a customer base that you can target by advertising, direct mail, selling online or similar. If you are less dependent on passing trade then you don't need prime positioning and you don't need to tie yourself in to tough leases.
2. If the business is dependent upon passing trade then make sure there is sufficient fat in the business to enable it to withstand a drop in sales without going broke. Unfortunately this implies the business will already be highly profitable, which means you will find it hard to buy at a half-decent price.
3. Try to minimise the length of lease when you take the business over. This way, if the business doesn't perform as you had hoped, your ongoing lease commitment is not too onerous. But make sure you have a good right of renewal at the end of the initial lease period so that you have the option of staying there if things do go well.
4. Choose a business in an area that is likely to increase in popularity, or at least stay level, for the next four to six years - and then remember to sell it before the popularity drops.
5. Fully research all proposed developments in the area - new roads, new shopping centres, altered parking restrictions can all change the viability of a business very quickly.
6. Try to renegotiate the lease as a precondition of taking the business over. If the business has been performing poorly and the property owner likes you and thinks you would be good for the business (and therefore for him), then you may get better terms.
Retail is the most popular business for beginners but it is littered with the bankruptcy notes of many of them. Because it is one of the easiest to understand and get into, many people underestimate the risks. Make sure you don't.
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Chapter 9 – buying a manufacturing business
If retail is the most popular type of business to buy, then manufacturing has to be the least popular.
Manufacturing is all about making things by using people. And it is the last bit that puts so many (too many) individuals off.
How are Your People Skills?
To make money through a manufacturing business you have to be good at handling people: staff, customers, suppliers and bank managers.
You have to be very proactive. You have to chase your customers, get orders, screw down suppliers, motivate staff etc. And all this proactivity can be very time-consuming, very stressful and quite hard!
Manufacturing is stressful because there are so many things that can go wrong.
Staff don't show, suppliers don't deliver on time, customers keep changing their minds, then go broke.
Poor Cashflow
It can be difficult to make money out of it as well. Your first problem is that thorny old subject of cashflow . It doesn't!
Manufacturing must be one of the greatest users of cash ever invented by humankind. It simply soaks it up - everywhere and all the time.
Machines need replacing. You have to move premises because the new machine doesn't fit where you are. Stock becomes outdated when you change designs. Key staff leave and you have to spend a fortune finding good replacements and then a further fortune paying for their mistakes while you train them.
And if you start to be successful and your sales shoot up it gets even worse. You get into the dangers of overtrading. Overtrading means selling more than you have the cash to finance properly, and it can break you. This sounds daft but it's true.
If you double your sales over, say, six months, then all else being equal you will also double your accounts receivable and double your stock levels. This means you need a heap of extra cash. But it doesn't stop there. When you make a big increase in your sales you also strain every other part of the business. Quality can suffer, you lose control of your debtors and start having bad debts, your machines start to break down from overwork - and so do your staff.
Overtrading can affect any business but manufacturing is the one area where it can cripple you very quickly indeed. And because manufacturing is such a user of cash, you have probably borrowed to the hilt and put your house on the line as well.
A Chance to Prove Yourself
The good thing about manufacturing is that you are usually in charge of your own destiny - the success or failure of a manufacturing business is nearly always directly related to the competence and confidence of the owner.
If you can handle people well you can often make lots of money and have lots of fun. Many problems can arise but it can be very satisfying fixing them all and succeeding.
In summary, manufacturing is one of the least popular options for people looking at buying an existing business, but because of this you can often buy manufacturing businesses for ridiculously cheap prices and with minimal ongoing financial risk.
So, if you are interested in manufacturing, how do you put a deal together?
Buying Manufacturing Businesses
Your two big problems when buying a manufacturing business are managing people and poor cashflow. To try to minimise these two major problem areas try the following:
1. Look for manufacturing operations that use sub-contract labour rather than employees. This takes away part of the problem with handling people and can also improve cash flow. Employees are an immediate drain on cashflow because they want paying straight away. Subcontractors normally provide credit. This is particularly advantageous when you are expanding the business.
2. Stick to something you understand. You don't have to be a skilled tradesperson, but should at least know the basics of what the company is trying to do. And make sure it is something you enjoy doing. The stress of running a manufacturing operation can be much easier to handle if you are having a ball while you are doing it.
3. Minimise the amount of cash you use to buy the business. Keep back as much as possible for a rainy day - or even the odd cloudburst. Manufacturing companies specialise in unpredictable weather patterns. Cloudbursts are regular occurrences, hailstorms not uncommon and hurricanes and tidal waves not off the map either!
4. Never pay goodwill, unless it is tied in very specifically to future sales and performance. Manufacturing is one of those areas where vendors try to disguise goodwill items as real assets: recipes, designs, trademarks, patents etc.
5. Try to have a fallback 'asset stripping' position in case the business becomes a disaster. In other words, try to structure the deal so that, if all else fails, you can close the operation down, sell off all the assets and recover most of your cash. This is a good philosophy for any business purchase but is particularly relevant to manufacturing businesses.
6. Use your purchase of the business as an opportunity to renegotiate trading terms to improve cashflow. Shorten the payment terms for customers; negotiate extended credit from suppliers etc. This will enable you to hold back more of your own cash for those cold fronts moving in from the south.
Retail and manufacturing are almost at opposite ends of most business yardsticks: reactive to proactive; cashflow positive to cashflow negative; simple to complex, low people management to high people management.
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Chapter 10 – importing and wholesale
Nestled nicely in the middle is that often-overlooked area of importing and wholesaling, a kind of halfway house between manufacturing and retailing.
You need to be reactive with your suppliers and customers, but often only once or twice a year when you are negotiating new deals. It is not as cashflow greedy as manufacturing but does not have the daily cash-over-the-counter benefit of retailing. It is usually a little more complex than retailing, but not by much and as few people are usually employed your people-management skills are generally only required in negotiations with suppliers and customers.
Most wholesaling these days is import-related. Gone are the days when manufactured goods passed through one or more wholesalers before ending up in the shops. For this reason you also need to be able to put up with some overseas travel- gosh, what a bore!
A successful importing and wholesaling business needs only two things: good buying contracts and good selling contracts. As well, as a potential owner you need quite a bit of cash and good negotiating skills.
Good Buying Contracts
Most businesses in this category have established 'lines' with manufacturers. Sometimes these contracts are in binding agreements but more often they rely on the history of the relationship between manufacturer and wholesaler, which may go back over many years. Even if the contracts are in writing, you will often find that it is not too difficult for the manufacturer to cancel the agreement if they so wish.
More important is the strength of the historic relationship between the manufacturers and the business you are looking to buy and how that is likely to be affected by a change of ownership. Therefore, what is more important than getting your lawyer to check the fine print of the contract is actually speaking to the suppliers, preferably face to face and not just over the telephone.