****Evaluating Business Models When Buying a Business

Tips for Buying a Business

Evaluting Business Models When Buying a Business
Buying a business? Of all the things to consider when buying a business, a thorough evaluation of the business model is the most important consideration.

When buying an existing business, it's important to thoroughly evaluate the business model.
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In essence, when evaluating a business model, you must ask three questions:

• How does the company I am about to buy currently make money?
• Can I continue to make money after I buy this business using the existing business model?
• Is there something I can do to change the business model to greatly improve the potential of this business?

How Does the Business Model Make Money?

At first blush, this question would not seem to be very illuminating:

How does a Subway franchise make money? Well, they sell sandwiches. Duh.
How does a local drycleaning business make money? They take in clothes, dry clean them, and get paid to do that. Duh.
How does a PR firm make money? They get clients to pay them money to get media placements. Duh.
How does a website development firm make money? They build websites and get paid to do so? Duh.
How does a lawn mowing service make money? They mow lawns and get paid to do so. Duh.
How does a telecomm value-added reseller make money? They sell businesses T1 lines and other telecomm services and get paid to do so. Duh.

To evaluate the business model, you have to ask probing questions that take the discussion up a notch. Here are a few sample questions to ask when evaluating a business to buy and that company's business model:

Is the business dependent on individual talent or can it still do well even when existing employees are replaced with new employees? In the case of a Subway franchise, the business is systematized and existing employees can be replaced. However, in the case of the PR firm, the customers may have been buying the skills and relationship of a single individual. If that individual is not there, the business model may not perform as well.

Is their repeat business and a recurring revenue stream? A lawn mowing service can sign up clients for an entire summer, and have repeat revenues from customers every week. In contrast, a website development company might only be earning money while working on a specific project. In that respect, the website company is like a taxi driver. No fare, no income. A telecomm value-added reseller locks into a growing recurring revenue stream because they are typically compensated by the provider (e.g. MCI, Sprint, etc.) as long as their client keeps the service. Hence, in the fifth year of business, they are still earning revenues from companies they signed up five years ago, four years ago, etc.

Is the value proposition unique and can a competitor steal the business away? A dry cleaner could lose a lot of business if a comparable business opened up across the street and offered the same services at half the price. The key to a strong business model is some sort of unique positioning that cannot be easily replicated by competitors.


Can I Continue to Make Money With the Current Business Model?

Just because the current owner is making money with the existing business model, doesn't mean you will be able to continue to make the same amount of money in the future.

In the case of the PR firm mentioned above, will those existing clients all stick with you? Will you be able to service clients well? Will you be able to attract new clients? The answers to these questions have a direct impact on how your business model will do for you.

At the end of the day, business models are not abstractions. They are personalized entities that succeed or fail. One person may do very well with a given business model, while another fails miserably.

So don't ask: is this a good business model? Instead, ask: Can I make money with this business model?

Can the Business Model Be Improved Upon?

This is where the real money is made.

If you simply plan on buying the existing business model and running it as is, then you will, in most instances, have to pay a price commensurate with what the business m model will generate.

However, if you can change the business model in a way that improves it, you can transform the price you paid for buying a business into a much higher value.

For example, maybe you buy the lawn service and transform it into a lawn service and landscaping company that also shovels sidewalks and driveways in the winter. You get a bigger share of your customer's wallet and you are well-positioned to grow the business because you have improved the value proposition.

Maybe, you buy the website development company and convert the model from a one-time contract business to a business that has upfront contracts but also has ongoing maintenance contracts. By doing so, you lock into recurring and predictable revenue streams that the previous owner never had.

You get the idea. When buying a business from an existing business owner, you need to look for the opportunities that the previous owner was never able to capitalize on.

Those subtle shifts in the business model are what can allow you to make buying an existing business the best decision you ever made.

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How to Start a Business with No Money

Posted April 8, 2009 04:35 PM (EST)

How to Start a Business with No Money

Is it possible to start a business with little or no money? Absolutely. In fact, back in 2004 that's exactly what I did. I launched World 50, investing only $400.00, and that was to buy stationary to print invoices.

This was good news for me, because I had no money. Zilch, nada, goose egg, the bagel. And I quickly discovered that investors don't want to invest in you anyway until the model is proven, and then take everything for their investment. Bad idea, particularly if you don't have a track record.

I learned that with the right approach, starting a business with no money is not only possible; it results in a better company. Here are some tips:

1) Live off your current job as long as possible. There is no reason you cannot explore and experiment through your entire first year of launching a new business while holding down another full time job. The first year is about ideation, about coming up with bad ideas and letting other people explain to you why they are bad, and how they can be better. You can nurture and grow the idea, and also build the initial wave of enthusiasm with prospective customers and employees all while moonlighting.

Got fired? Even better. After the first few weeks of a job search, no one can spend 50+ hours a week focused entirely on finding employment. Think Jack Nicholson in The Shining. Use your non-search time to gestate and spin-up a new idea. It's healthy, and may really lead to something. This is what happened to me.

2) Let your customers fund your working capital. This is key, although it is not possible for every business model. Developing, testing and manufacturing many products requires significant capital up front. But for a service business, it is much easier. My company sold annual subscription memberships to executives. The fees were required to be paid up front, but our costs were not incurred until months later. With no salary (living on a couple months of severance) and no immediate expenses, we quickly built up a bank account of $300k and rising.

Even if your idea does require making a product, it can be launched inexpensively. My good friend, Sara Blakely, started the amazingly successful company Spanx with less than five thousand dollars. She researched and wrote most of the patent on her own (using attorneys for the clean up), then begged and borrowed to find a plant to make her prototype. From there, she lined up orders, and the cash flow equation fell into place.

3) Outsource your sales department. You can't afford to hire (or commit to) high-ticket sales people. Find companies who already have a relationship with your target customers, and rope them in. World 50 sold to the highest level executives in world, and I had a small problem - I didn't personally know a single one! But I was able to talk Accenture, Bain, Omnicom, WPP and others into making all the introductions for me - all I had to do was close the sale.

In fact, these partner companies quickly became so excited about my new business that they donated all of our branding work, technology development and PR - and each actually paid me $50,000 for the right to do so! Now that may be hard to replicate, but if you can find ways to get your partners excited, you can get them to contribute.

4) You don't need to give away equity. Many people I have spoken with think that if you don't have cash, then the only way to launch is to give away lots of equity - to partners, to employees, to initial customers. Not so. I seriously considered giving our first customers and partners equity in the company to get them to participate. But as it turned out...they didn't want it! Customers could easily sign up and write me a check, it was a simple transaction - but if they received even one share of equity, it went to their legal department - and good luck wading through that mess. As for my service provider partners? They just wanted to participate in what my company was doing, and NOT have any brand liability in case I screwed things up. Take the high rode. I kept 100% of the equity.
***
In the end, launching a company with no money will force you to

1) build a better model which has sustainable cash flow right out of the gate - one of the most important things,

2) truly engage your partners - you are unlikely to succeed without them (money or not), and

3) retain control! You need to steer the ship, not your partners or customers, and certainly not your external investors ("Hey Rick, it's been 3.5 years - time to sell!").

The bottom line is this: If you can't earn the interest and attention of customers, partners and employees, you WON'T be able to buy it. And if you can, then why pay for it?

This post was originally published at RickSmith.me

The importance of having a good business plan

Wednesday February 4, 2009

The importance of having a good business plan
RSM EYE - By Girish Ramachandran

THE business plan remains the cornerstone in determining whether you can attract potential funders and investors.
However, statistics show that only 5% of business plans are read beyond the executive summary. And only 10% of proposals that pass the initial screening qualify for due diligence and receive funding.
That means on average, only six in 1,000 business plans get the funding they ask for.
Different types of funders look at business plans from different perspectives.
These individuals seek out businesses with good potential and sound strategies that will provide high financial returns, coupled with an option to exit the venture.
The 3Fs (founder, friends and family), angel investors and venture capitalists observe the highest risk levels as they gain entry into the business at its seeding points.
In contrast, to manage their risks, equity investors and commercial banks are more likely to look for entry points between the growth and maturity stages of the business.
The implication for entrepreneurs is that they must customise their business plan according to whether they are seeking funding from a bank or a venture capital fund.
A good business plan provides a clear roadmap to your corporate destination.
It may be your most important communication tool to investors. It will include a marketing plan, a management plan and financial projections for five years.
The financial projections are an integral part of the plan, since nothing speaks louder to bankers than numbers.
The marketing plan provides an overview of the business, its location and your marketing strategies. The management plan basically details the credentials and experience of those in the decision-making capacity.
To sum it up, you have to be prepared. Many people are unsure of what the bank can or cannot do for you, and why. Bankers expect you to know the basics before you walk in their door. Do your homework and set realistic assumptions.
A bank that wants to start a relationship with you will read your plan to know who you are and what you plan to do. Some things they are likely to look for:

The business background
You will have more credibility if you’ve had experience in the business and field you’re entering.
Attempt to show an overview of the market and highlight your advantages of your business over its competitors.
The business plan should detail strategies for breaking into the industry and show good potential for demand and further expansion.
People are an all important factor in a business, so describe the management team with short biographies of main managers.

Your financial projections
Bankers expect to see the three main financial statements – income statement, balance sheet and cash flow – projected monthly for the first year, and annually for four years after that. The cash flow is imperative.
These financial projections give bankers a sense of your profit and cash flow if they provide you with a loan.
You need to prove that you will have more than enough cash to cover the monthly loan repayments and any overheads.
The financial projections should mirror that of reality as much as possible. This implies that if you are able to obtain actual numbers (rents, insurance, equipments quotes and prices), use the actual numbers.
Some bankers like to say if they see too many zeros, they know the numbers aren’t reliable.
Take note, if you underestimate capital or operational expenses, you may end up overspending in the future and eating into your working capital.

Realism in your financials
Granted, you can’t really forecast your income or expenses. The temptation is to use over-optimistic assumptions to show strong projections.
That may work to your disadvantage in the long run. Over-optimism on your part will definitely come face to face with plenty of doubt on the banker’s.
The trick is to use conservative assumptions but still show strong projections. This is because bankers will compare your projections to industry reports on average performance of different kinds of businesses.
If you project margins way better than those, you’d better be able to explain why or how you’re going to accomplish that.
·Local alignment in the financials
Amounts have to logically match so that the amount you ask to borrow matches the financial gaps in your plan.
For example, don’t try to show you don’t need any money, because if you didn’t, you wouldn’t be borrowing. Don’t show that you need much more money than you can afford to borrow. Your cash flow should be realistic and show how much money you need and why.

A complete plan
A good banker will also expect to see a readable plan from executive summary through to the end. It should cover what you sell, your market, your company background, and specific dates and activities.
So the business plan is a two-way test.
Although most banks will require a plan, not all of them will really process the plan. Be grateful if they do. That means they are interested in your business and want to build a long-term relationship.

Girish Ramachandran is executive director of RSM Strategic Business Advisors. He is of the opinion that failure to plan is most certainly planning to fail. Feedback to this article is welcome. Please email starbiz@thestar.com.my

http://biz.thestar.com.my/news/story.asp?file=/2009/2/4/business/3188027&sec=business

To buy a stock, you need confidence in the earnings

Goldman Shares Sink to Lowest Price Since 1999 IPO (Update1)
By Christine Harper and Nick Baker

Nov. 19 (Bloomberg) -- Goldman Sachs Group Inc. closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year.

The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.

Goldman, which converted from the biggest U.S. securities firm into a bank holding company in September, dropped along with other bank and brokerage stocks including Morgan Stanley and Citigroup Inc. today as investors questioned how the industry can recover from more than $700 billion of writedowns and credit losses as economic growth slows.

``Investors are walking away from financial companies until they have a better idea of the earnings power of the entire sector,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC in King of Prussia, Pennsylvania, which manages $490 million including Goldman shares. ``In order to have confidence to buy a stock you need confidence in the earnings.''
Morgan Stanley, which was the second-biggest U.S. securities firm before becoming a bank holding company alongside Goldman, slid $1.78 today, or 15 percent, to $10.25. Citigroup, the second-biggest U.S. bank by assets, dropped $1.96, or 23 percent, to $6.40. All three companies are based in New York.

Profits Dwindle

Goldman surpassed rivals including Merrill Lynch & Co. and Morgan Stanley since going public in May 1999 to become the largest U.S. securities firm by market value and the most profitable in Wall Street history. On their first day of trading in 1999, Goldman's shares climbed 33 percent to $70.375.

Last year, the company became one of about a dozen in the U.S. with a stock price above $200. This year, profits are down 47 percent in the first nine months and some analysts expect the firm to report its first quarterly loss as a public company.

Morgan Stanley's profit has dropped 41 percent so far this year, while Citigroup has reported four consecutive quarterly losses. Goldman and Morgan Stanley each received $10 billion from the U.S. government last month as part of a rescue plan for the financial industry; Citigroup got $25 billion. In all, nine banks received capital injections.

Investors are concerned that return on equity, a measure of how effectively shareholder money is invested, will shrink because the banks are reducing their leverage, or ratio of assets to equity, to cut their reliance on debt-funding.

``A lot of the selling is questioning the business models of these big banks and investment banks,'' said Noman Ali, a money manager at MFC Global Investment Management in Toronto, which oversees $20 billion of U.S. stocks. ``If you don't know what the business model is going to be like going forward, and clearly it's not going to be levered 40 to one, the days of 30 percent ROE are going to be gone.''

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Nick Baker in New York at nbaker7@bloomberg.net. Last Updated: November 19, 2008 17:10 EST

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