***New Video Alert!
The most common question I get…
How much do I need.
This week, I break it down and show you a rule of thumb I’ve shared with hundreds of clients over the years.
Watch right here: https://youtu.be/Uw7Yso_8LP8
Cheers
See you over on YouTube
David C Barnett
What the heck is Ethical Franchising? Why does this term need to exist?
New Livestream guest-> Giuseppe Grammatico
I’m happy to have Giuseppe back on the show to join me on a live broadcast.
Giuseppe has been helping people choose the right new franchise opportunity for years.
Tune in and as we’ll be discussing Ethical Franchising.
What the heck is it?
Why does such a term need to exist?
What does unethical franchising look like?
This is a ‘must see event’ for anyone who may consider getting into a franchised business.
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here: https://youtube.com/live/_kE8AdTD3f4
We’ll be going live Today Monday December 09, 2024 at 1PM Atlantic Time and 12 Noon Eastern Time.
See you there!
David C Barnett
P.S. don’t forget… I wrote a book on the dangers of the franchise business model. Franchise Warnings is available from my blog site and from Amazon stores worldwide.
Today, we’ll uncover how ROI figures can be manipulated to make deals appear far more lucrative than they are, using an example from a widely promoted entrepreneurial book I read. By the end, you’ll know how to separate fact from fiction in the world of business buying. https://youtu.be/74ISnsgtwlM
The Seduction of High ROI
In the example provided by the book, here’s the hypothetical setup:
Seller’s Discretionary Earnings (SDE): $216,000
Valuation Multiple: 3.2x = Purchase price of $691,000
Additional Costs: $200,000 for inventory and working capital, plus $50,000 in closing costs = Total acquisition cost of $941,000
Down Payment: 10% of $941,000 = $94,120 (with the rest financed through an SBA loan)
The author of the book claims this deal yields a staggering 229% ROI annually, painting it as an unbeatable opportunity. But let’s dig deeper.
ROI vs. ROE: The Hidden Distinction
The first red flag is the misuse of ROI (Return on Investment). What’s described in the book is actually ROE (Return on Equity)—the return on the buyer’s cash investment, not the entire cost of the deal.
By focusing solely on the $94,120 down payment, the calculation ignores the fact that $847,000 is financed through debt. When you account for the total acquisition cost, the actual ROI plummets to 12%. While 12% is still a respectable return, it’s a far cry from the flashy 229% initially advertised.
The “Return” Illusion
Another misleading aspect is treating SDE as pure profit. In reality, SDE includes the owner’s salary, which means part of that "return" is compensation for the buyer’s work.
If we subtract a reasonable owner salary—say $100,000—the normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) drops to just $116,000.
Now, factor in the annual debt payments on an SBA loan, estimated at $120,000. Suddenly, the business is operating at a loss before even considering taxes, reinvestment needs, or unexpected expenses. This isn’t financial freedom; it’s a high-stakes balancing act.
The Risks of Overleveraging
This deal exemplifies several risks that make it a potential trap for inexperienced buyers:
Overpaying for the Business: With a 3.2x multiple plus inventory and working capital, the purchase price is inflated compared to industry norms.
No Margin for Error: A small dip in revenue could spell disaster, leaving no room to cover debt payments or unforeseen costs.
Inadequate Reserves: The lack of cash reserves means any unexpected expense—like replacing equipment or navigating an economic downturn—could cripple the business.
These risks highlight the dangers of overleveraging and emphasize the need for cautious, informed decision-making.
Why the Hype?
So why are deals like this framed as golden opportunities? The answer lies in psychology. These inflated ROI claims are designed to appeal to those new to business buying, positioning acquisition entrepreneurship as a low-risk, high-reward venture. But the reality of running a business is far more complex. It requires skills, dedication, and a realistic understanding of the financial landscape—not just optimism and a willingness to sign on the dotted line.
How to Protect Yourself
If you’re considering buying a business, here’s how to safeguard your investment:
Master the Numbers: Learn how to analyze financial statements and calculate realistic ROI. Don’t rely on SDE alone; focus on normalized EBITDA and cash flow.
Be Skeptical: Treat promises of extraordinary returns with caution. If it seems too good to be true, it probably is.
Invest in Education: Take courses or work with experts to build your understanding of cash flow, debt management, and market valuation.
Prioritize Reserves: Ensure any deal leaves room for operational challenges and economic fluctuations.
Conclusion:
Buying a business can indeed be a path to financial freedom, but only when approached with a clear understanding of the risks and realities. Flashy ROI figures and overly optimistic projections can lead you into financial trouble if you don’t take the time to dig deeper.
By sharpening your critical thinking skills and focusing on sustainable deals, you can position yourself for long-term success—not just short-term excitement.
Check out my book 21 Stupid Things People Do When Trying to Buy a Business: Learn How to Avoid These Awful Novice Mistakes https://a.co/d/2Ud3FT5
And be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com
Cheers!
Dave
***New Video Alert!
The most common question I get…
How much do I need.
This week, I break it down and show you a rule of thumb I’ve shared with hundreds of clients over the years.
Watch right here: https://youtu.be/RllPWOHB2yg
Cheers
See you over on YouTube
David C Barnett
In today’s competitive business environment, cash flow is the lifeblood of any growing company. For those buying or selling a business, effective cash flow management becomes even more critical. Whether you're purchasing a business and need funds to smooth the transition, or selling a business while maintaining operational stability, the ability to unlock cash flow can make all the difference.
This is where factoring comes into play. Factoring allows businesses to turn their accounts receivable into instant cash, helping bridge the gap between making a sale and receiving payment. https://youtu.be/kF4stTpkU08
What is Factoring? Factoring is a financial solution that allows businesses to sell their accounts receivable (invoices) to a third-party company, called a factor, in exchange for immediate cash. If you’re in an industry where offering trade credit is the norm—like retail or wholesale—you may find yourself in need of quick liquidity. Instead of waiting 30 or 60 days for your customers to pay, you can sell those invoices and access cash almost instantly.
How Does Factoring Work? Imagine you’ve made a $100 sale to a client. Typically, you would ship your goods or provide your services, then wait for the customer to pay within 30 days. In the meantime, you still need to pay your employees, suppliers, and other operational costs. Here's where factoring steps in:
Sell Your Receivable: You hand over the $100 invoice to a factoring company.
Get an Advance: The factor gives you an upfront payment—say 80% of the value, or $80.
Customer Pays the Factor: When your customer pays the invoice (after 30 days), they send the payment directly to the factoring company.
Receive the Balance: The factoring company then gives you the remaining balance, minus their fee—let’s say 3%—bringing your total to $97.
It’s that simple. You’ve effectively received $97 for a $100 invoice, but you’ve gained immediate liquidity, allowing your business to continue operating smoothly while you wait for customer payments.
Why Do Businesses Use Factoring? Businesses that face rapid growth or deal with long payment cycles often turn to factoring as a solution to maintain their cash flow. If you’re in a B2B (business-to-business) environment where customers expect trade credit, factoring can help you avoid the cash flow crunch that can come with waiting for invoices to be paid. This is especially crucial if your business is scaling up quickly and needs funds for inventory, payroll, and operations.
The Costs and Benefits of Factoring On the surface, factoring might seem expensive due to the fees involved, which can range from 2% to 5% of the invoice amount. However, when you compare factoring to other financing methods—such as credit cards, which also come with processing fees—it may be a more cost-effective option in certain situations.
The true cost of factoring is often lower than the hidden cost of waiting 30 days for payments while trying to pay employees or suppliers. In fact, businesses often find that the ability to access cash quickly outweighs the factoring fee. Plus, factoring doesn’t add debt to your balance sheet, unlike loans or lines of credit.
Is Factoring Right for Your Business? Factoring is a great option for businesses that need to maintain positive cash flow, especially those in industries where trade credit is a common practice. However, it’s not for every business. If your customers are slow to pay or you have a large volume of invoices, factoring can provide the liquidity boost you need. But if your business already has a healthy cash flow, you may not need to use factoring as a financing solution.
Conclusion: Factoring is a powerful financial tool that can help businesses manage their cash flow more effectively, particularly for those in industries that rely on trade credit. By selling your accounts receivable to a factoring company, you can unlock immediate cash to cover operational costs, pay employees, and reinvest in growth. While it comes with a fee, the benefits of quick liquidity often make it a worthwhile option for companies that need to stay agile and continue their growth trajectory.
Be sure to join my email list if you’re not on it already at https://www.DavidCBarnettList.com
Cheers!
Dave
***New Video Alert!
How do most small business owners end up posting ads that don’t sell their business?
They make the most common mistake that I see repeatedly.
They don’t understand the difference between the selling price of a business and the value of its cash flow.
In most cases, this is not the same number.
Most business brokers are clueless about this.
Watch right here: https://youtu.be/on4RmO0egMM
Cheers
See you over on YouTube
David C Barnett
