Buy Your Own Business With Other People's Money

INTRODUCTION xi

CHAPTER 1 The Good and the Bad of Owning Your Own Business 1

The Fictions and the Facts about Owning a Business 2

Fiction Number One: No Boss 2

Fiction Number Two: Short Work Hours 3

Fiction Number Three: You Will Have Lots of Money 4

Fiction Number Four: You Will Enjoy the

Prestige of Owning a Local Business 5

Do the Advantages of Entrepreneurship Outweigh the Disadvantages? 6

Decide on the Type of Business That Is Best for You 6

Determine Your Preference or Need as to Geographic Area 7

Consider the Hours of Operation 8

Experience and Knowledge Are Important 8

Pick a Business You Enjoy 9

Creating Your Experience 10

CHAPTER 2 How Much to Pay (Borrow) to Buy a Business 11

How Much Is the Seller Asking? 11

What Do Similar Businesses Sell For? 12

What Is the Value of the Business’s Assets? 13

Value the Assets at Their Book Value 14

The Book Value of Equipment 14

The Book Value of Accounts Receivable 15

Inventory 16

Patents and Copyrights 17

The Book Value of Other Assets 17

The Asset Called Goodwill 18

The Capitalization of Earnings 19

How to Determine the Real Net Income of a Business 19

Determine the Price of a Business Based on Its Earnings (Income) 24

Capitalization of Earnings and Return on Investment 26

The Sales Multiplier 28

Third-Party Information 29

Solicit Information from Employees of the Business 29

Check the Bank Statements 30

When Real Estate Is Part of the Business 31

In Summary, the Eight Methods of Valuing a Business 32

CHAPTER 3 Sources of Money for Your Business 35

Borrow the Purchase Price from the Seller 35

The “Business for Sale” Ads 36

The Seller’s Motivation to Sell 38

Enticing the Business Owner to Sell to You 40

Find Cash Inside the Business 41

The Equipment Owned by the Business 42

Intangible Assets 44

Accounts Receivable 44

Excess Inventory 45

Actual Cash in the Business 46

Personal Assets That Can Generate Cash 47

Obtaining Money from Commercial Banks 48

Choose a Bank That Is Small-Business Oriented 50

Have the Requisite Experience 51

Buy a Business That Has Loyal Customers or Clients 52

Buy a Business That Is in the Right Location 52

Prepare Projections of Income and Expenses of the Business 52

Your Presentation to the Bank 53

Loans from Suppliers 55

The Shortcut—Buy Out Your Boss Using His or Her Money 57

Buy a Franchise, but Not with the Franchisor’s Money 58

Friends and Relatives as a Source of Borrowed Funds 58

The Government—The Small Business Administration (SBA) 69

To Summarize 61

CHAPTER 4 Do You Want Partners? 63

Why You Might Have One or More Partners 63

The Partner Has Money 64

The Partner Has Expertise That You Lack 67

The Partner Has Contacts 67

The Partner’s Personality Complements Yours 68

The Seller of the Business Can Be Your Temporary Partner 69

The Part-Time Family Business Has Grown Up 70

Your Down-and-Out Relative Needs a Job 70

You Want to Include Your Best Friend in Your Deal 71

People Who May Help You Find Potential Partners 71

Stay Out of Trouble with the Government(s) 75

Companies in the Business of Being a Partner 78

Venture Capitalist 79

Small Business Investment Company (SBIC) 79

The Form That Your Partnership Should Use 80

The Business Form Choices 81

General Partnership 81

Limited Liability Company (LLC) 82

Corporation 83

What If You Go It Alone, without a Partner? 84

More Information on Forms of Doing Business 85

CHAPTER 5 Technicalities of Buying a Business 87

Buy Just Certain Assets of the Business 87

Cash 88

Accounts Receivable from Customers 88

Other Accounts Receivable 89

Inventory 89

Equipment 89

Bulk Sales Law 90

Assume the Liabilities of the Business When You Buy the Assets? 90

The Seller Takes on Risks, Too 91

Using the Business Debts in Your Negotiation 92

Buy the Business as One Package—A Corporation 92

APPENDIX A The Business Plan 95

What Is a Business Plan? 95

Why Every Business Needs a Business Plan 96

What Is the Format of a Business Plan? 97

Using Professional Assistance in Preparing a Business Plan 99

Help in Reading This Sample Business Plan 100

APPENDIX B Finding Investors and Navigating the Regulations 131

Securities and Exchange Commission Brochure 132

Active Capital—Frequently Asked Questions 149

What Is Active Capital? 149

Who Needs Active Capital? 149

Who Manages Active Capital? 149

How Is Active Capital Different from Other Internet-Based Investment Programs? 150

Can Any Investor Enroll with Active Capital? 151

Can Any Entrepreneur Enroll with Active Capital? 151

How Much Does It Cost to Enroll with Active Capital? 152

How Do Active Capital Fees Compare to “Go It Alone” Costs? 153

How Much Capital Can Be Raised Using Active Capital? 153

How Much Does Active Capital Itself Lend or Invest? 154

Do I Need a Lawyer to List on Active Capital? 154

If I Fill Out My Form but Do Not Post It Right Away, Do I Need to Sign Up Again? 155

After I Have Filled Out All My Forms, May I Change My Answers? 155

Must I Notify Active Capital After I Have Made a Deal? 155

Can I Use Active Capital If I Am a Canadian or Other Non-U.S. Company? 156

Can I Get Other Forms of Non-Equity Financing through Active Capital? 156

How Do I Learn When Potential Investors Read My Plan? 156

How Many Investors May Review My Plan? 157

Do All Investors Demand to Play a Role in Each Company? 157

How Can Lawyers or Accountants or Consultants Register on Active Capital? 158

Can I Register on Active Capital if I Have Filed for a Public Stock Offering with the SEC or

Have Not “Blue Skyed” in Every State in Which I Am Seeking Investment? 158

State Securities Regulations Administrators 159

APPENDIX C Small Business Administration Loan Programs 167

Basic 7(a) Loan Program 168

What SBA Seeks in a Loan Application 169

Eligibility Criteria 170

Small Business Size Standards 170

Eligible Businesses 173

Business Types and Applicants with Additional Considerations 173

Ineligible Businesses 176

Use of Proceeds 177

Ineligible Use of Proceeds 178

Availability of Funds from Other Sources 179

Character Considerations 179

Other Aspects of the Basic 7(a) Loan Program 179

Maximum Loan Amounts (Updated as of 10/1/2004) 180

Interest Rates Applicable to SBA 7(a) Loans 180

Percentage of Guaranty on 7(a) Loans 181

SBA Fees for 7(a) Loans 181

Fees Associated with SBA Loans 181

Combination Financing 182

Prohibited Fees 182

Prepayment Penalties 183

APPENDIX D SBA Forms 185

INDEX 217