Dave Says: Avoid the Business-Killing-Grind

Townhall.com ^ | November 1, 2013 | Dave Ramsey

[Kaslin]

Dear Dave,

I have an opportunity to buy a small business. What should I look for and what things should I check on before I make my decision?

Al

Dear Al,

The first thing you have to be absolutely certain of is that you’re going to wake up every morning and be excited you get to go to work again. Business owners must be passionate about their line of work because they’re going to be involved in each aspect of it every single day. Your vocation needs to be a vacation. Otherwise, it becomes a constant grind, and when that happens you’re in trouble.

As far as buying a business is concerned, you’ll want to take your time and really dig into things. In many ways, a business is only worth the income it creates, and just because it has a great location doesn’t mean you’ll make money. Who cares if they have a great name in the community if the business doesn’t generate an income? The same thing goes for having a brand everyone knows. If they’re not monetizing it, who cares? It all comes down to the net profit of the business.

Sometimes people buy businesses on multiples of gross sales before expenses. You may know enough about that particular business to understand that you run it for a certain number of percentage points of the gross. In that case, you’ll know what your profit will be. But most of the time when buying a small business, especially if you’re a rookie, you need to concentrate on gross revenue, expense details and the profit generated as a result.

Once you’ve done that, you’ll want to ask what you will make on your money. If you’re going to take on the risk of a small business, you want to be able to make at least 20 percent on it. In other words, if you buy a business for $100,000, it needs to make at least $20,000 a year.

The least it’s worth is called book value. Once you own the business, if you collected all the receivables, sold off all the equipment and inventory then closed the business, what would you have in your pocket? That’s the book value. If the current owner has $40,000 in inventory, $30,000 worth of equipment and $30,000 in receivables, the book value would be $100,000 just if you close it. Those are your floor and ceiling values. Somewhere in between you’ll find a fair price.

And remember this: If someone says a business does $65,000 a year, but they only pay taxes on $40,000, that means all they made was $40,000. If they don’t report it to the government, it doesn’t count. Don’t pull that under-the-table kind of stuff. A business is worth what is reported to the government, so take a good, hard look at the tax returns.

Lastly, do some research and find out if there’s someone in the same business, in another city, who would mentor you for a while. It just might be worth the price of a plane ticket to pick their brain and listen to what they have to say. Chances are if they’ve been in business for a while, they know the ins and outs of the industry.

Good luck, Al!

—Dave

Dear Dave,

I have a small business doing work on houses. We have lots of repeat business, but sometimes people don’t pay and we have to drop them as customers. Do you have any advice for avoiding these situations?

Steve

Dear Steve,

Virtually every small-business owner runs into this problem. The truth is collecting isn’t a customer problem; it’s a sales problem on the part of the business.

When we sell advertising for my radio show then have trouble collecting, it means we sold the account improperly. Now, what is a properly sold account? A properly sold account is one in which we approached a qualified customer who had money, and the relationship was constructed in such a way that they realized from the beginning paying us on time was an –important—even vital—part of the relationship.

When we sit down with potential advertisers, we make it clear that we will bill them exactly on the 25th of the month. We also stress that we expect to be paid within five days. If we don’t have your payment by the first of the next month, you’ll be getting a phone call. Then, if you don’t respond to the call by the 15th, you won’t advertise with us ever again.

That may sound harsh, but I believe a thorough understanding is essential in all business transactions. It keeps things professional and eliminates a lot of unnecessary stress for you, your team and your bottom line!

—Dave

[donmeaker]

The key to a small business, is on most days, have the discipline to only work a half a day.

5am to 5pm, 6am to 6pm, 8am to 8pm and so on. Tt is less important which half of the day you work.

[driftdiver]

Daves right, collections is a sales problem.