Why Some Businesses Obtain Loans Easily

As a small business owner there are times when you will need a loan to keep the business going.  Some owners will plan and consider applying for a loan when they really don’t need it immediately.  Others will wait until the very last minute, and then they are turned down with no other place to go.

But becoming bankable will take a while even a few years.  Here is why I say that:

  • Of course, you realize that banks like to see a business that is profitable and being well run. Having your finances in order, and taxes paid and current, is the best way to demonstrate that you are running a well-managed business.
  • Owners who want financing yet show very little revenue, a net loss, or have been delinquent in filing taxes perhaps for years, will be turned away.
  • So, what will make you bankable? You should have at least three years of positive financial information on hand.  Often, business owners will try to minimize revenue as a tax planning device to reduce profits, but this strategy can work against you when you seek outside financing.
  • Raise both your personal and corporate credit score by reducing credit balances, paying all debt on time, and avoid applying for new lines of credit during the preparation period.

This process can take several years; therefore, it is important to get sound advice from an accountant and a business banker early and often.  The path may be difficult, but it will soon lead down to the right one.

Are You Thinking of Buying a Business?

Some people often think how great it would be to be your own boss and own a business.  But some want to start their business from scratch and develop the business using their own creative genius.  Others would simply purchase an existing business or franchise because they can more readily see the potential success of it.

If you have decided to start by  acquisition, you should consider several things when preparing and researching the purchase of a business or a company.

  1. A strategic plan must be developed.  Writing this plan will help you analyze and develop and define your market segment and see where you can differentiate your product offerings, distribution channel or customer service.
  2. Consider the perfect seller. Working with your advisers, develop a list of companies or a business that match your strategic interest.
  3. Consider the corporate culture of the target and if that culture will blend with your company culture.  Will the two companies welcome change?  There will always be a need for motivation and training to meld the two cultures.
  4. Look at your technology, is the infrastructure up to date and will it be able to absorb additional employees? Are your email, CRM and ERP systems ready for an upgrade?  You may want to acquire a company because it has more advanced technology.
  5. What are the policies & procedures of the target company, and do you have policies and procedures in your own company or business?  Can the policies be easily incorporated? If not, then look for a company that is process-driven so that the resulting businesses can scale more easily.
  6. What is the competition like?  What will your competitors think when they hear the news that you have purchased that company?  Will they be frightened for the forthcoming competition, or will they laugh because you will spend a lot of time melding the businesses and be distracted from competing.
  7. What about product integration? You will have to review this well in advance of the purchase. Can you develop an analysis that identifies any potential shortfalls in your current product offering?  Will you have created confusion among your customers because you have created competing products which they may not be willing to pay for both products?  Could you have created a new set of competitors?
  8. Once you have identified the target company and may have generally discussed deal terms, you need to organize your thoughts in the form of a letter of intent.  Your adviser, lawyer and accountant should have lots of input on the precise deal structure to meet your goals.  After the letter of intent is accepted the due diligence process begins and then the definitive asset purchase agreement or stock purchase agreement will be crafted.  There probably will be a few drafts of the agreements negotiated, but once the agreements have been signed,  the buyer’s bank will confirm that the money has been wired into the seller’s account, and the deal is officially closed.
  9. However, the due diligence process mentioned above must be managed and followed to make sure that the seller’s questions have been answered.  This list of questions is also referred to as the due diligence checklist.  Once the letter of intent has been signed, your advisers will guide you through the sequence of meetings and data requests. All due diligence items will not be delivered all at once.  You will want to see the financials of the target and the financial projections, as well as customer lists and performance. The buyer will need to coordinate multiple on-site meetings covering topics such as technology, product management, finance and customer contract review.
  10. After the closing there is more work that has to be done to integrate both cultures as well. Starting during the due diligence period, key individuals will be organized into teams to to combine technology infrastructure, corporate locations, product lines, sales and marketing teams, corporate messaging, personnel policies, etc.

Help! I Need an Accountant

Small business owners have many tasks to perform in running their businesses.  They take orders, prepare the shop, order inventory, hire employees and perform bookkeeping.  These varied tasks can become overwhelming especially when you think that you must prepare the accounting and balance the books.  Who has the time?

But you needn’t feel this way.  Consider hiring an accountant.  But what should you look for in an accountant?  The first thing you should do is to determine what you need in an accountant and what he can do for you.  What are the skills and knowledge that you require of an accountant?  Is he a CPA? Where is your business now, is it a start-up or a small company with a small staff?  Will you need financing soon, or are you thinking of an initial public offering of stock? The answers to these questions will help you determine what you need in an accountant.

There are so many accountants with specialty services these days it can be confusing to select someone. And then there are those who are your basic accountants.  Accountants typically provide a wide range of tax services, from filing tax returns to tax planning to examining the tax implications of transactions.  Some even offer assurance services, including audits, reviews and compilations.  Some accounting firms recently have expanded to provide business advisory services, including succession planning, business valuation and forensic services, technology consulting, human resources consulting and investment advice.

If all you need is someone to prepare your quarterly financial reports and year-end financials and income tax reports, you would need an accountant from a small firm.  However, you need to determine whether the accountant is appropriate for you.  You should discuss with him his qualifications and experience. You must ask him about his clients and how large they are. Where would you fit in the client roster in terms of size?   Will he pay attention to you or would you be a low priority to the professional?  An accountant with small business practice would be a better fit for you if you are a small business and expect to remain as you are for several years.  Is the accountant familiar with your industry?  If so, he would then be able to present your financials properly and be able to pinpoint troublesome areas in your business so that you can make improvements. He can help you improve your bottom line.

You need to discuss with the accountant how he will handle your account and how much he will be charging for his services.  How many face-to-face meetings will you need with him for him to understand your business and how he wants to receive your information in paper or loaded onto a disc which syncs with his software.

But the best way to select an accountant is to ask your friends and business contacts who they would recommend.  Make sure that you interview several accountants so that you will have the best fit to meet your business needs.

Business Planning Includes Succession Planning

Not long ago two brothers I knew had a landscaping business.  They told me that they had recently taken out life insurance on each other in case one of them dies so their families and business’s debts would be taken care of.  One brother was against it, while the other was in favor of it.  But he acquiesced.  It is a good thing that he did.

A few years later, one of the brothers had a fatal accident while working.  The other brother was left to run the business.  He was so happy that the insurance was in place that it helped him continue the business and take care of his brother’s family to the extent that his nieces and nephew could attend college without worrying about the expense.  It was due to the fact they had taken out the life insurance policy.  Now that business has been taken over by the surviving brother’s son-in-law and is doing great.  A second-generation business.

Think about this:  if you suffer a heart attack and need time to recover, you need the ability to have other people step in and manage the business and pay the bills.  Exceeding a month’s convalesce could mean that you could lose the business.  A successful neighborhood fish business was being sold.  The agent told me that the owner suffered a debilitating heart attack and could not return to the business.  He had no insurance.

Owners of businesses should plan a “what if” scenario indicating in writing who should take over his tasks.  Perhaps it is a trusted staffer, relative or friend who could sign checks and purchase orders, and have access to accounts and records.  They should purchase insurance that provides money to hire someone to run the business if they become incapacitated for an extended amount of time. If there is no one running the business, vendors and customers might get nervous and discontinue their patronage.  Bankers can decide to start calling in credit.

These stories should make sole proprietors and partners consider succession planning.  Some owners feel that their children will take over the business.  It rarely happens – children want to do their own thing. Other management options to consider are current employees, customers or competitors who would purchase your business.

Finding your replacement is difficult so plan ahead, it is best to start early. Leaders are not always easy to find and it takes time to mentor someone into a management role. You will need to identify potential successors in your family or among your employees. You can hire from outside the company, but it’s helpful to groom someone already in your business over time so the transition to new leadership will be smooth.

Planning for continuity or retirement wise.  Be sure to do it!

Why Do Businesses Fail?

We have a great idea and we are anxious to go into business and become an entrepreneur.  You are advised to do your market research, consult with focus groups to test the market, determine your competitors, and write that business plan.  You look for investors and put your own money and probably friends and family money into the business.  You plan, strategize, write and then you are on your way. You are energized with the hope that your business will be great.  But what can go wrong?

Here are five common reasons why new businesses fail:

  1. Lack of Sufficient Capital

Opening a new business, no matter how small or large takes a lot of money, and many new owners do not foresee this.  I recommend planning your strategy and write a formal business plan.  It is important to understand the difference between a startup budget (money you will need to open your doors) and an operating budget (money for your monthly costs and expenses).

  1. Insufficient Marketing

You may think that you must hire a public relations firm to write your news articles and keep your name out front.  But as a startup you do not have the money to do this.  There is so much out there that is free or relatively inexpensive in the way of social marketing tools, like, Constant Contact, Twitter, Instagram and Facebook. You can use these initially.  You can even have a presence on the Internet by creating a website.  In today’s world, especially with the Millenniums and their use of the smartphones, you need to have a website.

  1. Not Understanding your Target Market

You need to know that the market you are entering is growing or self- sustaining.  It is foolish to enter a market that is declining; you will be unsuccessful and waste the investment you have made in the business.  You need to understand the demographics of the area and what their buying habits are and what they like to do.  Gearing products to the wrong group of people are recipes for disaster.  If you find that you have targeted the wrong market, you may not have enough time to pivot to another market.

  1. No Experience in the Business

It is beneficial to have some experience in the type of business you want to establish.  If you want to open a restaurant, and never have been in a restaurant’s kitchen or know what the margins are for running the business, you are wasting your time and money.  You will need to know what you are getting into.

  1. Going into Business for the Wrong Reasons

The entrepreneur Guy Kawasaki says that going into business to get rich is the wrong reason for going into business.  You should go into business to fulfill a need of society, or what can make life better for us.  It takes a lot of time to run a business, probably up to 80 hours a week, and the entrepreneur can become overwhelmed with the responsibilities.  It is important to have a support group, especially your family, going into it.

When Plan A Doesn’t Work

When Plan A Doesn’t Work

The entrepreneur sets out to create or manufacture a product for a certain target market. We hold focus groups and send questionnaires and analyze their responses. We analyze the competitive marketplace and determine that we have a viable product. We do all the things that the marketing gurus say we should do to communicate our product to potential customers.  We forecast the sales we believe we could achieve and cover our costs well enough to provide a profit.

We launch and we are excited about our product, but something happens along the way.  Those customers whom we targeted are not infatuated enough with our product to make it sustainable.  Our sales forecast is not met. We are losing money.  What happened?

Perhaps you created a product that would saturate the market in a few years.  Were you wise enough to have created a core product so that you could change it or modify it into another product that would attract the same customer group who purchased the initial product?

We gather our team together to discuss the nature of our product.  Did we create value for the price offered?  Did we make it easy to use?  Was there something else in the marketplace that we did not discover?  We invested all this money on plant and equipment, inventory, and personnel, now what do we do? Give up? NO! We pivot.

Pivot?  What does that mean?  It is “a structured course correction designed to test a new fundamental hypothesis about the product, strategy and engine of growth.”  (See, The Lean StartUp by Eric Ries, Crown Business, 1978). This is a word that is especially used in the start-up technology world, but it has application for other industries as well.

When your business model is not working, you leave Plan A and turn to Plan B. You reimagine your product and your market. You find another use for the product, or we target another customer group.  We review how the original customers used our product.  Do they use it in the same way that we anticipated?  Is the size of the product appropriate for the customer?  Can these customer interactions be made more lasting and valuable? Can the recurring revenue services and products extend beyond the initial sale?  You are not alone in making changes.

There are many companies which started off with one idea and then had to change it to another idea.  These include:

Twitter  –  from Odeo which offered a network where people could find and subscribe to podcasts.  But I-Tunes came into being as a strong competitor.  Then they brainstormed and came up with the microblogging platform Twitter.

PayPal – originally allowed people to “beam” payments from their PDAs.  After merging with a financial services company called X.com, PayPal became the preferred payment system for EBay.

Instagram – It began as Burbn, check-in app that included gaming and a photo element as well. The owners worried about its clutter and potential actions.  They stripped all the features but one: Photos.  So, they rebuilt the app and focused solely on photography.

Wrigley – Wrigley, a salesman, offered chewing gum for the purchase of his soap and baking powder.  The chewing gum became more popular than the soaps and baking powder.  He went on to manufacture his brands: Juicy Fruit, Spearmint and Doublemint. The rest is history.

Fab.com – began as Fabulis, a social network targeted towards gay men. Although it tanked, in their side jobs the founders had a knack for selecting products the customers liked.  And took a new direction with Fab selling hand-picked home goods, clothing and accessories.

If you find yourself in a position like those above, don’t fret be innovative and pivot.  Find a use for your existing product, or change your target market, or even use the customers you currently have to develop a new product.

Sources:

What “Pivot” Really Means by Alan Spoon, Inc.com, August 10, 2012

Anatomy of a Business Pivot, by Mike Periu, American Express Open, Oct. 28, 2013

14 Famous Business Pivots by Jason Nazar, Forbes, Oct. 8, 2013

 

The Trump Tax Plan and What It May Mean to You

The President-elect made a few campaign promises to us regarding taxes.  And since the Republicans are controlling the House and the Senate, we are likely to see tax changes if his campaign plans and promises hold.  These may not go into effect until the 2018 tax year.  Since his campaign promises were without specificity, below is what we do know.

Business Taxes

Trump has promised to repeal the estate tax, reduce corporate taxes to a flat 15% and simplify individual taxes.  Trump has indicated he will first focus on changing business taxes before individual ones.

C-Corporations currently have a graduated tax rate to 35%, he is proposing that any business would be taxed at 15%.  However, we do not know what expenses would still be allowed, and there is talk that Trump maybe moving toward a gross receipts tax, where very few expenses can be deducted. This would be good for some industries and not for others.  It would discriminate against certain types of businesses – those that are very heavily expense-laden, like retail; they would pay more.

S-corporations and partnerships, which are pass-thru entities, presently are taxed on the individual level, but they would have the option to be taxed at the 15% corporate rate.

Personal Taxes

For individuals, Trump may take the top rate down by 6.6% to 33%, repealing the alternate minimum tax and reducing the number of tax brackets from seven today to three.  Those with taxable income between $0 and $37,500 ($0 to $75,000 for married filers) would be subject to a 12% tax rate, while those with taxable income between $37,500 to $112,500 ($75,000 to $225,000 for married filers) would be subject to a 25% rate.   And those with taxable income above $112,500 ($225,000+ for married filers) would be subject to a 33% federal tax rate.  This may sound beneficial to some people, but there might be some negative surprising results as to what some people’s tax liability might be.

Trump may change the standard deduction and it would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while eliminating many itemized deductions and capping all deductions at $100,000 for single individuals and $200,000 for married couples.  This increase along with the lower tax brackets would see the federal tax liabilities go down for most Americans, and is in line with Trump’s goal to simply tax rules and present the rich from taking legally gray deductions.  Charities may suffer if there’s a cap because this would not incentivize charitable deductions.

Under the Trump tax plan a middle class tax payer would likely see modest tax savings while those in the highest income ranges would actually see the most in savings given the lowering of the highest marginal tax rate, increase in the standard deduction and repeal of the Alternative Minimum Tax.

For those of us with businesses it would behoove us to consult with an up-to-date accountant regarding year-end tax planning.

Ways to Fund Your Business

question-markStarting and planning a business can be fun as well as a daunting experience, especially when it comes to being able to pay for all the equipment, inventory and payroll that goes along with it. How am I going to pay for all this, you may ask.  How much will a bank loan me, or who is likely to be an investor in my company?  I offer some solutions to these questions which further discusses these options mentioned in my August 23, 2016 essay on Funding Options.

For a start-up business it will be difficult to get an investor interested in it unless you have a hot, trending business and the personal skills and background that goes along with your ability to run the business.  An investor focuses on your product and proven market demand for it indicated by sales growth and the cash flows that can be generated.  Growth from year to year of say,  20% to 50% would pique his interest.  He wants to be able to get a return on his investment for a period of years and then he may sell out in 5 to 7 years. He will determine your commitment to the business by asking how much of your own money is invested.

If you get an offer from an investor, he will most likely want preferred stock in the business. Preferred stock is stock in the business but with some differences. It has a maturity date and there is interest or  dividends paid on the amount of the issue which is paid semi-annually.  Here the investor is getting interest paid on the use of his money, and the maturity date indicates that the principal amount is repaid at the maturity date.  The investor also has a higher claim on the business because of his position as a “preferred” stockholder.

Bonds are another instrument to consider.  However, they are used to fund projects.  If you are considering purchasing a building, for example, you could get a bond from your municipality issued for this purpose which will have a benefit of being tax-free to the investor and a lower tax rate for you to pay.

Bank loans are difficult for a start-up to obtain, but if you are in business for a few years and have growing sales and good cash flow, then a bank would consider you.  Of course, there are the issues of collateral, character, capacity and economic conditions which will be considered.  You can apply for a small business loan guaranteed by The Small Business Administration at banks in their program. The SBA loans feature interest rates that are below market.

Equipment can be purchased with an equipment loan and the equipment will be collateral for the loan.  The beauty of this kind of loan is that the manufacturer may work with you on the amount of interest to be paid.

Of course, there is the Crowdfunding route you can take.  Prepare a presentation of your product or project and the amount of money to be raised.  Different crowdfunding platforms have different requirements and features for hitting your target amount.  Read their requirements carefully and make sure the particular platform is right for you.

The above are considerations that must not be weighed lightly.

 

 

Startup Funding Options

So, you want to start a business; you have this great idea for one; or, you have a product that you want to introduce to the marketplace.  But what is holding you back?  Money?  Well, there are several options for you to take advantage of.  Let’s take a look at them.

Many aspiring entrepreneurs will say that they will take the money out of their savings.  According to a recent study funded by the Ewing Marion Kauffman Foundation, nearly 70% of entrepreneurs rely o their personal savings. About a quarter of entrepreneurs rely on venture capital and “angel” or private investors (see my earlier essay on Angels vs. Venture Capitalists), while only 15% rely on friends and family. An even smaller percentage — about 7% — received funding through corporate investments. Crowdfunding is also a popular alternative. According to Fundable, a small business crowdfunding platform, crowdfunding raised $5.1 billion in capital in 2012.

There are other options other than those indicated above.  Depending upon the state you live in, you will want to reach out to an economic development agency.  There you will be able to find financing through tax-free bonds.  For example, in New York State there is the New York State Industrial Development Agency, which issues double tax-free bonds.  That is, the income earned from the bond interest exempted the purchaser from both New York State and federal income taxes.  These will offer a much lower interest rate to you from those in the market.

If you are contemplating a manufacturing-based business, you may consider leasing equipment, the supplier of the equipment will finance the purchase of the equipment.

If you are looking to purchase an existing business, the seller may be willing to fund at least a portion of the sale with a mortgage.  This is true especially in the restaurant business and other small businesses. The seller will usually stay with you in the business for about three months to make sure that everything is going smoothly for you and to introduce you to suppliers and other vendors.

Your success in this regard is to think about other financing sources and to think outside the box.