The Art of Cash Flow: Tackling the Lifeblood of Your Business
A Virtual CFO’s step-by-step guide for service-based businesses. by Jody Grunden.
Over the next seven minutes or so, you’ll read about the power of cash flow in a service-based business.
I’ve spent the better part of 15 years as a Virtual CFO, helping service-based businesses boost their financial health with stronger forecasting and cash flow management.
In this article, I plan to answer the following five questions:
I tell the story of what it was like to be a business broker and why I ended up leaving the business. Watch here: https://youtu.be/LsieCGOiS9I
Transcript:
Hey guys it’s David
Barnett for www.InvestLocalBook.com. I was just on the phone earlier today with
a gentleman who is exploring the idea of becoming a business broker. He found
my blog site online and some my videos about buying and selling business and he
wanted to call me up and get some feedback about my experience when I was a
business broker from 2008 until 2011.
A lot of memories. I
thought, you know, it’s time for another autobiographical installment for my
blog site. Basically after the financial crisis of 2008 to 2009, it become very
difficult in my finance brokerage business, I had to give that up. Over half
the companies that I was using to source capital from went out of business
during the crisis. Because they were packaging finance deals together in
selling them on your wall street and nobody wanted by that asset backed
commercial paper as it was known at the time. So I had met several different
people who were trying to buy businesses over that time. And I had run across a
whole bunch of people trying to buy and sell businesses as brokers who had
absolutely no idea what they were doing. And I was getting a lot calls from
these very people who are trying to help their clients. Obtain financing again,
not having any idea what they were doing. Not that I was an expert at the time,
about buying and selling businesses. But I knew the money side of things and
the financing part so I meant a gentleman named Richard who owned a Sunbelt Business
Brokers franchise. I talked with him at length and I basically decided that I
was a smart guy, I knew the financial side of things and knew financial
statements. I know about small business and that I could probably make a go of
it as a business broker and the reason why I chose to join up with Sunbelt, was
because they were large international franchise chain and they had the
resources to provide me with training. So I would actually have a training
program, manuals with workbooks. And there was an online program and their
training led into the IBBA program and eventually I got my certified business
intermediary designation.
So I decided to start with
them. And basically in the fall of 2008, started to work with some clients. One
of my first client was a guy, a husband and wife team, that had a building
materials business. I went through the process as it was taught to me and
managed to sell their business in the closing date came in February. So it was
like literally a five or six months’ deal and I brought home a nice big fat
five-figure paycheck and it was you know seemed like great idea, seemed like
great money. So I started to do devote myself fully to the business brokerage
career and do reading and further training and then start on the path to my
designation. In 2009, I decided that would buy the Moncton, New Brunswick
office of Sunbelt business brokers and by that time there were a few associates
that had joined the team. So I moved the business to a new office and we had
there was myself, three other associates as well as a front office
administration person and all things were humming. The problem with business
brokerage is that there are two distinct sales cycles. The first sales cycle is
convincing business sellers to list their business for sale with the brokerage
cycle and there were some people over the course of the years that I was doing
this. That I spoke to over the course of two years before they finally signed
on with me and list their business for sale. So it was quite frustrating and
then the second sales cycle of course was selling the business. So one of the
very first people that signed on with me, was actually a friend chicken
franchise restaurant and that restaurant Would be the last business I sold in
December of 2011. So I think I had listing file for almost three and a half
years. Where I worked on the file and didn’t make any money. Now the big
problem with business brokerage as a business model as far as I am concerned in
this day and age is the fact that it is largely a contingency revenue model. So
when people listed their business for sale with me. I would charge them an
engagement fee. Which was money up front that demonstrated number one that they
were serious about selling the business and number two inputs of general in my
pocket. It was a little bit of cash for me to have to pay the bills. There were
several stretches when I owned the business brokerage where I went nine or ten
months without doing a single closing. So even thought I sold over 35 companies’
while I owned on the brokerage there were times, where I would have like eight
or nine months with no income coming through the door. Except an occasional
engagement free and what that did for me personally it was awful. It meant that
I couldn’t really create a budget at home. It meant that I couldn’t plan
financially for things that were to happen when a deal did close and I brought
in one of those paychecks and could have been 30, 40, 50, $80,000 and all we do
is pay off the credit cards and lines of credit and then I would be afraid to
spend money because I wasn’t sure when the next paycheck was going to come
through the door.
So by 2011, I arrived at
a point where that summer I had six different deals that were set to close for
the winter and I was confident enough in the deals that were closing that I
decided to take my family on a two-week vacation to Florida. So I went on to
Florida, we went to Disney World, visited all those attractions and when I got
back basically over the course of the next eight weeks. Three of those deals
fell apart. So one of them failed to go through because it was a regulated
industry and the government bureaucrat that was in charge of licensing,
wouldn’t issue a license to the buyer for whatever reason they had. So there
was one deal fell apart again buyer wanted to buy the seller wanted to sell
deal was in place but a third party tipped over my apple cart. Basically the second
deal fell apart because a bank that an issue to finance later rescinded it. So
they changed their mind, they basically said yeah, we told you we’re giving you
the money. Now we’re not. And so again, buyer and seller wanted to do a deal.
The deal was in place. The deal fell apart because of a third party upsetting the
applecart, the third deal fell apart because of a franchisor. The buyer and
seller, made the deal they’re both very happy with the deal and then when the buyer
started to have meetings with the franchisor. The franchisor was a jerk to the
buyer. And the buyer told the seller said look man I love your business. I love
what you done with it, I love the earnings. I would love to be in this business
but I will not get into business with those guys. And so it was because the
franchisor, the third deal fell apart deals four, five and six went through as
per the plan but instead of me ending up in December of 2011 with $100,000 of
surplus funds in the bank and basically ended up at the end of 2011 with my
debts paid and a little bit of money in the bank.
And it was around that
time that my wife informed me that our marriage will be ending. So there was all
this personal stress at home. There was the business stress of not being able
to have regular, manageable, cash flow. And I decided that was the time to pull
the plug. I basically made to deal with one of my associates that they would
take over the franchise and you know it wasn’t like I sold the business and got
a big lump of cash or anything. Basically made a deal with him to sell the
business and get a cut off all the files that I had essentially opened in the
years that I owned the business and that was when I walked away from being a
business broker and needed and I knew that with the changes come in my personal
life. I was going to have to get a regular job and have some sort of stability
to plan my budget things because you know two kids to feed and wife that wanted
out the deal. So that is my story that’s my life as a business broker and I’ll
tell you it was one of the most exciting period of my life because there’s
nothing more that I enjoy than trying to solve problems. Figure out a way to
make things happen and in that role, you’re basically constantly moving
mountains and trying to work things out between the buyer and the seller and I
loved it. But at the end of the day it’s just not an industry that I could make
work for me. In the way that I needed to.
Anyway hope you
enjoyed the story and we’ll talk later. You made it into the video that’s
great. Why not come over to my blog site: www.InvestLocalBook.com. Where you
can see all my latest posts and videos. You can also take the time to watch my
welcome video, see what I’m all about and if you wish sign up for my email
list. I only send one email each week. You get to choose which topics you’re
interested in so that you only get information that you want to learn about as
easy to unsubscribe anytime. Click my free resources link and have access to all
of my free eBooks, audiobooks and other PDF downloads. Thanks and we’ll see you
next time.
Think you can just ask whatever you want and hope for the best? You may be scaring off the exact buyer you need to meet. Watch: https://youtu.be/CuiJUenzEzc
Hi, Everyone it’s David Barnett here from www.InvestLocalBook.com and my new exit planning course:www.Howtogetoutofmybusiness.com. I’ve got a question here today, it’s sort of a topic of discussion but it’s for business owners, when you sell you need to get the price right you’re asking price. Let me give an example. When I was a business broker for over three years I would get people all the time come in and they would say ‘’Hey want to sell my business’’ and I would say great the first thing I have to do is an evaluation and I would do what was called the most probable selling price evaluation. I still do them today for consulting clients. I would then come back with that business owner and would say look here are all the factors considered and this is here some examples of other people who’ve recently bought businesses like yours and this is what your business is going to sell for. Let’s say it was $275 000 and then the business owner would say no, my financial planner says that I need $500 000. Never thinking that what they need has actually nothing to do with what the business is worth. So then I would explain to them you know what you need has got nothing to do with what it’s worth. If you need more money then maybe you can’t afford to retire right now maybe you need to keep operating the business.
Now here’s the problem, some business brokers would say to the person ok you want $500 000 let’s ask $550. Now it’s a business worth $275 and it has an asking price of $550 I wouldn’t take those listings when I was operating my brokerage I would tell them, you know what you can list it for $325 or I don’t want the listing. Here’s why when you over-price a business and you try to get way more than what the business is actually worth. What the cash flow will support, what happens is you miss out on what I call the reasonable buyers. The reasonable buyers are people who are thinking people, who’ve educated themselves maybe they’ve even taken my www.businessbuyeradvantage.com program and they know what a business should be worth. And if they see a business that’s worth $275 000 with an asking price of $310 they know that’s there’s a negotiation going to take place. They know the seller has left the room for a back and forth negotiation. That’s fine.
The reasonable buyer is going to make an offer; discuss with the seller they’re going to pursue that opportunity. When a reasonable buyer sees someone with a $275 000 business who’s asking $550 000. What they think is that person who’s selling has no idea what they’re doing and they would be right. And they believe that the seller is not unreasonable person. And they know that it’s difficult to negotiate or have any kind of reasonable relationship with an unreasonable person. And so what they end up doing is he might watch the business or wait for the price to come down but they don’t engage with the seller. And so what ends up happening is that seller who’s got the crazy over inflated price never gets to meet the reasonable buyers but you know who he does get to meet?
The unreasonable buyers and what I mean by unreasonable are the people out there who are just low balling everyone trying to get a fish to bite the hook to take the bait, so to speak. so unreasonable buyer is someone who goes into the market and simply bids way low on everything hoping to find a desperate seller, who is willing to talk to anybody so the unreasonable buyers if they see you know a business that might be worth $275 with an asking price of $310. They may come in an offer of $150 or $200 but that’s okay, because that seller is also talking to reasonable buyer’s so they don’t need to take the bait.
The unreasonable seller who’s asking $550 that unreasonable buyers still going to come in and low ball at $150 or $200 and that’s the only kind of buyer the unreasonable seller is going to meet and he’s going to spend all this time talking with these guys and some of them have money and some of them don’t. Some of them are just tire kickers and some of them are just wasting your time. The reasonable buyer is the personal with money and purpose and motivation and drive and they have sound thinking. And they’ve educated themselves. They’re not going to pay double of what a business is worth. They just won’t, that’s why as a seller it’s important to get proper advice on what your business is actually worth, before you put asking price on it.
I do most probable selling price evaluations today for my clients around the world and be more than happy to do it for you. So if you’re thinking about selling a business you need at the price right and you need to work with someone who can help you set the proper price and show you why your business is worth what it’s worth so that you can have that intelligent conversation with a potential buyer that comes along, and hopefully it’s reasonable buyer with money and purpose and motivation and desire.
Anyway thanks a lot and we’ll talk to you later. Don’t forget to go to my website www.InvestLocalBook.com. sign up for my email list everyone on my email as guests to enjoy my videos before everyone else. Thank and we’ll talk to you next time. You made it to the end of the video. That’s great. Don’t forget visitwww.InvestLocalBook.com, sign up for my email list it’s right down here under the welcome video. Thanks and we’ll see you next time.
Hi everyone, it’s David Barnett from
InvestLocalBook.com. This week I’ve got a question from Kurt who asks about
partnerships and I’ll read it here: I have recently approached a local business
owner for a partnership. Me being able to buy in. I think he may actually be
considering it. How would I evaluate this opportunity and what would be some sources
of financing?
Well Kurt let me tell you. If a business is already up
and running and established then probably, unless it’s a very mature business
that’s paid off all of its debts, it probably already has financing built into
it, so if it’s a business let’s say that’s worth $400,000 and there’s $300 000
of debt the financing is already there. You would be buying and/or be becoming
a shareholder by purchasing some of the shares and you’d only be buying what is
represented by the equity.
So say there’s $100,000 worth of equity there. As far
as you getting your hands on money to buy those shares, you’re not going to
find any outside sources of financing for that aside from maybe your relatives,
parents, you know great aunt that kind of thing. If a banker is willing to lend to you personally,
it will be personal lines of credit for example.
Now personal debt at the bank is usually associated
with your level of earnings and your job, so if you wanted to get a lot of
credit in order to have money to buy into this business then you would you need
to arrange that debt facility before you left your job.
Now here is the big danger of doing what you’re
proposing. Getting into business with someone, especially as a minority partner
is a risky affair and the closest thing that I can think of to this type of
relationship would be a marriage. You’re going to be getting involved with
someone who is still going to own the majority the business, could still outvote
you, when it comes to important decisions. The only way to get around that is
to have a partnership agreement that specifically spells out that maybe even if
you don’t own the majority of the shares or even half of them, that you still
get an equal proportion of decision-making power.
Now the problem with that is if you have to regulate
your relationship with this person through contract then in order to go back
and visit the contract means there must be some kind of conflict between the
two of you. In my experience conflict
between the two people usually stems from people not having a well-defined job
description or series of responsibilities. If you’re going to get into a partnership with
someone, you have to know them and trust them and know that you’re going to be
able to get along with them. Also, you have to have a well defined structure as
to who is responsible for what. You need to formalize the roles within the
business just like a big company does. Different
managers of different things. Different people have different responsibilities.
I recently did business with a partnership and it was
a man and a woman. They were not a married couple, they are business partners
and I met the gentleman only once because I needed his signature on something. Other than that I just dealt with the woman.
That’s because the woman was CFO and in their partnership agreement they had clearly
defined roles, she was the CFO and the president and he was head of operations
and so he managed everything to do with the plant and the factory floor and
receiving the shipping, the transformations of the goods and she never went
there.
Her domain was the financial aspects: payables,
receivables, making sure customers paid, etc. They both had a very clearly
defined set of responsibilities and roles and then every once in a while, they
met together as shareholders to discuss the direction of the company and big
picture things.
The problem that often happens in small companies that
are partnerships, especially in your situation where you’re thinking about
buying into a business that already exists, is the owner that’s already there.
He’s already accustomed to being the person in charge of all decision making, so
everything goes to that person right now. They make all the decisions. Are they
open? Is their mind open to a change in how the business functions? Are they
open to having another owner there? Are they willing to define roles and not
have the both of you stepping on each other’s feet all the time? It’s a very
big decision and it has to do with a lot of things. It has to do with business sophistication and
also emotional maturity and that’s why I say that in a lot of ways this is like
a marriage because you’re going to be joining yourself up financially with this
person and you have to be able to get along with them.
There’s another client of mine that I’m working with
right now, who has found someone that wants to buy his business and they’re
actually considering a multi-year transition. The buyer will buy in 20% then
the following year, they’ll do a dividend of any extra cash and then the buyer
will buy another 20%. Eventually the dividends
will allow the buyer to buy out the seller in that five-year transition period.
They’re going to go through a period where both of them are going to have an
ownership interest and in the beginning, the buyer will be minority and towards
the end, the buyer will be the majority.
What they have realized, with my help, is that what
they actually have to create policy and procedures manual. They have to create
job descriptions for all the different roles, they have to create a formalized
hierarchy or organizational chart showing who does what, so that when they
operate with two owners, each of them is going to know you know; when I am
wearing the hat of the service manager then that’s what I do and these are my
responsibilities. “I’m not going to go and stick my nose in the business of the
marketing manager because that’s his domain,” for example.
These two guys are wearing multiple hats so it’s
always going to be a challenge to make sure that people are just doing their
roles and then to reconcile that later when they come together as shareholders
to have that shareholder meeting to make sure they’re both on the same page.
So it can be a very difficult and complex thing. Kurt,
you’re not going to get somebody to lend you money to buy into a small business. In my book Invest Local, I explain clearly why it does not make sense to be a
minority shareholder and the one exception I do give it in the case where
shareholders are active in the business. This is what you’re proposing.
So I hope that answers your question and if anyone has
any other questions or comments feel free to send them along and don’t forget
to sign up for my email list at www.InvestLocalBook.com
The value of any market is underpinned by the availability of financing. –Ed Pendarvis, Founder of Sunbelt Business Brokers.
What would houses sell for if there were no such thing as a mortgage? How many $40,000 cars would be on the road if there were no car loans or leases? Not many.
Buyers always want more and getting more means using other people’s money. This is called leverage. You put down $10,000 to buy a $100,000 house and rent it out. It earns $1,000/m which is only a 12% return each year but if interest costs are $2,000/year then you’ve earned $10,000 on your $10,000 investment. This is a 100% return on your own money. That’s the power of leverage.
Business buyers want to apply the same kind of advantage in buying your business. The problem is that it’s harder to get financing for certain aspects of a business.
Let me give you an example: a business owns machines, equipment, leaseholds or real estate, inventory and uses operating capital to finance receivables.
Most commercial banks will lend against machines & equipment. Some like to lend against real estate. Some will use government guarantee programs for small business to finance leasehold improvements to leased locations. Lines of credit can be issued to finance the right kinds of inventory and part of the receivables. The buyer is going to need his own money to put ‘skin in the game’ and make the bank happy to provide this financing.
Do you know what the bank won’t finance? Goodwill. Goodwill is the intangible value of the fact that you’ve built up a great clientele. It’s the difference between the agreed upon purchase price of the business and the value of the tangibles; the things you can touch.
I’ve advised people and personally handled over 50 transactions and all but one required the seller of the business to provide some level of financing. It all depends on the level of tangible assets in the business. A food court restaurant? You might need to finance 50–60% of the sale. A home foundation business with lots of equipment? You might need to finance 10%.
I or an experience business broker will be able to let you know what might be a likely selling scenario for your business. It’s important to know because if you don’t understand this, you may turn down a good offer thinking that businesses are sold for all-cash. I’ve personally witnessed many sellers lose out on good opportunities to sell simply because they didn’t recognize a good offer when it was made to them.
Why don’t buyers have enough money? They always want to buy something bigger. If you have a $250,000 business for sale, the buyers will be people with $40-$60,000 in personal liquid equity to invest. The people with $250,000 are trying to buy million dollar businesses.
The same scenario exists with home buyers. People with $25,000 could buy an old mobile home and live mortgage-free but most choose to use the money as a down-payment on a much nicer place to live.
Also; you need to consider the bankers. Many deals I’ve worked on have involved bankers who would only make loans if the vendor was financing part of the deal. There are two reasons for this:
1. The seller knows the business better than anyone else. If the seller believes the buyer can make a go of it and pay his debts and that he’ll get his money eventually, this gives the banker confidence in the deal.
2. If the buyer screws up, the banker will know someone who has an interest in taking the business back in order to get their money. Someone who knows how to run this kind of business, you! In effect, the bank likes vendor financing because it creates another opportunity for recovering their losses should a deal go bad. Taking a business back is an option, not an obligation for you.
In my experience, sellers who are closed to the idea of financing part of the deal end up with businesses that languish on the market for years and eventually performance slows. This lowers the value of the business. Eventually there is no cash flow to support goodwill and the business is sold for the value of the tangible assets which can be financed. There you go. You get all your money, but you get less!
This was the case in the one deal I’ve done with no vendor financing.
Also, vendor financing notes are often ‘subject to offset.’ This acts as a guarantee for the buyer that you’re not lying to them about any information concerning the business. If you do, they have recourse against you by offsetting their damages against the note. Many transaction advisors, including me, tell buyers that they should never trust a seller who won’t agree to this. The simple logic is that if you won’t put your money where your mouth is, then what are you lying about?
If you plan to sell in the next 12 months: Be ready for an offer which includes you financing part of the transaction.
If you plan to sell in the next few years: Take a look at your debts. If you need to purchase new equipment then consider using leases or loans which are assumable or transferrable to a new owner. This can help a buyer by creating ‘built-in’ financing for them.
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David C Barnett is an author, speaker, consultant and coach. Find out more about his books and writing at www.DavidCBarnett.com Where you’ll find hundreds of blog posts, over a hundred videos, lots of FREE materials as well as books and online courses all about Local Investing, Buying and Selling small businesses, Small Business management and Personal Finance.
