Buy or sell a business the right way

"Easy come, easy go" is how most people would describe their various business ventures these days. 

Everybody appears to have settled in for a long ride through this global economic crisis, resignedly accepting financial loss as an unavoidable pit stop. Spooked business owners are busy unloading going concerns while speculators are making hay by snapping up every business that's for sale, often taking shortcuts to hasten the transfer of ownership. 

If you are the seller in a similar scenario and you aren't vigilant, you could end up selling your business for so much less than what it's actually worth. On the other hand, if you are the buyer and you neglect to do your research before agreeing to take over the business, you could end up with a lemon.       

IF YOU ARE BUYING A BUSINESS, here are some steps you can take to protect yourself:

1. Make sure the business is right for you. It's very tempting to conclude a cheap sale on the spot and be able to tell everyone that you are now an entrepreneur. However, many companies have gone bankrupt simply because the owners didn't know how to run them or didn't care enough about anything but the profits.

To avoid being duped by opportunistic employees, suppliers, and even customers, consider buying a business only if it's something you are knowledgeable and passionate about. If your line is fashion design, for instance, you shouldn't even think of buying an auto repair shop.

2. Consult experts. Talk to other people who own the same kind of business; you can draw on their experiences to make an accurate assessment and forecast for your business. Don't scrimp on your payroll; have an attorney and an accountant on board and consult them every step of the process. Otherwise, you could end up making irreversible and costly errors in your decisions.

3. Conduct due diligence. You need to obtain and carefully examine the seller's financial statement and records. Have your lawyer and your accountant look into the profit-and-loss records, tax returns, balance sheets, and supplier's records for the past three years as well as into the current receivables. Have the business appraised including its assets, inventory, and brand. This will provide the basis for the offer that you'll make to the seller.

There are many factors that go into determining the value of a business, but the best and the simplest indicator is its ability to consistently generate profits. However, poor performance doesn't always mean that a business is inherently unprofitable; it could simply be the result of mismanagement. On the other hand, consistently poor performance despite changes in management is a very loud alarm that you shouldn't ignore.

4. Examine the lease contract. If the business already owns the land and the building on which it stands, then you don't have to worry about this. Otherwise, make sure to have your lawyer go through the lease contract with a fine-tooth comb. If the lease contract appears disadvantageous to the lessee, ask the lessor if he would agree to execute a new one. If the lessor insists that you continue under the terms of the existing contract, maybe you should shop around some more. 

5. Consider franchising. The advantage of buying a franchise is that it's ready-made, it has a proven profitable business formula, and you can get support from the franchiser in all areas of your operation. The disadvantages are the possibility of huge franchise fees, bad location, absence of total control over your own business, and negative brand association in the event that the franchiser gets in trouble with the law. You can eliminate or at least minimize some of these risks by carefully evaluating the franchise locations and finding out if any lawsuits are pending against the franchiser.

IF YOU ARE SELLING YOUR BUSINESS on the other hand, here are some tips:
1. Assess the value of your business. Hire a reputable accounting firm to do the job. Go over your assets, inventory, receivables, and profit-and-loss records for the past three years. The business valuation will give you an idea of exactly how much your business is worth, and it will boost your confidence in asking for a fair asking price. 

2. Form your transition team. Hire an attorney who's an expert in corporate law, mergers and acquisitions, and contracts. Hire an accountant. And hire a broker/intermediary if you have no buyers in sight; he or she will find them for you and bring them to the negotiating table.

3. Prepare your selling memorandum. This is a document that provides your prospective buyer with information needed to understand your business. Make sure to draft it in a need-to-know format (but don't give too much information away) and always show your business in a positive light. Before showing your selling memorandum to anyone, have everyone concerned sign an ironclad confidentiality agreement first, including everyone on your transition team.

4. Prepare the letter of intent. This is a letter that signifies your willingness to sell your business to a particular person and his or her willingness to purchase it from you. After the letter of intent is signed, you can move forward in your negotiations; only then should you reveal more about your business to the buyer. Make sure that you are protected by nondisclosure clauses, just in case the potential buyer backs out.

5. Prepare for the due diligence review. Expect due diligence to be conducted by your prospective buyer. To save time, prepare all the necessary documents in advance. Have the past three years' worth of books of account and tax returns ready, and compile all documents in support of your business valuation.

Also, prepare your incorporation papers, tax and business permits, licensing agreements, lease contracts, supplier contracts, customer contracts, and other relevant contracts. Create a good impression with your prospective buyer by having your financial information prepared by a professional accounting firm.

Be prepared to answer questions like, "So if your business is doing so great, why are you selling it?" Have your reasons ready; they should be plausible and shouldn't put anything in a bad light.

Don't forget to conduct your own due diligence review. Find out everything you can about your prospective buyer's credit record, solvency, and business reputation.

6. Give your business a facelift. Repair what needs to be repaired, clean up the clutter, throw out the junk, window dress to the full extent that you can. Don't give your prospective buyer any reason to give you a low offer; impress him or her with a clean, orderly, fully functional, and well-managed business.   

7. Negotiate price and terms of payment. Refer to your business valuation report; it will help you decide what your bottom line is. Don't go below your bottom line. A bad economy is no excuse to give away your business for a song. Remember that an economic crisis is an opportunity in disguise. Just as there are hundreds of spooked entrepreneurs like you lining up to sell their businesses, there are also hundreds of speculators out there looking to buy a business. If your prospective buyer withdraws, simply push your broker to find others.

8. Close the sale. After all the preliminaries are over and while the prospective buyer is still sitting at the negotiating table, have your lawyer draft the business purchase agreement. The buyer may insist that his or her own lawyer draft the agreement; that's fine, but be sure to have your own lawyer go over it very carefully. Check the terms of payment and use a magnifier on the fine print. To avoid violation of the Bulk Sales Law (Act No. 3952), give your buyer a list of all your creditors and amounts owed, if any, and give your creditors advance notice of the sale.

- By Reeza Singzon, Entrepreneur Philippines Magazine, April 2009

Four tips to protect business information

The saying no man is an island has never been more apt than today, particularly among business establishments.

These days businesses could no longer operate without technology. Gadgets such as laptops and desktops are used to store critical business information, including business plans, product delivery schedules, payroll and files of employees, billing statements, bank accounts and credit information of clients.

Coupled with connections to the internet, these vital information for business have never been more susceptible to a wide array of threats. 

“The most common threat that people still think of up to now is that of viruses, but for businesses, the greatest threat is information theft or data loss,” Eric Hoh, Symantec’s vice president for Asia South region, said in a press briefing Tuesday.

“The most common threat that people still think of up to now is that of viruses, but for businesses, the greatest threat is information theft or data loss,” Eric Hoh, Symantec’s vice president for Asia South region, said in a press briefing Tuesday.Add to that, most business owners do not have information security as one of their core competencies.

“In a random survey that we did, people still think that they can keep their information secure with only an anti-virus. The landscape of threats has changed. It is no longer the same as it was before,” Hoh said, stressing that an anti-virus can only do so much as prevent virus from getting into your computer.

The wide array of threats that businesses have to deal with now, with regard to their information, includes compromised websites, hackers, malware, spam, data loss, and botnet servers, among others.

Hoh cited a study conducted in 2008, which showed that 90 percent of records lost by small and medium businesses worldwide involved organized crime targeting corporate information, while 73 percent of companies around the world were hit by cyber attacks.

“It is not only about someone hacking into your computer or someone stealing data from you. If your computer has malware, it can collapse anytime together with the vital business information that you have stored in it. What will happen to the business when that happens?” Hoh said.

The Symantec executive shared with Entrepreneur.com.ph some tips that small and medium businesses can do to protect vital business information from getting into the wrong hands:

1. Educate employees

Develop Internet security guidelines and educate employees about Internet safety, security, and the latest threats.  Part of the training should focus on the importance of regularly changing passwords and protecting mobile devices. 

2. Safeguard important business information

Safeguarding information is critical to businesses of all sizes and SMBs are facing increased risks to their confidential information. One data breach could mean financial ruin for an SMB. Implement a complete protection solution to ensure proprietary information—whether its credit card information, customer data or employee records—is safe.

3. Implement an effective backup and recovery plan

Protecting information is more than implementing an antivirus solution.  Backup and recovery is a critical component of complete information protection to keep SMBs’ desktops, servers and applications running smoothly in case of disruption—whether it’s a flood, an earthquake, a virus or a system failure.  One outage could mean customer dissatisfaction and costly downtime, which could be catastrophic to the business. 

4. Secure email and Web assets

Select a mail and Web security solution that can help mitigate spam and email threats so SMBs can protect sensitive information and spend more time on day-to-day activities.  Spammers and phishers will use current events and social engineering tactics to get users to give up personal information such as credit card and banking information. 

- By Carlo P. Mallo, Entrepreneur Philippines website http://www.entrepreneur.com.ph

Seven Simple Steps To Writing A Business Plan

The business plan, together with solid market research, is the foundation of any business. It outlines your company’s direction, brand values, identity, and how it would operate in order for the business to become a success.

In most instances, the business plan is the official inception of a business idea as it shows the nitty-gritty of the proposed venture.

If you are planning to start a business with a loan from the bank or with business partners, the business plan determines whether the deal will be closed or not.

But more often than not, writing a business plan is a daunting task dreaded by most entrepreneurs, especially those who have yet to start their business.

However, one should not be daunted by the task, since the language of a business plan need not be technical.

Remember that a business plan is basically a list of your business strategies and objectives, assets and resources at hand, and the best methods for your company to become viable and generate your desired profits.

A business plan can be as simple or as complex as you want it to be, but for your investors’ sake, do keep it understandable and not too wordy.

It should include the name of and description of your business, a vision statement, business profile, your products and services and key people; a description of the economic environment and how you intend to steer your operations through possible turbulence; a marketing plan and evaluation of competition; and a budget, including a cash flow projection.

Here are seven steps on how to make a business plan without breaking into sweat:

Step 1: Name your business

Most entrepreneurs consider their businesses as their babies; and just like naming babies, choosing a name for your business is not an easy task. The name of the business will be your trademark, and will represent your business in all transactions.

Besides the business name, one should also consider coming up with a separate name for the products and services that will be offered.

Be very careful when choosing product names, for very often, this will determine the brand image and brand experience of your product.

After all, the name, as the Department of Trade and Industry would put it, is extremely important because it distinguishes your products and services from those of your competitors, and helps to establish your identity in the marketplace. 

Page 2: Mission and management

Step 2: State your mission

Most people have life goals, and so should your business. Although it may be easy to say that your business’s mission is simply to make money, putting up a business is in fact more complex than that.

In the mission statement, spell out the purpose of your business and its goals, including the product or service concept you plan to adopt.

Like everything else, keep the business goals and targets realistic, so as not to put off the reader (of the business plan) with fantastic fanciful claims.

Always keep in mind that a potential investor or lender will base their decisions on your business plan.

Step 3: Introduce the business and its management team

Make a clear and complete description of the business and how you plan to start and operate it. You need to state the rationale behind the business’s establishment.

Introduce the people – the team – who will run or invest in it. It is however, not enough to say who they are – include a brief look at their background including prior professional and business experience, educational attainment, leadership skills, and personal resources.

And convince the reader of the capabilities of your management team.

Include in this part of the business plan an overview of the general economic environment in which the business will operate.

Step 4: Elaborate on your product and marketing plan

In this part of the business plan, discuss how the product or service in detail and how it would generate revenues for your business.

This part will answer questions such as: Does your product have any unique characteristic? How big is its potential market and how much of that potential market can you attract over certain period of time? Enumerate your suppliers, their availability and reliability.

Next, describe your market, and provide a detailed description of your potential customers, such as their demographic profile and recent trends in consumption patterns related to your products and services.

Write down your sales projections as well, but do not make overly optimistic forecasts.

Step 5: Illustrate your financial strategy

This is where you will need to focus on the bottom line of any business. This will attract the most interest from your readers – show the flow of money into and out of the business, coming up with either profit or loss for a particular period of time.

Keep in mind that finance people will be looking at the numbers and analyze your projected performance ratios.

If your business has been operating for some time, and you have made a business plan in order to seek additional funding, pay close attention to the cash flow portion of your financial report.

The cash flow analysis shows how efficient the management team has been in making use of the cash that goes into the business.

Most new businesses tend to end accounting periods with deficits; this is but normal.

How this deficit will be turned around is an important point that the business plan should reflect.

Present a detailed budget for your operations, reflecting all your departments’ projected expenditures.

The budget is an important guide when trying to raise revenues or when making capital investments.

Step 6: Write the executive summary

A business plan can be a very long document with hundreds of pages, so for the convenience of the reader, you need to provide a concise brief of the plan’s crucial contents.

This section encapsulates your entire business plan for those who don’t have time to go over the entire document – these are often the decision makers who should be informed about the business.

 The executive summary is usually written last, after the entire document is completed. The executive summary may appear at the start or at the end of the business plan.

 Step 7: Go over the entire document

Whenever it is possible, use charts and graphs to illustrate cash flows and projected return on investment.

-from Entrepreneur Philippines Magazine, February 2010