Understand When You Need to Create a Business Plan
Published April 28, 2010 | 
I continue to be amazed how time after time Entrepreneurs will walk into their commercial bank, sit down with the commercial loan officer and try to explain their need for a loan to help them fund either the start up of their business venture, expansion, or more recently, their pressing and legitimate need for working capital during the current recession. 
The response recited to them by the banker, the same in almost every case, is the need for them to develop and prepare a business plan for what they are trying to accomplish, whether start up, business acquisition, business expansion, or maintain current operations.
The business plan requirement has been standard operating procedures for some U.S. government agencies including the Small Business Administration which works directly with the lenders by guaranteeing commercial loans approved and funded to Entrepreneurs for their small businesses by commercial banks.
I cannot imagine why any Entrepreneur would knowingly asking for a loan without a detailed business plan to present to everyone involved (including themselves) with the loan approval process, providing answers to all their questions and issues with the related risks.
How can any entity from the smallest, to ones the size of the U.S. Automobile Manufacturers (General Motors, Chrysler) ask for any amount of money, especially from the people of the United States without a detailed 
Business Plan outlining the funding needed, defining the “use of proceeds” for the funding, and what they think the results will be, based on a set of general assumptions developed through experience and research (i.e. jobs created, retained, capital formation, etc.).
In looking back over the events of the early recession, the auto makers behaved like they had been told by someone to just show up, ask, and no problem, they would get the funding they wanted with not too many questions in the process, but to their surprise they were told to come back when they had prepared a business plan explaining why they should get the loans and how changes to their business models if any, would result in positive cash flow, associated net profits and positive effects to the balance sheet. This is one of the greatest examples ever, that not having a formal Business Plan is a major weakness in all but the simplest and smallest of self-funded business models.
A detailed Business Plan was also missing for the stimulus package and many questions about the package details were simply met with shrugs and statements like “details would be provided” after funding has been approved, which makes it no wonder that consumer confidence has been shaken to extremely low levels.
Business Plans are never easy to prepare and shouldn’t be taken lightly as a major business tool, even after one has prepared hundreds of detailed plans for projects from businesses representing all major industries and levels of spending, 
but the planning principles remain the same, just as the principles of successful business models remain the same, resulting in profit, cash flow, increased equity, and associated wealth and job creation.
You should always remember that Business Plans should be prepared to provide feasibility information for the process of determining whether funding should even be pursued at all, and if so, what type of funding, and successful Business Plans not only help Entrepreneurs and businesses potentially realize their greatest dreams, but also avoid their worst nightmares as well.
How to Structure the Business Purchase Transaction
Published May 14, 2009 | 
As the potential buyer of a business, it helps for you to understand the kind of transaction that you are connecting to, as businesses can be bought by either buying the assets of the business or buying the stock of a corporation, and either way, you end up with the business. Most deals are structured as a purchase of assets as opposed to stock in order to minimize the chance of the liabilities of the seller becoming the obligations of the buyer, also, there may be better opportunities for you as the buyer to deep appreciate the purchased assets and take tax write-offs when you purchased the assets.
The first thing you’ll want to do is ask about the current legal structure of the business you are thinking about buying, and the most common legal structures include the sole proprietorship, the general partnership, the corporation, the “s” corporation, and the limited liability company.
People get confused when they hear that the sale of the business will be an asset only transaction and they usually react by saying, “but I want to buy the business itself”, but assets can include anything the business owns including its name in the ”goodwill” value it has built up, therefore, you are in fact getting “the business” but you are able to separate much of the past liability issues that might become future issues for you to deal with since you are not taking on the “business.”
A sole proprietorship is a business owned by one individual and in the eyes of the law, there is essentially no business at all, and the owner is considered to be a self-employed individual carrying out a trade, and while there can be employees, the business is the owner and there is essentially no “business” separate from the owner themselves. If the business you are investigating is a sole proprietorship the transaction can only be an asset base transaction since there is no business (with stock or shares of ownership) to purchase, and in this case, you would simply set up on another legal structure of your choice and then transferred the assets into that business.
With a partnership, like the sole proprietorship, there is also no “business” and the partners are considered a group of self-employed individuals carrying on a trade or practiced together, therefore, there is no business or stock to be sold, and in this case, again, you would need to set up your own company structure and transferred the assets you purchase into that business.
With the corporation, there is a separate legal entity or business, and in this scenario, you and the seller of the business have a choice. You can either purchase the assets of the corporation and rolled them into a new business structure that you set up or you can purchase the stock of the corporation and actually own the business. If you have this choice, it usually works to your benefit from a liability and taxation perspective to buy the assets of the business and not the company itself, and this is true because when you assume ownership of the company itself, you assume all of its past, present, and future liabilities (debts, liens, lawsuits, etc.) that the previous owner may have created.
Many small, privately held companies are structured as “s” corporations, and from a business sale transaction perspective, this is no different from the structure of the corporation and you can therefore either purchase the assets of the corporation and rolled them into a new business structure that you set up or you can purchase the stock of the corporation and actually own the company. In most cases, you don’t want the shares of the company, where you in here at all of the assets but also the liabilities as well.
A limited liability company (LLC) is a legal structure under state law and each state has its own LLC act. As a business entity, most LLC’s are structured and legally recognized for tax purposes as a partnership, but some however, elect to organize as a corporation for tax purposes, and if you find out that the legal structure of the business you are trying to buy is an LLC, you need to inquire about the formation of the LLC, whether it is a partnership or corporation, and again, for a partnership you can only buy the assets so buying the business itself is not possible.
In most cases, you as a buyer are wise to consider an asset only sale for the liability reasons alone, also, if shares are purchased, the assets on the books may have been fully depreciated 200 there may be no further depreciation allowance available for tax purposes. There may be some advantage to purchasing shares, however, if the company has previous tax losses that you can use against future profits, and as always, due to the complexity of tax laws you should seek competent tax advice from an accountant or lawyer.
Negotiating the Business Acquisition Offering
Published May 13, 2009 | The following is a time frame for the business acquisition negotiations:
- Hire a Broker 1 week
- The Search 16 weeks
- Letter of Intent 2 weeks
- Due Diligence 4 weeks
- Renegotiation 1 week
- Redraft of Agreement 1 week
- Closing 1 week
- TOTAL 26 weeks
After you have taken all of the necessary steps to gather information, review the financials, determined the value and price that you are willing to offer and discussed the situation with your broker, lawyer and accountant, it may be time to prepare an offer. This is only the first stage and since the seller only knows of his asking price you should be prepared for a rejection, but don’t worry, as its all part of the game. Some brokers will encourage and even pressure you a bit into drawing up an official offer to purchase and you may want to consider drafting a Letter of Intent instead of going to the costs and delays of drafting a detailed formal Offer to Purchase.
Have your broker advised the seller that a Letter of Intent is being drafted to demonstrate your good faith and to be used as a foundation to begin formalized negotiations, your attorney should draft your Letter of Intent, and while your attorney may want to dress it up a bit, you should keep it short, simple and without all of the legal “mumbo-jumbo.”
Even though you have completed the evaluation process the question remains about how much to offer and what your Down Payment should be. You have two options including (1) offer a price close to your evaluation, and (2) offer an amount quite a bit less than you are prepared to pay and go back and forth. The first approach is better for several reasons including you will show that you are a serious buyer and you are not interested in an endless negotiation process, and there will be many other issues to negotiate and you want to try and settle this part quickly and move on to other issues.
Brokers will prepare their clients (Sellers) for offers that fall below their asking price and in general, the broker will be aggressive if they get any offer within 15% to 25% of the asking price, so keep this figure in mind, as the good news is that there is so much still for you to do within the negotiation that there is no need to worry, as you’ll have plenty of goodies to offer the owner.
With these considerations the suggestion is that you offer your evaluation less 5% to 10% but not less than $10,000 below your value, and insofar as the down payment, you want to offer as little as possible as was outlined previously but it depends on your financial situation. Do not allow your broker to influence the amount as this is your money, and whatever the percentage, cut it in half to start, so if they ask for 50% off for 25% of your total price. Again, this is just a starting point and like everything else it will be negotiated, so do not offer an amount that you do not presently available and be prepared for an outright refusal.
In their remaining balance of the business after the down payment will be financed by the owner, take 10% to 20% off the interest rate and add 30% to 50% to the term, and if they are asking anything over 10% in less than five years always go to 9% and five years as a minimum.
Do not present the letter to the seller directly, have your broker do so and confirm back when it will be delivered, and now is the hard part because you are to do nothing, absolutely nothing until the expiration date of the offer. This means no calls to the broker at all and if the broker contacts you in the interim and wants to discuss anything except the offer let them know that you will only do so once the offer is received back either signed, refused or as a counter offer. This is a key tactic and if the broker feels that you are anxious or if they have any conversations with you, they may inadvertently send mixed signals to the other party such as your willingness to up the offer recently.
When you do hear back there are only three possibilities including acceptance, total rejection, and a counter offer. Chances of acceptance are rare and it’s great that this happens and don’t convince yourself that something must be wrong or that you should have offered less, as this may be the first offer or even the best so far or maybe the seller just wants out already.
If there is a total rejection of the offer you have to consider your options and the best way for you to do so is have your broker find out what, if anything is acceptable and this at least gives you a starting point. You may get a response that the seller was insulted by the offer, but that’s okay, you’re not! Group called the seller and explained that you are prepared to make another offer but if you do it will be a final and that if you walk, you are not coming back to the table and this is the reasoning, if the seller is willing to let you walk at this very early stage without even extending a counter offer then you can tell by their actions that negotiating with them is going to be nearly impossible since there is so much else to cover.
With a counter offer, look at each point for acceptance, rejection and how close you came on each of the individual points and ask does it appear that they are more flexible on balance of sale amount than on down payment? What was the counter in percentages? Whatever their counter is, keep the accepted points if any, and prepare another Letter of Intent. With a Letter of Intent, the only major point is the purchase price and despite what others might say, if you want to make another offer move right to your evaluation, as it shows good faith and if you cannot begin to get close after this you may be fighting a losing battle, and at the very least, it will almost certainly elicit a counter offer because you moved up quite a bit.
Most brokers are attorneys will try to avoid having you and the seller negotiate directly even in their presence, and others will go as far as to flatly refuse direct negotiation between the parties, and they may try to have all discussions go through them which is a monumental waste of time, so you have to deal with this immediately. Advise the broker that if they are buying the business for you then they can dictate the agenda and who we’ll or who will not be involved in the negotiating process, however, for as long as it is your money that’s being spent in you and no one else, will determine who will handle negotiations, and do not waiver on this one bit.
The final stage of the negotiation process is to move toward the creation of the Offer to Purchase agreement and this document will be prepared by your attorney will cover each of the significant points of the offer you have negotiated.