Monday, May 23, 2016

How do we manage ‘disorganized liabilities’ like gift certificates when transferring a business? - David C Barnett

I was once brought in to consult on a business purchase deal that had gone bad.  The deal had been put together by a real estate agent and the agreement didn’t address a lot of the ‘business’ issues relating to the motel/restaurant being sold.

In fact, there was nothing in the agreement about outstanding liabilities. 

In the month leading up to the sale of the business, the seller held a promotion and sold $100 gift certificates for $80.  When the deal was done, the buyer soon learned about all the gift cards that were circulating.

What was the man to do? Risk upsetting all these customers by refusing to accept the gift certificates?
His only remedy was a costly legal one.  He sued the seller and the realtor who ended up losing his license over the fiasco.

But what is the correct way to deal with this kind of thing?  Easy, by making the seller responsible for outstanding liabilities and creating a system of accountability which assures the buyer they won’t get ripped off.

Here’s an example: Buy the motel/restaurant with some portion financed by the seller.  The monthly payments can be made via cheque –or- by passing along collected gift certificates.  To the seller they’re as good as cash because he already collected the cash without having to deliver the service.  If some certificates are never redeemed, the seller gets to keep that cash.

The only thing we have to do in this system is ensure that the new owner is issuing distinctively different gift certificates from those of the seller so they can be easily identified.

Watch the video here: to learn what one very sophisticated seller negotiated when this issue came up in his business transfer.

Don’t leave the details of such a complex transaction up to amateurs! If you’re going to buy or sell a business, give me a call at (506) 381-8416 and let me help you make sure your deal works out properly.

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it.

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Sunday, May 15, 2016

What do Business Brokers and Business Sellers mean by 'Standard Multipliers?' -Viewer Question - David C Barnett

Hello everyone, David again with another viewer question.  

This time I’m asked, ‘what are these standard multipliers that business brokers and sellers talk about when pricing a business?’  

Watch my video answer to this question here:

Well here’s the idea: if you multiply the earnings of a business by a number, you get a value.  If you use the right magic number you find out the value of the business. 

My preferred method of doing this kind of thing is called the Direct Market Data Method.  When doing this you need to normalize the financial statements using a proper set of rules.  Then you research the subject company and find what others have paid for similar sized businesses in the same industry using databases created by valuation professionals.  You then multiply the cash flow by the factor you discover in your research and find what’s called an Enterprise Value.

You then need to adjust this value based on operating capital that forms part of the transaction.
As you can see, this is not a simple thing for amateurs.  If the wrong data is researched you get a bad result, if the wrong normalizations are done, you get a bad result, etc.

Let me give you some examples.  A small mom and pop restaurant might be valued at 1.1 times SDE (Seller’s Discretionary Earnings) while a septic pumping business with the same amount of cash flow could go for 3.6 times SDE.  A larger restaurant with 100 employees may go for 2.8 times SDE. 

As you can see, if you try to apply a ‘standard multiplier’ to these businesses, you either end up over or under valuing them.  The reason the multipliers change by industry and enterprise size is because of the differing degree of risk.  What I love about this method is we actually get to apply the opinion of past buyers as to the degree of risk they saw in their transactions.

In one crazy case I was asked to review a business valuation which had been prepared by an accountant.  The guy had taken net income, multiplied it by 4 because he thought this was the right ‘standard multiplier’ and used the result as the value of the goodwill.  Then he calculated the net operating capital and added this.  Then he estimated the value of the fixed assets and added that too. 
The result was a million dollar valuation on a business that put $100,000/year into its owner’s pocket including his salary.  This would be the type of value we might see on the stock market for a publicly traded company and it obviously didn’t make any sense.

So, when you hear someone defend an asking price on a business because of ‘standard multipliers’ you should be very cautious.  It may mean that you’re talking to someone who doesn’t quite know what they’re doing.  They may be trying to use jargon which they think is impressive to bully you into agreeing with what they’re trying to sell.

Anyone who is going to buy or sell a business should engage an experienced and qualified person to value the business and understand fully how the final number was arrived at.  Also, there are some simple ways to ‘test’ any figure that I share with my clients regularly.

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not.  The more you share, the more likely someone who needs this information will be able to find it.

Also, I have a new FREE tool for business owners.  15 questions to ask yourself daily to help maximize the value of your business.  Download it free here:  Remember, I DO NOT automatically add people to any e-mail marketing lists without their permission.

If you would like to hear from me weekly though, you can sign yourself up at

Thanks and I’ll see you next time.

Saturday, May 14, 2016

Learn the processes involved in Mark Podolsky's raw land investment system

Last year I appeared on Mark Podolsky's podcast about passive income. 
Mark teaches people how to invest in vacant land and earn huge returns.
He recently started offering a webinar and I invested the time to check it out.
It's very educational. There is a sales pitch at the end but I wouldn't share it with you unless I thought there was value in attending the webinar alone. I learned some things about processes as they are employed in this type of business.
Check it out. It's only about an hour.

Sunday, May 8, 2016

Are businesses with greater potential worth more money? Viewer Question - David C Barnett

Are businesses with greater potential worth more money?

Let me teach you about Blue Sky.

Hi there, it’s David once again from where I answer questions relating to local investing, buying and selling businesses and personal finance and home economics.

This week I’ve got a question from a viewer who asks, ‘What about business sellers who say that their business is worth more because of the great potential it offers?’  Watch my answer in this video:

This is a great question. 

First, let me state that any business you buy should offer the potential for improvement or growth.  This, in my opinion, is why you would buy a business.  You want to be able to bring your own skills to the table and make improvements. Since we know from earlier videos that businesses are valued at a multiple of earnings, if you can improve the workings of a business by $1, you increase the value of your asset by several dollars.  The exact amount depends on your industry and the size of the business.

But does this potential mean that you should pay the seller more than what is fair given the cash flow that exists at the time of purchase?  In my opinion: no.

Let’s cover some terminology so that we can be clear about what we’re talking about.  Let’s say you decide that, based on the cash flow, a given business is worth $100,000. If you add up the value of the physical goods in the business such as tables, chairs, machinery and inventory, you might get a value of $65,000 for this example.  This is the tangible asset value or replacement value of the business.
Given the fact that there are loyal customers and a profit though, you’re willing to pay more than this asset value.  The difference between the two, in this case $35,000 is called goodwill.

Goodwill is amazing.  Of course, you want to buy a business which has goodwill; it means that it is profitable.  Now, what if the seller says something like this, ‘My business is worth another $20,000 because of the new housing development being built across the street.  The potential is there to earn more money.’

An asking price beyond what the cash flow will support is called Blue Sky.  It’s literally a payment for the promise of a brighter tomorrow.  The problem is, who is going to guarantee that the necessary sales and profits will appear to justify this additional asking price.

Furthermore, who is going to do the work to get those sales and transform them into increased net-profits?  It’s you.  Now why would you pay someone for work that you were going to do?

When you buy a business, you should only pay for what you get today.  That is the cash flow that exists currently.  If the seller was so confident that profits were about to increase, why doesn’t he keep the business, experience the new profits and then sell the business at its new higher value? 

If you want to learn the ins and outs of buying a business and avoid costly mistakes, you should take my business buying course, it’s at or at least read my new special report, ’21 Stupid Things People do when Trying to Buy a Business’  It’s available as a .pdf and from Amazon.

Sunday, May 1, 2016

Common Mistakes People Make When Trying to Buy a Business- Viewer Question- David C Barnett

Learn from these mistakes and save yourself hundreds of thousands of dollars.

Hi there everyone, it’s me, Dave Barnett from  Watch the video here:

I received another viewer question from Bruce.  He asks, ‘What are the common pitfalls that buyers get caught in when trying to buy a business?’

It’s a great question and one that I’ve received in various forms from dozens of readers and viewers.

I actually sat down and tried to come up with a list of the most common problems to try to address in a video or series of videos.  When I was done though, I had over 20 items.  I knew that I couldn’t cover them all in one video.

I’ll tell you a few of them here but it gave me the inspiration for a special report that is about 30 pages long that you can download here:

It’s called 21 Stupid Things People Do When Trying to Buy a Business.

Also, it’s not free, but the price is very low.  That’s because the information is actually very valuable and I only want to share it with people who are serious about taking the right precautions when embarking on a project as complex as buying an existing business.

Here’s a quick list of some of the stupid things that buyers do which I cover in the report.

·         Failing to understand how businesses are valued
·         Failing to account for the value of their labour
·         Failing to adjust for operating capital
·         Over-committing cash flow
·         Underestimating the value of their own capital
·         Failing to get the proper help
·         Failing to get help
·         Asking the wrong people for help
·         Failing to make a reasonable projections
·         Failing to consider capital expenditures
·         Failing to do proper due diligence (there are 3 pages on this.)
·         Failing to create mechanisms to hold the sellers accountable to what they say
·         Failing to properly do research
·         Failing to understand the risks of the franchisor fails
·         Failing to understand the importance and power of a landlord
·         Failing to budget properly
·         Failing to have a reserve for cash
·         There are a few bonus ones in the report as well, making the list longer than 21

This gives you a snapshot of the everyday problems I see when helping buyers work on their deals.  Unfortunately, I get called in to help people sometimes after the deal is done and have to show them where they went wrong and how they may be able to get things back on track.  Usually, it means that the buyers have already wasted tons of money.

If you want to learn the full three-step process of how I help people buy businesses (it starts with education) then you should visit

Thanks and we’ll see you next time. If you found this video/article useful please like it and share it. It helps move the video up on search ranks so that other people like yourself that are looking for this kind of information can find it easily.

Thanks guys, I’ll talk to you soon.

Sunday, April 24, 2016

Why is the Gross Margin one of the most important things to watch? Client Question- David C Barnett

Hi there again, It’s David Barnett from  This week I was asked what I thought was an important number to keep an eye on when managing a business.  Watch the video here:  My answer was: the gross profit (or gross margin.)  Why?

Simply put, the business can’t function over the long term if we don’t charge the right price for our product or service.  The gross profit is what is left over after we pay for the direct expenses of serving the customer.  In construction this would be the tradesmen and the materials.  In a restaurant it would be the cost of the food and paper supplies. 

The problem we run into when we have an income statement which simply has a sales figure and then all the expenses deducted is that we can’t verify that our pricing is correct over a short period such as a week or a month.  In the video, I demonstrate with an actual income statement like this.  If it’s impossible for a business manager to constantly check and ensure the target gross profit is being met, then problems can creep in over time.

For example, you may implement a pricing strategy that is used to quote projects.  If the cost of your supplies and labour are slowly creeping up and you don’t change your pricing formula, the gross profit will start to shrink.  This may mean shortages of cash to pay bills.  You may mis-interpret this as a receivables problem when in reality it’s a margin issue.  Most worrisome is the fact that businesspeople who don’t actively manage from their financials often are unaware of issues until they are pointed out in annual financial statements.  This could mean trying to respond to a problem up to 18 months after the issue has begun.

If an income statement is set up properly, a good manager can check weekly or monthly and make sure the gross profit is on track.  Other issues can also become apparent.  The video was inspired by a conversation with a UK businessman who thought his business had suddenly become more profitable.  He thought it was great.  What he didn’t realize was that one of his suppliers had neglected to send him some invoices.  When they fixed their oversight, he had put himself into a hole by spending money that really wasn’t his.

If his income statement had been properly structured and he was reviewing it weekly, he would have noticed the sudden drop in costs.  This would have led to inquiries and the billing issue would have been discovered before he spent the money on something else.

Now what about all those overhead expenses that have to be paid for out of the gross profit?  Well if the gross profit is under control and day-to-day operations are profitable, we can then examine the overheads on a regular basis to see if any start to get out of line. 

Another big reason to have a properly structured income statement is so that a potential buyer can easily compare the business to peers.   This is called benchmarking and it’s an important part of the evaluation process.  If the business activity is transparent and easy to understand, the business can be better managed and can be sold more expediently.  It’s also likely to fetch a better price than an equivalent business with more muddled books.

If you’re interested in learning more about buying and selling businesses, managing businesses, or local investing, visit my blog at  While you’re there, sign up for my insiders list and be amongst the first to receive my new videos each week by e-mail.  If you think you may need my help with a project, you can reach me for short consultations at or contact me at (506) 381-8416 or to discuss a project.  

Sunday, April 17, 2016

Where do we find operating capital and what should it cost? Viewer Question- David C Barnett

Watch the video:

This week I got a small business finance management question from Phil, who asks: What about working capital? Where can I get it and what is the cost?

Before we get into that though, what do we mean by working capital? Working capital is the money that you have to invest in a business to get your products or services from the point where you start working on your raw materials or start creating your services, up until to the point where your customers pay you. As the business grows, the operating capital may have to grow, and if we don’t grow too quickly and we are profitable we should be able to grow the operating capital as we grow our profits and grow our business. This is financing working capital through Retained Earnings, sometimes this is called ‘bootstrapping.’

If we are starting up a new business or if we are growing too rapidly, we may not be able to afford bootstrapping and may need outside sources of operating capital.

For example, let’s say I buy raw goods and I have to pay for the goods when I get them. Then it takes me 30 days to transform them into my finished products. Say its 10,000$ worth of stuff for this example. It takes me a month in order to turn them into my finished products, and then I sell it immediately to my customer, and he takes 30 days to pay me.   So I’ve got $10,000 tied up for two months before I get paid and my cost recovery as well as my profit is received.

So if I sell $10,000 worth of products every month, how much operating capital do I need? Well it’s not 10,000 because when my goods that I bought is at the beginning of the month are completed. I then sell them; I start waiting to get paid but on that day I have to buy another 10,000 worth of product to start working on for the next month’s deliveries. So I actually need $20,000 worth of working capital for a company that has sales of $10,000 a month if we have to spend the money up front and collect sixty days later from customers.

So where do we get operating capital?  First we’re going to start by looking at the balance sheet.

Assets are on one side of the balance sheet and your assets always have to equal your liabilities and your equity which are on the other side.

On the assets side you have cash in the bank, receivables, inventory and work in progress.  On the other side are liabilities; you’ve got payables, this is money you owe your suppliers, lines of credits and credit cards.

I’m not discussing loans here because typically bank loans are for capital goods, things that you use over a long period of time.  Usually when we’re talking about operating capital a bank will create a line of credit and they’ll secure that with a lien against certain assets typically inventory and receivables. The idea being that the line of credit goes up and down over time whereas a loan is usually secured against a fixed asset that we know has a longer life and maybe we’re going to pay for over several years.

In the equity section, we have retained profits (or earnings) which is simply the profits of the company that we haven’t removed. We leave that money in the company to help the company grow, remember when I mentioned bootstrapping?

The owner’s contributions also appear in the equity section.  It’s the money the owner’s put into the business to help it function.

When you start off a business of course you don’t have any retained profits but you probably have some money of your own that you put in to help to get going.

Next you go to the bank and say ‘look I need some inventory’ and let’s say the bank agrees that the inventory is a certain nature that they don’t mind making a loan. What we call fungible inventory that’s non-perishable so two-by-fours for example are fungible. It doesn’t matter who made them or how old they are, they still two-by-four pieces of wood.

Non-perishable means that it doesn’t have an expiry date that’s upcoming. So for example, it’s much more difficult to get the banker to give you an inventory financing for lettuce, because if we don’t sell it in time it goes rotten and then the value of your inventory disappears. It’s difficult to get inventory loans against for example: ladies dresses because at the end of the season they may no longer be fashionable or suitable for the time of the year and all of that sudden your inventory again has no value, so if your inventory meets certain criteria you can get a line of credit.

Now the question was what were the different costs for different sources of operating capital, so payables is money that we owe suppliers and payables typically we get 30 days before we have to pay our suppliers in certain industries some industries go longer 45, 60 even 90 days or longer and you can negotiate sometimes those terms. So really you can finance operating capital from payables for 0%, because it’s literally your suppliers investing money in your business and depending on your relationship with them. They have the power to be very generous with or maybe if you’re someone who doesn’t pay your bills on time and they get frustrated with you, then of course they demand cash on deliveries, COD which means you don’t have access to this type of working capital at all.

Credit cards if used wisely can be 0%, why do I say they’re 0%? simple. You use a credit card to buy some goods, when the statement arrives you have a certain number of days to pay it in full on time and if you are set up in proper order and you pay that credit card in full every month on time, you never pay any interest charges. If you are not well organized and disciplined, then you know 9 to 29% is the cost.  If you want to learn more how to properly use credit cards in a business, then you should read my book Credit Card Advantage is available from Amazon and from the website.

So what is the cost of equity? Basically you have to know what sort of return you demand of your business and if your business is struggling to grow and you’re just starting off you’re probably not demanding much of a return in your business.  In bigger companies they often look at the return on equity as one of their key performance indicators. In big publicly-traded companies, shareholders often demand a certain dividend based on their investments in the shares. So they can actually calculate the cost of this source of capital as well.

However, a lot of the time our challenge with operating capital is not actually a challenge with operating capital, it is a challenge with cash-management.  In the example I started off with, you buy $10,000 worth of inventory, your cash goes down by $10,000, your inventory goes up by $10,000, you then spent thirty days converting that into your finished product, so then the inventory goes down by $10,000 and your work in progress goes up by $10,000, these are all still assets. We’re just changing where on the balance sheet or what form these assets take. We then shipped the products to our customer we send them a bill, it changes from work in progress back to inventory briefly, finished goods and then changes into a receivable.

So again the capital is just changing its form on the asset side, so a lot of the times in a small business you might have a whole bunch of receivables. On paper you might have enough operating capital but it’s not in the right form, so there are other ways that we can convert the form of capital.

For example, if you have a lot of receivables and you need cash, you can use a process called factoring. What factoring is you convert a receivable by selling the receivable, so your customer no longer owes you the money, they now owe it to the factoring company and the factoring company pays you an advance on that receivable so $1,000 receivable if you sell it to the factor they might give you $800 today. So now we’re moved money from the receivable line into the cash line and when the customer ultimately pays the factor, they may withhold $30 or 3% fee for example, then send the other $170 to you.

This is the same goal that companies have when they accept credit cards as payment.  They’re also paying a 2-4% fee in exchange for immediately having cash and not a receivable.

So if you’re relying on it, month in and month out every month, you could look at it from an annualized point of view and say that you know it costs over 30% but with factoring a lot of companies that do factoring in some parts of the year or they factor certain customers but not other except just to give themselves the amount of liquidity or cash in hand, that they need to keep things functioning.

Changing Inventory into cash would look like a liquidation sale.

I hope that answers your question. All the assets except cash are uses of operating capital so we’re use our capital literally to finance receivables, the inventory and the work in progress.  The liabilities and equity are actually our sources of operating capital. Where we get money to help our business go.

If there are any other questions about this kind of stuff, please don’t hesitate to send me an email Don’t forget to visit my blog site. to sign up for my email list.  Email subscribers always get my latest videos first.  Thanks.