Forecasting and Budgeting - Why Bother?

This week, I am turning over the podium to a buddy of mine, Greg Tilley of Weather Gage, LLC.  His contact information is greg.tilley@weather-gage.com.  Greg, it's yours.....

Business owners are busy running their business.  Creating a plan for the coming year is not high on the list of priorities.  A forecast is just guesswork anyway, so why bother?  Projecting an increase in sales doesn’t make it happen!

It’s true that a forecast doesn’t guarantee success, but how do you know if you have succeeded in business if you have never defined success for your business?  When a runner starts on a marathon she may not be certain that she will finish, but she certainly knows where the finish line is and how to get there.  Otherwise, her chances of success are pretty slim.

It’s the same in business.  Your chance of succeeding is greatly reduced if you haven’t planned for success.  That includes setting goals for the year and then figuring out what resources will be needed to achieve those goals.  The forecast translates those goals and resource requirements into a measurable action plan.  The forecast becomes a blueprint that guides day to day decision making.  It influences your response to every new opportunity or setback during the year.  At the end of the year you can evaluate what worked and what didn’t, and make an even better plan the next year.

Once you’ve decided to make a plan, how do you start?  How much time will it take?  If you have never done it for your business (or at least not since start up), then it could take some time.  The good news is that it will be easier each following year.  Also, you can reduce the impact on you and your business if you enlist a professional to help.  Either way, here are the basic steps:

1.       Set realistic goals.  Most businesses set goals based on revenue or income, but goals can also relate to other factors like staff sizing, inventory turnover, operational efficiencies, debt reduction, quality improvement or some combination.  The only requirement is that they are measurable and reasonably achievable (you don’t want to set yourself up for failure).

2.       Determine what, if any, resources and actions are required to achieve the goals.  This could include new hires, equipment, marketing, etc.  Identify the costs and timing associated with each, and whether there are contingencies to consider.

3.       Develop a financial forecast model that incorporates the goals and resource requirements.  At a minimum, the model should include a P&L and cash flow statement so you know if your cash and credit lines are sufficient to fund the plan. (This is where you may want to enlist a professional with experience in forecasting.  They will be able to do it faster and more accurately than you could.)  The model does not need to be as detailed as your accounting system, but it should be detailed enough for you to measure your progress on key revenue and cost items throughout the year.  It should also include a list of assumptions. 

4.       Use the process as an opportunity to question your expenses.  Sometimes, we spend at levels based on prior years, without serious consideration whether a particular expense, or level of spending, is still appropriate for our business going forward.  Where possible, check your ratios against industry norms.  Is your sales and marketing cost in line with your competitors?  What about the revenue per square foot for a store, or revenue per server for restaurant.  Statistics are available for most industries.  Not all businesses will conform to the norm, but it gives you a basis for understanding any variance.

5.       Evaluate your progress against the model at least quarterly.  You might make adjustments in the model as you go, but always keep a copy of your original forecast so that you can evaluate deviations at the end of the year and make adjustments the following year as appropriate.

A plan and forecast can be done any time of year, but the first quarter of your fiscal year is optimum.  Let’s do it!

JHB – BUSINESS SOFTWARE THOUGHTS

Once again I turn the microphone over to Jeff Becker.  Take it away Jeff......

If you are reading this, then Frank may have run out of topics to apply his snarky humor too. That really sucks, because I enjoy his writing over mine. So here we go. Prepare to be bored!

Software, why do we still need so many different programs that ultimately hold our information hostage from other programs? There are many reasons, but there are three main reasons in my opinion. They are as follows:

1.       Any good piece of software started out small and had a great idea, only to be bought by a larger company and subsequently screwed up. You are left feeling like a hostage.

2.       No one was addressing a particular need until a big company showed up…..thought it was a growth area….over sold it….and then screwed it up. You are left feeling like a hostage.

3.       Who the hell can talk to a programmer, let alone want too!! I finally kicked the habit of communicating by grunts and clicks! There is no way I am stepping backwards and talking in 1’s and 0’s!

There are many other reasons, but it all boils down to what I believe is the mind set of all big software companies. They know…..once you have stuffed all that information in…..gone through the learning curve of how to effectively use it……they now have you hostage! The entire process of talking to the sales team and listening to how they were going to streamline my business….always left me frustrated. After I committed to the package…..went through the learning curve of using it….it ultimately didn’t work as advertised. Then I had to deal with product support or a consultant! Can you say extra cost? Now this happened over a period of 20 years, so I am definitely carrying some baggage.

I eventually came to understand that I was asking for something that the infrastructure of servers and available networking protocols, just really couldn’t handle it. Meanwhile I was sold that it could. If I had needed free health care at that time...I would have shot the reps and gone to prison. I didn’t think they would understand me there, so I set that idea aside until I got a bit older.

I say watch out software companies! Business owners are getting tired of being guinea pigs or hostages. I wish I had all the money back that I spent on computers and software, thinking that their solutions would simplify my life. They all did in some little way, but the fact that none of them talked to each other just made me feel like a hostage and created a new manual process. Just the act of having to import and export something is a process that takes time and attention.

One good thing came out of all those dollars wasted. It made me really think through and determine what my process needed to be, if such a piece of software existed. Let me tell you a bit about my learning curves and how I incrementally became paperless.

MANAGING CONTACTS

The first area I wanted to streamline were all the contacts I had. I owned a specialty construction company and I worked all over the world. I would subscribe to a bid service…..mine data and manually enter the contacts into a piece of software called Sharkware. It was one of those contact managers like Goldmine. Sharkware was later screwed up by a big corporation. Anyways, it was great. I could talk to a lot of contractors, keep current with all those conversations, make links to people that knew each other, and then I could pick up where we left off at any time. People were amazed with my memory, little did they know! This was in the 80’s.

Outlook eventually became the dominate contact manager, but by no means did they create the market. The problem with the solutions available on the market, to include Outlook is -- they don’t integrate easily into other programs. Outlook now provides some integration, however it still doesn’t play nice with other programs with ALL of its features. So, you are held hostage with some of your information if you leverage it for all its capabilities. Don’t even get me started on what it takes to share this information with other users. Outlook is now reducing the many great features it once had. It’s starting to look like a downward spiral into being broken up into more features that now have to be bought.

They do have some hooks for programmers to push and pull data, but ultimately you cannot leverage ALL of the information it has with other programs. You become a hostage and your systems are separate. We are still at a point where sharing the full power of Outlook or any other contact manager will still require this information to be manually placed into your other systems. Have you ever changed your address with a big company, only to still get your mail sent to the old address? This is why. They can’t just use one system either!! So I simply ask, “Why can’t we change contact information in one place and have it register in other systems?” It makes me start calculating the cost of ammo to accomplish my revenge on all the decision makers at Microsoft.

INVENTORY/PURCHASING/ESTIMATING

Every company has some form of inventory. If you buy something from a manufacturer…or a supplier….then go install it or sell it…you have inventory. All three of the above areas absolutely need to be pulling from the same database. This will tie together the purchasing component when it’s time to re-order.

The problem is that accounting packages don’t do it well and standalone inventory solutions hold some important part of your information hostage. Not to mention the inventory sitting on jobsites, riding in trucks, and the list goes on.

Estimating programs absolutely don’t like to work with other programs. Most employees that are out there creating estimates, are using spreadsheets full of information the way they want to use it. I think a bit differently on this subject. I think we should all go to our Vendors and ask for a spreadsheet of everything they sell. Then simply import this information into your software and have it all in one place for the company to draw from. Use each vendors naming and numbering conventions. This simple act makes talking to your vendor easier and purchasing a snap. The minute you call it something else, you have just made your process less efficient. Now all the estimator needs to do is break up the vendor’s items into the many different units they will need for bidding purposes. They will also need a more flexible calculator and the ability to bundle items up to address the many ways they have to bid cost and units. Easily programmed.  

The biggest mistake I have observed is that a common naming convention isn’t used. Therefore your supplier may sell you something called a “Widget”, everyone else in the company calls it a “Thing-a-ma-bob”, and you sell it to the customer as a “pet rock”. Inventory is the #1 contributor to most organizations digital nightmares. The office grind of disputing invoices, returning unused parts, and trying to get this tightened up into a “real time” report is virtually impossible with the solutions today, especially if you re-name what the vendor is selling you. This problem is as much approach as it is the program.

MOBILE COMPUTING

There has always been hope for putting a mobile device into the hands of your employees and having them record their day in “real time”. You can do it now, however anything available today simply doesn’t do everything you need it to….and/or….want to track. They all force you to use the data flow the way they think you need and getting the information to flow requires that you to sometimes enter the information in a format that just doesn’t allow recording the data the way you want. It usually requires you to create a new name for items in order for you to shove your information into how the program was designed.

Mobile platforms have a long way to go. If you consider what is available on a PC today…..after having been around for decades….it’s logical to expect the same from all of these mobile solutions. Why can’t we have some flexibility in creating fields that we need? It’s because all of these mobile solutions are simply an extension of the PC software that is already frustrating you! How many mobile apps did you buy when they first starting coming out? How many do you buy or even use today? I refuse to buy a single app now. They still don’t have what I need.

I once used a custom programmer and created a piece of software, back when Palm Pilots were the rage. It worked great! However we all know the story of Palm. I was not only a hostage, but I became an orphaned hostage. I wish I had that money back. Screwed again by a big corporation’s opinion of what I needed for a phone. I went back to locked down spread sheets in hopes for a better day. However, I did achieve real time reporting!!

I am really excited about the integration of mobile software into the operating systems and cloud computing finally being an option. It really makes the cost of custom programming enter back into the affordable range.

 

DIGITAL PAPER/IMAGE MANAGERS

A lot has happened here with PDF being the format winner. Making it feel like paper is where the image management software war is still going on. Many years later, they all still have problems. The big problem is….that it is still a piece of paper and still needs data to be entered by a person. I gave up all hope in OCR technology. It just doesn’t work.

I think a paperless office is the best hope for even the dis-organized of the world. However, there has to be a naming convention for it to succeed. At least link it to a transaction, so it even the disorganized can find it.

The other issue is marking up the document like you would a piece of paper. There are some good products for this, but it is critical to pick one that does it well. I have used two in particular. Paperport is the one I have used the longest, but it is getting screwed up by a large organization. I am almost exclusively using Bluebeam right now. But…..I just received news….they were bought by a large organization in Germany. Who knows what my fate will be. The important factor in picking your document manager is to make sure they don’t convert your PDF’s into some proprietary file format. Otherwise you will always need their program to mark it up and read the files. “Neat scanners” is one of those products you should definitely avoid.

I also required all of my vendors to send all paperwork, via email. This established a custody chain, and a secondary backup system just in case. Tell them that they won’t get paid until they do. It is your company requirement. I only received 2 or 3 vendors that griped about it. I allowed them to fax it to me because my faxes were automatically converted to PDF’s and emailed to me.

There is a solution available for PDF’s, however moving to a paperless office will require some changes in how you do things. It may also require you to change some personnel that are going to resist the change. This is the number one place you can reduce the workload your employees currently have or possibly reduce the number of employees. Remember….most employees won’t figure out how to make their job easier…they just chalk it up to what they hate about their job and slog through it each day. PDF’s paired with automated “real time data capture” is the key to a well-functioning paperless office. When done right, it will feel like paper. PDF’s should only be used as documentation…..software should be capturing the digital information ONE TIME…and then making it flow to the many places it needs to go, without entering it multiple times.

I would also like to add, that your office staff should have a second monitor. Since a PDF is still going to be a piece of paper, they will need to be able to view the PDF on one monitor, while reviewing, marking up, or entering the data on the other monitor. This is what makes a PDF feel like paper. Switching back and forth between a screens on a single monitor is what makes the process seem burdensome. I can go on forever about how I work with PDF’s, but this is the basics you have to have.

ACCOUNTING PACKAGES

This challenge was the subject of many nights of Jack Daniels fueled rants! However, it was one of my proudest moments when I finally discovered the solution and broke the code of accounting packages. When I was in a very large growth spurt, I invested in a $40,000 accounting package that was going to do it all. I learned once again, that throwing big money at something didn’t work either. The more expensive software options, still don’t get it right. They can be more confusing than the more basic solutions. They involve more screens and will most likely handle the data differently than you would. If you want to tweak the system, you have to pay a consultant to do it.

Anyways, it was my attempt to combine estimating, purchasing, asset management, and inventory. Then…..after I loaded the information…hired the local supporting consultant….I was still unhappy with it. I just wasn’t happy with how I had to enter the data and how limited it was on the flexibility to crunch the data many different ways. Yep, I had more spreadsheets to export to.

 I bought the program knowing that I had to make some changes so my business would fit into the program the way ithandled information and subsequently spit out its reports. BIG MISTAKE!! Never settle for a system that requires you to change the way you want to track your business…..or requires you to rely on a consultant to make customized changes. I eventually threw it out and went back to Peachtree!

So here is the hustle in my opinion. The software companies wrote their software and then made recommendations as to “what size” company needed “what solution”. This was all based on who could afford what price point of course. All a CPA had to do was parrot what the software companies advised about their product. This eliminated risk for the CPA. It then set the stage for the large companies to simply buy up any competing company that carved out too much market share from them. This is why we don’t have many options. CPA’s don’t want to buy a bunch of software in order to perform their tasks for clients. As long as any the big boys buy up the small guys who have a great idea, then they get the CPA as a free salesman. I can’t tell you how many business owners tell me that they use Quickbooks, because that is what their CPA said they needed. Ultimately I feel as though I fell prey to the big software company plan.

Now here is something you need to understand about software. In order for software to work its magic, they use a backend database. A simpler explanation would be to say that they create tables. It is the same as using an Excel spreadsheet. Think of your larger spreadsheets and think of each tab as a programmers table. As you create a new tab within the workbook, you have just created a table of information. When the different tabs need to be combined into a single sheet with totals information, then this is when programming along with backend database beats the flexibility of an Excel spread sheet.  They can do the same thing in less tabs and have greater flexibility in accessing the information.

So here is the secret…..wait for it….wait for it…..

Open up your accounting package and count the number of digits your chart of accounts will allow you to enter. I think Peachtree is 17 and QuickBooks is 25. That is a REALLY BIG number. Try typing that number into excel…excel will even choke on it. 2,500,000,000,000,000,000,000,000 ….. That’s a big number!

So what does that mean? It means that both processes need to know what you want to track and how…in order for them to work. It also means that programmers have over built their software and we are not leveraging the smaller programs to their full potential. I chalk this up to both sides miscommunicating. How information needs to be organized is a big deal. Programmers keep adding features, however it starts making the software very complicated as they do it. This is a problem for the mobile computing software integration. In most cases, a re-write is necessary for many solutions out there. Remember, you are a hostage and getting them to spend the money to do it will be a difficult. They will instead choose to slowly roll out new versions each year, that give you access to a few more areas you have been screaming for.

Back to that big number in your chart of accounts. If you count the number of customers, number of vendors, number of jobs, number of cost codes for each job, now add the number of items you might buy from each supplier…..add to it all the other GL#’s you put cost to……now come up with a safe number of new GL#’s you will need each year. You will quickly see, that after 4 years you still haven’t maxed out the chart of accounts. Remember that all business owners assign a number to everything we track. So if we have ONE table that can accommodate that many numbers….why not just use the one table and forget about the other modules and its features…..meaning you just eliminated a bunch of tables to inter-relate. Programming becomes easier when trying to integrate a mobile solution. Better yet….why not just write your own and get big business out of the hostage taking business!

The solution is putting all that you track into the 18 or 25 digit number. The software will spit out any report you want as long as you do this. You can actually use a smaller accounting package for a much larger company if you do this. The industry would like you to believe differently. Just roll up the items you want to hide for financial or other reporting purposes.

So another way to say it is you don’t need all of the modules these base accounting systems are selling you. Leverage the chart of accounts differently than an accountant would typically have you organized. Try it out once and you will see what I mean. You have to understand, the accountant is setting up your chart of accounts, so they get the information that theyneed! Why not design your own chart of accounts, so it is something you can make sense of.

Owners need to address this part of their business. They are paying too much for these larger systems and many are not getting as much out of the smaller ones. Accounting packages are a backend system. They only organize information for reporting. I say organize it yourself, but make sure your accountant has the accounts he will need.

THE SOLUTION TO BRINGING IT ALL TOGETHER

Real progress has been made in programming. It used to be, that a programmer had to write very large strings of code to accomplish a simple mouse click. Now those programming languages are large pre-written modules that are simply cut & pasted or dropped and dragged to where they belong. Since the operating system now incorporates all the basics, a simple programming tie is all that is needed. So what I am saying is this…..custom programming makes sense today!! I did just simplify the programmer’s job, however it has become a lot simpler than it was. If you leverage the potential of your chart of accounts, create a road map of how you want to track your business, then you just made the programmer’s job easier and less expensive.

The mobile infrastructure is now here as well. Operating systems now have all the features that were considered “custom” simply built into them. Things like GPS, Camera, touch screen, and Cloud computing are all part of the operating system. Moving data and networking is no longer an issue as well. This sets the stage for capturing “real time data” when the work happens or when sales are made. If paired with a backend accounting system that is simplified like I explained above…then the act of stuffing the data in automatically, really reduces the programming costs. You tie this in with PDF’s being able to be tied to a transaction and the storing and sharing of contact information…you have just simplified a large part of your business.

Now here is the catch. Programmers don’t understand your business needs any more than a CPA or lawyer. They don’t want to do your job, nor do they feel like it is their place to advise you on how to do it. They have a job, they do it well, and you probably won’t pay them to run your business.

Custom programming your perfect system is the way to go. You can do it in small steps…or you can take a few years and make the change all at once. You can even make the programs you have now, talk to each other. Then start designing your dream program.

You can even have the systems run in parallel until you are ready to make the switch. The bottom line…explore custom programming to solve the processes that make tasks require multiple people. You may eventually start to believe that your “get it done” employees…can really handle a digital world. The programmer’s job is to make it work before you ask them to use it.

IN CLOSING

If you read my previous post and are now reading this post, you can see the direction I am heading. Helping small business owners fix clunky processes is my future. I have partnered with a programmer that has been doing this for a few decades and we are like minded and know we can fix this issue. He has been listening to these complaints for years and has the bulk of these solutions already written. We just need to tailor them to a business owner’s needs. I am now confident that our business model can compete with the solutions that are out there with me interpreting the client’s needs. I think business owners are ready to really fix the problem.

This was not meant to be a sales pitch. I simply felt as though this was the biggest challenge as a business owner I ever had. I didn’t want an office full of paper pushers that didn’t earn revenue. Having wrestled everything from DOS to windows 8.0, figuring it out consumed too much time and a lot of money. The answer was always there, but I just didn’t know enough about the programmer’s side to see how to communicate my vision without it costing a bunch of money. This exposure to programming has given me the last piece of knowledge I needed to streamline the software problem we all face. I also love to talk business and Frank’s blog is a great place to pass on my experiences to those of you that have the same passion for efficiency.

I never did get to write my dream piece of software, but I did manage to organize my existing software to reduce the redundancy and automate the many processes that I had. It consumed a large part of my time, but I at least got close. I know exactly how my next company will be organized as it grows.

So I think it’s worth the time and money to write your own software. Eliminate or at least, better utilize the office staff you have. Quit paying for software that holds you hostage. At least take the first step and start making the software you already have start to talk to each other.

 

Good Luck in Business,

Jeff Becker

Jeff@jhbecker.com

JHB Philosophy 101

This week, Jeff Becker steps up to the podium.  Jeff and I go back a lot of years.  In this post he shares his experiences running businesses.  Jeff is truly of the business owner mold.  Take it away Jeff...

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Frank had suggested that I write a piece for his blog a few years ago. However, I was still licking my wounds from having lost a 15 year old company that I had grown from 1.5 million per year into a 28 million dollar a year company. I simply hadn’t spent enough time reflecting on what I did wrong and what I did right. I now think it would be helpful to some to put my thoughts down in writing.

I started my construction company at the age of 28. My confidence came from having personal experience in actually doing the work and feeling as though I understood the technical side as well as the physical side of construction means and methods. So doing the work was the easy part. The piece of the puzzle I had to learn on the fly, was the business side.

MY APPROACH TO BUSINESS

My company travelled the entire United States as well as a few overseas jobs. I was always meeting other business owners in new places and those business owners were 60 year old men who were always happy to engage in conversations about business challenges and experiences. I think they found it interesting that I didn’t want to make small talk. I still don’t understand why so many people waste time by thinking their time is better spent talking about sports or the latest reality show when there is so much to glean from other owners when you get a brief moment of their time. Most business owners don’t want to be buddies, so trying to find “personal” common ground, is a waste of time more often than not. If there is common ground, it will happen without any effort. This approach really helped me tremendously as I tried to navigate and learn business. After all, work was the common ground that landed me in front of them in the first place. The rest happens or doesn’t happen. The relationship grows when working through challenges together. You will find this approach throughout this piece.

Another base belief I have, is that money is only made on the actual performance of the work. So if you believe that money is made by the office, this article is not for you. My entire 15 years was a constant struggle to create efficiencies that eliminated or reduce office personnel needed. I did this with as many as 6 and as few as 2 people. Other entities in my trade were using many more than I was. Becoming paperless is the key.

So after the first year, I realized I needed to know more about accounting. I felt powerless and the CPA I had was a specialist in filing IRS extensions. I was cash strapped and had no idea how to really budget my year when all I was getting each year, was what I called an end of the year “Oh Shit”! This is how I found Frank.

PICKING A CPA

I was really becoming a computer nerd. More on that later. I was using Peachtree at the time and so I felt it would be smart to find a CPA that actually knew my accounting package. Frank was on the Peachtree software support list. He was providing bookkeeper training and I didn’t see any other CPA at the time doing this.  Since I had a bookkeeper, I pulled the trigger and our relationship commenced. Frank and I later learned that we had common ground and that we both had visions concerning our two trades. Through that process, we continued to teach each other and pontificate about how we were trying to manage our businesses. Although Frank and I never just “went out to have a beer”, we did however have many personal conversations that I think pointed to the fact that we could. So, lesson 1, always find a competent CPA that you respect. How do you find that? Talk business first and make the conversation as much about your business as theirs. How the other party runs their business will tell you a lot about how they view yours. It also educates them about yours, so they can better help you organize yours. Make sure you know what you want to track, how you want to track it, and eventually how you want to see it on paper. Most CPA’s don’t care, and don’t know how to run your business. Don’t ask them! However they really can help you organize your information, so you can file taxes correctly. Over the years, Frank has only made one mistake and one joint mistake. Both times he did what was right and we both shared in our portions of the issues. The fact that Frank and I still do business, must mean he feels the same. Did I mention that I always felt that we “Could” go out and have a beer together? Make sure you are like minded.

PICKING A LAWYER

I was in a trade where it was more like the “Wild West” back in the 80’s. It was run by a generation that worked out more problems without the need for lawyers. Millions of dollars were worked out on a bar napkin or a simple hand shake. Of course lawyers were a part of forming a contract document, but law suits were really a last resort and marked the end of doing business with the other party. The moment you sued, the relationship was done forever and any friends they had, you lost as well. So it was always in everyone’s best interest to work things out, even if it cost you money in the short term. This was a very good learning exercise. I quickly became focused on developing a clear and concise bid document. Spelling out what items we would perform, really helped weed out the customers that really didn’t understand the job that they wanted built. Avoiding a customer that doesn’t understand what they want, will save you a lot of money, time, and energy by not working for them. I have only used a lawyer for litigation twice in 15 years. Once in Pittsburgh over $15,000….he was a crook and another against an insurance company that wouldn’t pay for a 1.5 million dollar machine that got dumped on a Tennessee interstate. 

What value does a lawyer have in a business? Well, they sort of do and they sort of don’t. The answer is about 50/50…LOL!! Those of you that own a business get that comment. How I used a lawyer, was as an advisor. Lawyers are very good at telling you both sides of the issue and how it plays out in the courts. Many things can be written, however, if there is no case law concerning the other parties issue, you will most likely win when going to court. I used my lawyer as a researcher. I wanted to hear what case law supported my position and what case law supported theirs. I would then use this new found knowledge in conversation with the other party and plant the seed, that their position wouldn’t exactly be a slam dunk for them. It always resulted in a compromise by both parties and a real savings in time and money. The lawyers always win and cost more money than a simple compromise. So how did pick a lawyer? I point you back to my “approach to business”.

BANKING

The most important lesson I learned was that you can’t just have one banking relationship. Although I did always want one, this is never good for the business. I was financing machines that cost about 1.5 million each and they were specialized. Meaning, there was only 5 companies in the USA that even really used these larger machines. This put my business model in a high risk category regardless of the profits. So the best way to say it is this. Eventually every bank is controlled by the Feds. They have to fit into a federally defined risk assessment model. If you get a “No” from your banker, it may not be you. You obviously have to be able to determine whether or not you need to improve some part of you balance sheet, but a lot of times the bank may not be looking to put YOUR RISK TYPE of business into their loan portfolio. I say move on and find one that is. I still have what I consider my go to banker and he played a very important role in helping me when I met my demise due to the depression. When I got a “No” from him when I was wanting to grow, he sent me to another loan officer that was looking for my type of company and could do a higher risk loan. That is the most important attribute you want in a loan officer. When he can’t help, does he care enough about you to recommend someone that will? Another must have attribute is whether or not they will spend a day and take a tour looking at how your business operates. They need to be asking a lot of “why do you do it that way” kind of questions. This shows interest. I can’t recommend anyone better than Pete Fuge with BB&T. The guy was a great teacher as I learned about banking. I still remember him showing up in a nice suit and wore out construction boots. This let me know that he has done this before and he really wanted to learn what I was up to and eventually needed. He also played a role in telling me “No” and advised that growth wasn’t a good idea, based on what he was seeing in the market. In the end, it was Pete that helped the bank officers realize that I was failing due to the economy and not that the business was being run improperly. I was simply written off and we both took our lumps as businesses that took risk together. Your loan officer has to be your best cheerleader. After all, when the doors shut and they consider your loan, you are not allowed in the room to speak your case directly. Educate your loan officer…dress him up and equip him with flashy pom pom’s….and send him in! Taking nothing personal when it comes to banking.

PICKING AN INSURANCE AGENT

I found this to be one of the funniest experiences. Every agent I ever had, drove up in an older model car and within a year, upgraded to some high end luxury or sports car. The insurance game is a racket. Especially when it comes to workers compensation. I had to fight with the insurance company every time I changed agencies. I never got confirmation of this, but it is my opinion that once you get an agent, the insurance company doesn’t want you to change. As a matter of fact, they won’t quote another agency for fear that the broker is pushing your rates up higher and they don’t want to expose that. They are hoping that the “relationship” can allow them to increase your rates every year and chalk it up to problems with your industry risk. I call bullshit! Every time I forced a change, I saved money! So what I am saying is….make a change. Make your agent be competitive and keep your rates the same. Even if you like the guy…..fire him one time….see if he comes back for your business next year.

PICKING EMPLOYEES

I love this topic. Much has been written about this topic since I have been in business. HR has really put a strangle hold on the industry. I still can’t get my head around this entity and why it is needed. I guess I can see it for mega large companies that are just selling a widget, but I think I can argue as much for itas I can against it . I have always liked a small business, so I naturally grew larger with a small business approach. Back in 2001 my father and I did a roll up of small engine businesses in Manassas. It was a retail business that I eventually became too busy to be a part of. My father took over that and eventually sold it.

I was very unconventional, because I really like the “Type A” personalities. I guess big businesses eventually run out of Type A’s but I still believe they are stifled more than they simply run out of them. HR is a big factor in my opinion. Anyways, here are my reasons why.

A type A person wants responsibility. They hate control and if they are capable, they will help you get there with little to no supervision. It really simplifies your business. However there are some pitfalls that you have to manage immediately until you determine you are like minded.

#1 Make sure they are not a prima donna. You want a type A that feels responsible for their mistakes. Once you have that, you got it made. If a Type A makes a mistake, they will move heaven and earth to correct that mistake and see it as a learning experience. A type B will most likely be afraid to approach the same issue twice and need a lot of babysitting when it happens again.

#2 Make sure they are the type that wants to find an easier way to perform the work. I am unfortunately prejudiced with the opinion that most people will bitch about a process within a company, but never take the steps to improve it. Even Type A’s. They simply show up every day and chalk it up to it being a part of the job they don’t like. This is where you HAVE to be there, so you can talk about the bad parts of the job and eventually come up with a way to make the bad part become a good part. That was always the leading topic when putting all the type A’s in the same room to brainstorm. This is how I opened the minds of my fellow cavemen and eventually became a paperless company.

#3 You have to make sure that the job you want done is clearly communicated. Otherwise you give the type A, wiggle room to point the finger back at you…..if something goes wrong. If you don’t clearly communicate…and it will happen…you have to take it on the chin and shift to fixing the problem WITH them. After all it is only costing you money if you don’t and you caused the problem by not doing your part.

#4 You ABSOLUTELY have to interface with them every day for a year to make sure you are comfortable that they perform the tasks required to your satisfaction. This is when you communicate how the company is going to interface with clients, other employees, and most importantly organize their work. I never really cared about how they did the work. I learned new ways to do the work from these type A’s sometimes. Having spent the time to discuss the process of doing the work netted us many efficiencies. There is nothing more productive than a bunch of type A people, driving towards the same goal, discussing how to improve what we do. We became a company of inventors as a result. Both sides felt very good about what they were doing because we all had a hand in solving a challenge. I even have a joint patent as a result. It is meaningless now, but I don’t want to get started down that road. It is another learning curve that has no place here.

#5 If you do all of the above correctly…..and you have a business that is growing…..you can now start focusing on having that type A groom a successor. Nine times out of ten, they will pick and groom their successor, much like you. I don’t recommend doing this until you have at least 5 years under your belt. If customers are wanting you to grow, resist it until repeat business demands it consistently. I have seen the 5 year rule play out in many businesses.

So I like Type A’s in leadership roles and from there, I try and find Type A’s that are in hiding amongst the type B’s. I had many that stayed with me for the entire ride. I hope this helps.

PICKING CLIENTS

Never forget that YOUpick your clients! If you work for a problem client, then you have forgotten how to say NO! Bad clients will always cost you time, money, and possibly employees. Make sure your client knows why they need you, how to use you, and appreciates the relationship and what you offer. If you have to have a bad client to make ends meet, start looking for another quickly. This challenge is what pushed me out of Northern VA. There are only so many “Good Clients” in any geographic area. Go find what you are looking for in other places. However, don’t discount what a so called “Bad Client” is telling you. They may be trying to help. So stay opened minded until you figure the relationship out.

 

FINAL THOUGHTS

So I now find myself looking for a new challenge. I have grown a business to a size few achieve. In Northern VA that isn’t so big, however nationally it is. I have purchased and run a retail business during that time, so I know what it is like to be “at Risk” and also how to manage and sell widgets…this I lovingly refer to as “Retail type” businesses. My latest passion/venture is going to market with processes and custom software that streamline and teach small companies how to grow and manage the office and “get it done” processes. Process challenges is what I really excel in. Predicting a depression was not.

Well, I hope this hasn’t been too long winded. If all of this is posted on Frank’s blog, then and only then, will I drop my insecurity of being too long winded. I am hoping Frank doesn’t edit this down to something simpler….like…..he had a great business….but failed!

Good Luck in business,

jeff@jhbecker.com

 

Guest post from Sami Jadallah - Mistakes I Made Starting a High Tech Business

This week, I turn the blog over to Sami Jadallah, a long time friend and client, who started a high tech automotive service business.  Take it away Sami...

Few years’ back I came up with an idea to keep track of service and maintenance of cars/trucks on a smart card. Having worked in Europe for few years, smartcards where a hot thing and with bright future. Ah well.

I proceeded to file for a patent, which took almost 14 months to prosecute and secure, and over $100,000. I won the patent then it was time to raise money and organize a team.

1.      Raising the fund:

Because of my many years of doing business overseas it was not too difficult to raise money, given my performance and my professional integrity. One of my clients agreed to come in as partner together with others. My share of 1/3 was a developer and manager of the project while the overseas investors put up the entire funds.

As it happens one of them ran into financial difficulties and did not pay his share, so I used my own money to pay for his shares including collateralize my stock holding even taking out second mortgage… Big Big dumb and stupid mistake… Never ever do that.. Let the company go down the drain but never ever put what you have a risk for the business.

2.      Selecting a team:

The business required both technical and business. On the technical side there was an Israeli company with advance technology in the field of smart card technology. A business associate of mine introduced me to the company and I negotiated an agreement with them to provide the technology (software) and the hardware. The company sent one of their top software developer to the Washington area where I made several appointments for him with local dealership to understand the automatable dealership software and who they electronically file all the service and maintenance records. Upon his return they filed a proposal of 9 months to develop and test the software. Well, they worked at but it seems it was not their priority since they were gearing to go public and my project was one way for them to present a large business opportunity to go the market and raise money.

As it happened, they did raise the needed capital using my business idea and contract with potential investors.

However when it came to the software they did a very shitty job of it and they were late, quite late… and when their team arrived in the DC area to test the software, none of what they did work and I had to hire a professor from University of Maryland to help fix what they could not fix. Lacking a technical team I was at their mercy and the delay and false start lost me a big opportunity to go public (more on this).

Finally we fixed the software but we lost precious time and confidence with dealership and industry, but never the less we proceeded any way.

To help develop the business and marketing, I hired a former VP of a Premier top of the line German car manufacturer who also happens to be the former president of a smaller European car manufacturer. To be the be the president of the company… he was also a head of a major though smaller European car manufacturer.

I also hired a VP of an extended warranty company to be the VP in charge of marketing.

Meanwhile I continued to work overseas and trying to earn income and enough money to pay there top of the line and expensive executives.

As it happened both were losers and my advice to any one… never ever hires a have been … these top executive can only go down and never go up. Hire a hungry young MBA willing to make something of himself and succeed and never higher guys who can only go down and who are used to big expense account, dinners, wines etc… and charge the small struggling start up company.

Also never ever hire anyone with a salary that is not tied up to performance… Once they have a contract they simply don’t give a shit about happens as long as they get their fat check every month.

3.      Legal Team:

Ah well, lawyers are no better than these car guys, specially when one of them is using your business to score a point for partnership, and keep dragging the business and legal process so that he can keep billing until he secure his partnership.  I lost a big big opportunity to go public with the idea, since it was a hot idea when .com companies were raising millions on names only without a product. And I had a product and had a patent to support it.

4.      Conclusion:

·         Never put your house or saving at risk for a business… no matter what, and if necessary let the company and business go down the drain rather than risk your personal financial security and lose your business too.

·         Never ever higher a technical or business partner who will use your business relations to go to the market or secure a big contract using your business as bait to catch the big fish and you lose every thing.

·         Always make sure that you put a substantial sum as penalty for poor of failing product… let the SOB pay for their failing and make sure that their failure is not all charge to you.

·         Never ever hire a have been, top executives who are used to big bucks and perks to head a start up company because they will milk you along the way as they buy themselves time to get a better job or secure retirement. A had been can only go down never go up… and the bigger they are the bigger they fail because they do not have the time or the smart to learn something new.

·         Always make sure you hire a young energetic smart young graduate who will work hard to succeed and who will also make you succeed.

·         Always tie up compensation to both salary and performance and never salary alone… it gives no one any incentive to succeed since they are guaranteed the money… They will work hard when they know they have to perform and deliver to the bank account.

·         As for lawyers, even the best lawyers are out for themselves… think 100 times before you hire a lawyer who will help you with your business.

I lost over $2.5 millions on this project and I continue to be angry with myself, have not reached peace with my self having put my family and their financial security at risk and I put my self at great financial risk… I did not mind if I lost the business because of the economy or bad product, but to lose it because off these so-called top of the line executive is a crime…

Sami Jamil Jadallah

Fairfax, VA

So You're Not Good at Finance...

I haven’t done a really good blog rant for awhile.  Here goes…

What would a world look like where mental health treatment made people worse rather than better?  Mass murderers would kill school children after receiving mental health treatment.  Soldiers returning from combat would shoot up army bases, kill their families, and commit suicide.  We’d sell deadly guns to nuts, because not selling to them would violate their constitutional rights.  The evidence suggests we inhabit that world.

Comedian Ron White  did a bit around the phrase, “You can’t fix stupid.”  Apparently, we can’t fix crazy either.  Why did WWII veterans come home and not shoot up military bases despite no mental health treatment, when veterans from Afghanistan shoot up bases after treatment?  Mental health “professionals” have some explaining to do.  Calling Dr. Phil.  Calling Dr. Phil.  I’m not getting an answer.  He’s too busy with Lindsay Lohan’s parents.  Now on to our regularly scheduled blog.

Business owners frequently tell me, “I’m not good with finances.”  Is not being good with money really an option for business owners?

Jan owned a multi-million dollar printing and marketing business.  She wasn’t good at finance so she paid a six figure salary to hire a chief financial officer.  She paid lots in taxes on her earnings, but never asked why the company bank accounts were always empty.  After all she’d hired a professional to manage that.

One day two banks called her and wouldn’t talk to her CFO.    They told her she was overdrawn in all the company accounts and needed to deposit $100K immediately.  She walked down the hall and confronted her CFO, who confessed to stealing $750K from the company.  He had covered his theft by kiting checks.  Check kiting is depositing checks from one overdrawn account to cover checks written on another overdrawn account.  Obviously, you can’t do this forever.  Back in the 1990’s, you could do this for a month or so, because checks cleared in about five days.  Don’t try this today since checks clear overnight.

Jan was bankrupt, despite having a successful business, because she wasn’t good at finance.  Business owners need two essential skills.  First, you have to be technically proficient at whatever service you offer.  If you own an auto repair shop, you’d better be able to change the oil in your car.

Second, you have to be good at business.  This is much harder than technical proficiency since it involves a lots of areas.  You need not be an expert in any of these areas.  You can hire experts,  but you must be capable of supervising your experts, which requires at least a degree of proficiency in many areas, such as finance, marketing, and management.  Please read Michael Gerber’s “E-Myth” series of books.  He writes that business success is about working on the business not in it.  Technicians work in the business.  You can hire them.  Business owners work on the business, which is much more difficult and requires entirely different skills.

But what about Steve Jobs and Bill Gates?  They were techie guys, not business people, weren’t they?  You are wrong on two counts.  First, pull your driver’s license out of your wallet.  What’s the name on the license?  Probably not Jobs or Gates.  People win the lottery, just not you.  Jobs and Gates are Michael Jordan to your Greg Jones.  Who’s Greg Jones?  I don’t freaking know either.  That’s the point.  You aren’t Jobs or Gates.  You’re Greg Jones, and nobody knows who you are.  I’m Greg Jones as well.  That doesn’t mean we can’t be successful – maybe not Apple successful, but successful nonetheless.

Second, both Jobs and Gates had incredible business skills in both marketing and finance.  Both had lesser known techie buddies, Steve Wozniak in Job’s case and Paul Allen in Gates’ case.  These sidekicks were the tech geniuses behind the initial success of Apple and Microsoft.  Jobs and Gates understood the technology, but more importantly understood the importance of the technology and how to sell it for a profit.  Their business skills were exponentially more important than their technical skills.

Thanks for reading!  As always, please visit the main S&K web site at www.skcpas.com and like the “How to Screw Up Your Small Business” Facebook page.

Until next time, let’s do it to them before they do it to us.

D.C.A.A. Compliance for Beginners

If you are a government contractor, you need to be aware of the Defense Contract Audit Agency (D.C.A.A.)  The D.C.A.A. approves your accounting system for the purposes of offering products and services to the federal government.  They may also audit the results coming from your accounting system for the purposes of determining compliance with Federal Acquisition Regulations (F.A.R.)

If you are new to the government contracting world, get used to acronyms.  Here is another one – D.O.D. (Department of Defense).  The D.C.A.A. has jurisdiction over the accounting for D.O.D. contracts, N.A.S.A. (yes, the space people), and some other agencies.  Making your accounting system D.C.A.A. compliant seems a daunting task, but here are first three steps toward making your accounting system compliant.

First,  your accounting system must segregate direct, indirect costs, and unallowable costs.  Direct costs are the actual costs of performing a contract such as contract labor, contract materials, and potentially travel related to a contract.  For example, if you provide  IT support to a federal agency, the labor costs of the people you have assigned to providing the services is contract labor and thus a direct cost.  The salary you pay to your bookkeeper is not a direct cost, since he / she is not providing services directly under the contract.

However, your bookkeeper’s salary is a perfect example of an indirect cost.  An indirect cost does not directly benefit a contract but supports the execution of a contract.  Telephone, office supplies, payroll taxes, employee benefits, and rent are typically considered indirect costs.

Unallowable costs are costs determined under F.A.R. to not be chargeable as either a direct or indirect cost.  Interest expense and income taxes are considered unallowable costs as well as alcoholic beverages.  No drunken fun allowed on the fed’s dime.

Key to segregating these three types of costs is setting up the chart of accounts in your accounting system properly.  You should group the accounts for your profit and loss statement by these types of costs.  For instance, accounts numbered 5000 through 5999 might be designated as direct costs.  Accounts 6000 – 8999 might be designated as indirect costs and accounts 9000 through 9999 could be used as unallowable costs.

Second, you must account for direct costs by contract.  For instance, if you have five contracts, you must be able to produce reports showing each type of direct cost by contract.  Accounting software typically helps you with this through job costing functionality.  Accounting for federal contractors has much in common with construction contractors in this regard.

Third, you must have a D.C.A.A. compliant time tracking system for labor.  The F.A.R. sets forth a host of timekeeping requirements, which are enforced by the D.C.A.A.  Most off the shelf accounting software packages, like the time tracking in QuickBooks, are not compliant by themselves.  Most require some sort of additional procedures, sometimes manual, to provide D.C.A.A. / F.A.R. compliance.  You can, however, find specialized D.C.A.A. compliant time tracking software that may integrate with your accounting software.

As you can see, understanding the basics of D.C.A.A. compliance for federal contractors isn’t difficult. Compliance requires up front planning when designing your accounting system.  Most small contractors can accomplish this planning in a day or less.  Ask your CPA for help if you don’t feel confident in this area.

Thanks for reading!  As always, please visit the main S&K web site at www.skcpas.com for real tax and accounting advice.  Also, please like the “How to Screw Up Your Small Business” Facebook page.  I post helpful and snarky business hints there daily.

Until next time, let’s do it to them before they do it to us.

Buying a Business - Making An Offer Part II

I promise to keep this rant to two paragraphs, not counting this one.  Then I'll get on topic.  If I don't, you can bitch slap me up side my ugly, arrogant head.

I'm tired of caring about crazies.  Notice I didn't write "mentally ill", "clinically depressed", or any of the other PC euphemisms for crazies, nuts, and whack jobs.  Instead, we need to aim our concern towards protecting potential victims.  Psychiatrists worry about stigmatizing nuts.  Their victims are already stigmatized.  Many times they're called corpses.

Ron White says you can't cure stupid.  Well, you can't cure crazy either.  Many of the craziest people in society are psychiatrists, like Sigmund Fruit (Archie Bunker's term).   Show me one brand of crazy that has a cure.  The crazy thing about crazies is that they won't take medication, because they're too crazy to believe they need it.  What's my point?  (I'm running out of space.)  We need to put nuts in nuthouses.  Their rights are less important than the rights of their victims.

In part I of making an offer, I covered the basics of deal structure.  Yes, it was a couple months ago.  Give me a break, I've been driven crazy worrying about crazies.  In this installment, I'll cover determining your offering price.

Let's set some ground rules about the size of potential business purchases I am addressing.  In this installment, I will cover buying businesses from roughly zero to five million dollars in annual revenue.  For businesses larger than that, the principles are the same, but the details, calculations, and deal structure tend to be different.

First, let's define what you are buying.  When you buy a business, you are really buying a cash flow stream or a stream of profits.  You aren't buying the seller's cash flow; you are buying the cash flow of the business in your hands.  That's an important point.  The cash flow available to you from the business and the cash flow to the seller are usually different.  Sometimes your cash flow is higher, but sometimes it will be lower.

Determining the cash flow available to you is an art as much as a science.  You start out with profit from either financial statements or income tax returns.  Then, you add back non-cash expenses, such as depreciation, and financial costs like interest expense.  You will also add back any discretionary expenses, such as the rent on the owner's girlfriend's apartment.  You also add back any other owner perks, like family on the payroll and extravagant auto expenses or benefits.

You can expect the owner and his broker to volunteer most of the above additions to cash flow.  They won't volunteer anything that should be subtracted.  If the owner worked actively in the business, but you don't plan to, subtract the cost of a manager to replace the owner.  In some admittedly rare cases, family members are paid below market value.  You'll have to pay more to replace them.  Determining the cash flow of the business in your hands is the objective.  I doubt you'll pay for the girlfriend's apartment unless she is really cute and digs you.  That last part you verify with some due diligence in a seedy motel.

After you determine the cash flow available to you, determine the appropriate multiple of that cash flow to get your offering price.  My business broker friends tell me small businesses are selling from two to three times cash flow.  To get multiples for your type of business, you can find databases of small business sales such as Bizcomps and the database from the Institute of Business Appraisers.  These cost money.  Your CPA, if a valuation professional, probably subscribes to these already.  Don't rely in any way shape or form on multiples from franchisors.  Their job is to get the highest prices for their franchisees.  To do so, they'll lie to their mothers.

You will find that multiples of cash flow sometimes vary wildly even within an industry.  Company size has a big effect.  Larger companies typically sell for larger multiples.  Even accounting for size, you may see some pretty wide variations in multiples.  Don't expect a "correct" answer in your search for a multiple.  If you get outside two to three times as a multiple, you are outside the norm, and you need to perform some detailed research into the reasons for higher or lower multiples.

If you find that businesses of similar type and size sell for three times cash flow, don't immediately offer three times.  Multiples are subject to negotiation.  Don't go to your top acceptable multiple immediately.  The seller will likely counter your offer.  You need some wiggle room.

Expect to accept terms somewhere between your original offer and your top acceptable price.  If you can't get a price in that range, walk away.  The number one frustration expressed by buyers about deals is buyer's remorse about paying too much.  Remember that the friendly business broker represents the seller, not you.  He'll tell you his price is fair all day long.  He gets a percentage of that price.

The final price for a business will probably be a multiple times cash flow plus any inventory.  You will likely not get receivables, and you should probably not accept any liabilities.  For businesses with significant equipment, you will probably have to buy the equipment in addition to the price as calculated above.

Once you have determined your offering price, don't immediately rush to the seller and definitely don't fill out the offer form from the broker.  Run to your attorney.  You will be making an offer with a plethora of caveats.  For instance, your offer will be subject to verifying the financial numbers provided by the seller.  If the numbers are garbage, you won't consummate the sale.  The offer will also explicitly detail what assets you are purchasing and what assets and liabilities you do not want.  There will also be state law niceties to consider.  Since, I'm only a shit house lawyer, get some real advice from a real lawyer.

Thanks for reading!  As always, please visit the main S&K web site for real tax and accounting advice, www.skcpas.com.  Also please like the "How to Screw Up Your Small Business" Facebook page.  I post tidbits of incredible value there daily.  Yes, that's sarcasm.  Sometimes, I just spew forth.  You get what you pay for.

Until next time, let's do it to them before they do it to us!

Buying a Business - Making an Offer, Part I

If you haven't read my previous post on break even analysis, please read it before reading this one.  It teaches determining whether you are going to make an offer to purchase a particular business.  In this post, you'll learn about putting together your offer.

You have a few decisions to make when putting together an offer to purchase a business.  First is whether to buy the assets of your target business or the business entity itself.  This is a critical decision.

If you are buying the business entity, you are buying all of the assets and all of the liabilities, known and unknown, of your target business.  If your target business is a corporation, you are buying the stock of the business.  If the business is an LLC, you are buying the actual LLC.

At first, you might wonder, "Who in his right mind would take on the possibility of unknown liabilities?"  Sometimes, however, if makes perfect sense to buy the entity, and you can mitigate the possibility of getting stuck with unwelcome surprises.

If you seek a federal government contracting company with existing contracts, buying the entity is pretty much the only choice.  Federal contracts are not assignable.  To get the contracts, you have to buy the entity.  You can't purchase the contract as a separate asset.

You do not, however, have to buy a business entity to get a valuable existing business name.  The name is a separate, valuable asset that can be purchased.

When you purchase the assets of a company, you get to pick and choose exactly what you are buying.  You can, for instance, buy the customers, inventory, and hard assets of a company without buying the accounts receivable.  You can leave those with the existing owner to collect.  If the receivables are bad, that is the previous owner's problem.  You don't have to take any of the liabilities at all.  However, if you take the receivables, the existing owner will probably insist that you take the payables that produced the receivables.  But, all of this is subject to negotiation.

Let's look at the tax differences between purchasing the business entity versus purchasing the business assets.  When you buy the entity, you get no immediate tax deduction.  Your purchase is like buying Ford Motor Company stock.  If and when you sell the stock in either Ford or your new business, you'll get capital gains tax treatment on the sale.  If fact, your seller gets this treatment as well if you buy the entity.  Sellers prefer to sell their entities for this reason.  They get lower tax bills on their sales.

When you purchase the assets of a business, each type of asset has a separate tax treatment.  For the hard assets, such as equipment, vehicles, and furniture, you get a depreciation deduction.  For inventory, you get a deduction when you sell it.  Thus, purchasing assets is typically a better tax deal for a buyer even before you consider that you don't have to risk getting unknown liabilities.

If the seller wants an entity sale, but a buyer wants an asset sale, what factors determine which happens?  To capitalize on the tax advantage of an entity sale, most sellers will accept a slightly lower price for an entity sale.

A buyer can mitigate the potential danger of unknown liabilities by setting aside some of the purchase price in an escrow account.  That amount typically runs between 10% and 25% of the purchase price.  The money is released after a period of time sufficient to determine that no unknown liabilities have arisen, typically three years.

So don't completely discount the idea of purchasing the business entity, but be aware that the escrow account ensures you'll still be dealing with the previous owner until the escrow money is disbursed.  The seller and the business aren't yet completely divorced during that time period, and like an ex-wife, he'll be hanging around to make certain you give him his money.

Almost all small business sales are done as asset sales, because they are less risky for the buyer from a liability standpoint and provide for a clean split from the previous owner.

If you decide to make an offer for a business in the form of an asset purchase, you next have to determine what assets you are buying.  For small businesses, the seller typically keeps the cash, accounts receivable, and all liabilities.  The buyer gets the business name, customers, hard assets, inventory, and can choose whether to accept an existing lease.  The seller also normally agrees not to compete with you for a period of time within a specified mileage range of the business.

While you decide which assets you want to buy, you absolutely need an attorney to write the formal offer you will present.  Do not allow the seller's business broker to write YOUR offer.  As with real estate, the broker represents the seller's interests, not yours.  Most broker written boilerplate documents also have lots of legal issues.  It's your offer.  Get your representative to write it.  Paying an attorney now is way cheaper than paying one later to unwind a poorly written document.  I know from painful personal experience.

My next post will cover determining how much to offer for your target business.

As always, thanks for reading!  Your comments are appreciated and helpful to others reading the posts.  For real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.  Also, please like the "How to Screw up Your Small Business" Facebook page.  I post business tips there several times daily.

Until next time, let's do it to them before they do it to us.