2 Valuable Lessons Learned About Business Acquisition Loans

 

During our first talk, the gentleman made quite an impression. Not even knowing much about the business he was looking to buy, my focus was on how polished this gentleman was.

I received his call cold one day. He called to inquire about getting a loan to buy a business. This would be my first business acquisition loan ever. I wasn't completely in the dark about business acquisition loans though. I had read a few 'How to Buy a Business' books before. Also, I was knowledgeable on underwriting a business loan.

Fast forward a year and the deal turned out to be a failure and here's a few reasons why.

• Character is more than the money you have in the bank.
• The gentleman and I met to discuss the deal more. Based on his personal net worth, he was able to afford the business loan to buy the business. I had failed to analyze his ability to operate a business though. He didn't even have a business plan explaining how he would operate the business.

• Lack of due diligence
• In my haste to do this deal, I failed to encourage the gentleman to do a complete review of the business. The gentleman trusted in the previous owner's opinion. He should have asked for:
• 3 Most Recent Years of Business Tax Returns
• 3 Most Recent Years of Balance Sheets and Income Statements
• Current Business Licenses
• Customer Lists
• Accounts Receivable Days Outstanding Report as of Most Recent Month End
• Accounts Payable Days Outstanding Report as of Most Recent Month End
• List of All Business Advisors (Insurance Agent, Banker, Accountant, Attorney, Consultants)
• Deed of Trust (the previous owner owned the building)

• Use of a Business Broker
• I failed to bring in an experienced business broker on the deal. Business brokers work with sellers and represent them in a business sale. Business brokers work with both seller and buyers. They help to structure a deal that lowers downside risk.
• The business seller in this deal owned the business for close to 20 years. In a little over a year, the business failed due to mismanagement.
• I would like to think that a business broker would've set up a deal with conditions of performance for the buyer. These conditions would have lowered the downside risk for both the buyer and the seller.

Although I would go on to do several more business acquisition loans, this first one left me with a few scars. But, I learned a couple valuable lessons:

• If a deal seems too good to be true, then it's a BAD DEAL more than likely.
• Money is a great tool to have, but you better have common sense and self discipline to go with it.

Are you looking to sale or buy a small business?

Searching for advice and guidance during the due diligence phase?

Please consider us at Guiding Light CFO.

We would love the opportunity to work with you. We make sure you don't end up in a bad deal.

3 Ways Business Financial Management Consultants Keep Your Small Business From Crashing

As I sat with her, I could feel the weight of her frustration and lack of clarity. With each passing second, I wanted to leave and never look back. For one, I didn't want to have to visit and give her the news anyway. I was hoping to send a letter (yes, this was over 15 years ago and we still sent letters in mail), an email, or leave a voicemail. Anything, but having to visit and talk with her face to face.

After getting to her place of business, I delayed as much as possible. I was full of fear and anxiety. After about 10 minutes of small talk, I jumped in with both feet. I told her that her business loan was in default and non-performing. Also, if she didn't make a payment to bring the loan current by the end of business day, I'd have to send her to collections. What happened next, I couldn't prepare myself for.

Guiding Light CFO

I would have expected her to become silent or even start crying. Instead, see became angry. She began telling me what I wasn't going to do. I wasn't going to take to her house (which she pledged as collateral for the business loan). I wasn't going to shut her business down no matter how much she was behind on payments. Luckily, I had already been through enough of these meetings to where I didn't take anything she told me . More than anything, I felt helpless. I wanted to switch sides and help her rather than being on the side that I was on.

My job was managing a CDFI loan fund. We focused on making microloans to minority and women owned businesses. 75% of the loans within all the funds I managed at the time were severe late pays. This means they were in the early stages of being non performing loans.

What's the point in telling you this story?

Remember, I wanted to help rather than harm this woman-owned small business. But, due to my job at the time, my hands were completely tied. Now, after some time and life experience, I'm on the other side and helping small business owners. I help small business owners overcome difficult business situations such as:

1) Improving Cash Flow

2) Having More Cash Available in the Bank

3) Growing the Business Based on the Owner's Goals

Guiding Light CFO

I'm a small business financial management consultant with 15+ years of experience. I provide value to small business owners in 3 primary ways:

1) Help to Make Sense of the Numbers in Plain English

2) Train You to Take Control of Your Business By Knowing Your Numbers

3) Encourage Motivation and Action to Grow and Expand Your Business Based on Your Goals

What motivates me to provide this value? I'm motivated to help those small business owners that have a good business, but they need help to make it great. What's a great business, you ask? A great business is a business that accomplishes the owner's goals.

Guiding Light CFO

If Your Business is Less Than 2 Years Old With No Employees and Minimal Sales, Don't Get A Business Loan

Is Inflation Out of Control Or What? 

As I write this entry, we're on the cliff of the next economic recession. The Feds have raised the Federal Funds Rate exponentially within the past year or so, and we're beginning to feel the effects of these actions in making money more expensive to borrow. And I mean everything is costing more (gas, housing, cars, etc.). Now, let's turn our attention to small business financing (specifically start ups and early stage businesses) and see how this doesn't encourage confidence in getting a business loan. 

Now is Not The Time to Play Around With Borrowed Money

When I've had the urge to play a hand or two of Poker Texas Hold Em, I'll typically go into a hand with a predetermined amount of money that I'm ok with losing. Beyond this, I'll fold in a heart beat depending on the strength of my hand in conjunction with the calls and raises. In other words, you have to be able to know when to hold them and when to fold them (here's my shameless Kenny Rogers plug) 

Oddly enough, many small business owners don't know when to fold... I don't know... maybe it's because they're not Poker players. Here's what I mean. As a small business owner who has yet to make any real money (take the last year you earned a W2 income and double it), who hasn't hired at least one or two employees (either part time or full time), and at least earned between $100,000 to $150,000 in gross sales, then you're doing yourself REAL BAD if you obtain a business loan. Here's why: why create stress and worry for yourself about making monthly loan payments (principal and interest or even interest only) at high interest rates and you're barely holding the business together? Your time is best spent in creatively thinking and taking action of ways to earn more profit and sales with the resources you already have. 

Don't Fall For the New SBA Hype

I'm a huge fan of SBA loans for small businesses. Both the 7a and 504 programs; I think they're great and deeply needed. Within the last several months, the SBA has relaxed their lending standards for small businesses with the stated goal of increasing more loans to businesses that traditionally haven't had much access to capital. Again, I support this much needed change, but cautiously though. Business funding like most things in life typically work out well for those that have discipline and foresight in terms of managing and growing their businesses prudently and diligently. However, just as the recent PPP and EIDL fraud has shown, there are many out there that are just looking for a quick way to access money for purposes that aren't focused on managing and growing their businesses. Not here to hold anyone's hand or keep them from doing what they've already made up in their minds to do, but I offer some guidance in this regard: similar to marriage, it's easy to get in ,and hell to pay to get out. If you do decide to obtain a business loan for your business, make damn sure you've done your homework first. Ask yourself: 

• How will I pay this loan back if the business doesn't make it? 
• Am I willing to work at W2 job just to payoff this business loan? 
• Am I willing to give up whatever real estate or personal property I may have pledged to get the loan in order to pay it off? 
• Am I willing to be on the hook personally or someone I may have added to the loan as a guarantor be on the hook to paying the loan off? 
• Can the business really grow and make enough profit to pay me and my employees a livable wage while at the same time covering all other operating expenses, taxes (local, state, and federal), and loan payments? If so, how much margin for error do I really have? 

Before jumping headfirst into a business loan commitment, make sure you do the math, and make damn sure the math adds up right. 

Until next time... 

Do You Really Need Bank Financing to Start Or Grow a Small Business: Back To The Future Edition

 

As I sit here, I'm in shock and awe of how long it's been since I've updated a post on this blog... geez... 

A LOT HAS HAPPENED AND IS HAPPENING... It's a rather wet Saturday evening on a July 4th holiday weekend. Where should I begin? Sure, let's start with what I've been up to especially from a business perspective. 

For well over 10 years now, I've been operating a tax prep and advisory firm, Jericho Tax Consultants. For the most part, we service individuals and small businesses that need expert, yet affordable tax preparation and advisory services. We also provide tax resolution services at both the state and federal levels. I've been involved with the tax preparation, advisory, and resolution industry for damn near close to 20 years. I really enjoy it... weird, I know. 

For the last 5 years or so, I've also been operating a CFO advisory firm, Guiding Light Financial, Inc. We focus on providing guidance and advisory services to small business owners to help them to grow profits and more importantly cash flow. This business really gained traction during the aftermath of the CV19 pandemic due to the many small businesses that were decimated due to lockdown orders and ultimately to the change in overall business environment. It's safe to say that we're living in the new normal. If anything, this just deepened my love and passion for helping and aiding small businesses to succeed, survive, and thrive. 

Last post on this blog, I was looking to ramp up the value I could offer the small business marketplace specifically those that are having trouble obtaining bank financing to grow and expand. Well, over the years, I've shifted my philosophy in this regard. I no longer believe it's prudent for small businesses to obtain bank financing (conventional, SBA, or private lending sources) especially in the start up or early stages. I'm of the mindset now that if the business model hasn't been vetted at least a year or so from bootstrapping (i.e. self funded), then switch up and pivot. Here's why...

After experiencing the ups and downs of life (wife, kids, mortgage, etc.) as well as the fragileness of it (see 2020 and 2021... need I say more), you better make damn sure that if you obtain bank financing or some fintech lender financing to start and operate a business, you better be damn sure you're working with a viable business model (i.e. you've figured out how to offer value to the marketplace and receive a profitable return for your efforts). How do you achieve this? You bootstrap and prove out the business model on your own dime and time. If you don't have the money to take this risk (either personally or borrowing from someone which I don't recommend), then I'm sure you have the time. I do strongly agree with putting together a business plan even if it's a one page business plan (see the $100 Start Up book). Once you have your one page business plan, then it's GO TIME!!! Pick up the damn phone, send an email or two, upload a Facebook, Twitter, TikTok, or  Instagram post, or buy some Google or Facebook ads. 

Before closing, let me say that I'm not completely against obtaining bank financing for small businesses... I guess that now with the passage of time and experiencing more than a few clients have some setbacks, I'm a little more selective about it. Just as most things in life, there's a time and place for everything. 

Hope to post more regularly now (at least, once a week). 

Oh yeah, you can provide more support by doing the following: 

• Like the Guiding Light CFO Facebook page (click HERE)
• Become a Twitter follower (click HERE) 

Stay tuned and thanks for supporting and reading :-) 

How the Tennessee - Alabama Game Proves that Management Failure is Business Failure

As I continued to cringe the auto updates I was receiving on my ESPN app on the Tennessee - Alabama football, I began to think about the many readings and experiences I've had in dealing with businesses that have gone out of business. Crazy to think that a college football game can inspire such thinking, but what can I say, Tennessee hurt me deep. 

In spite of hiring a new coach a little over a couple of years ago (Coach Jeremy Pruitt) from the SEC King himself, Nick Saban, there came a time of refreshing and hope. Hey, maybe we would live up to our legacy of being in the top tier of SEC football and no longer being bottom feeders... at least I thought. After watching yesterday's beating and thinking about the why and how business's fail, something became crystal clear to me. 

The Number One Cause of Management Failure in Business

One of my favorite books, The Business Doctor by Dr. Arnold Goldstein, talks a lot about what causes businesses to fail. To me, he's the goat on this topic. Going back to the TN-Ala game, I asked myself: is it the quality of players? is it the schemes and game plan? Heck, is it the mascots? It's easy to say it's the coach or the players, but I believe it goes deeper than these things. According to Dr. AG, the number one cause of management failure in a business is the failure to have the foresight to recognize the seeds of one's own destruction and to ultimately do something about them before it's too late!!! How does this relate to the game? Well, it goes all the way back to how we did Phil Fulmer in his last few seasons as head coach. Rather than help him into making a smooth transition by identifying a successor and allowing him to groom and mold him, we just dropped him like a bad habit. Because of this, we've been on the coaching merry go round and haven't even gotten close to experiencing true TN football. 

One of the glaring voids I've noticed with many small business owners is the lack of having a succession plan in place or even an emergency plan in case something terminal or at worst fatal happens to them. We get excited about starting and operating a business, but we hardly ever consider the possibility that we may not get the chance to see the business achieve the heights that we may have experienced in our dreams. Don't wait until it's too late... start with the end in mind. Plan for the end while at the beginning: are you envisioning a sale of the business or transferring the business to an heir? Do you have the proper commercial insurance packages in place especially key person life insurance? 

 

How to Avoid Chaos as a Small Business Owner

After watching the Lakers completely destroy the Heat in Game 1 of the NBA Finals, I was laying in bed before dozing off thinking about some of the small business owners that I've worked with in the past and how I could see that there were two very distinct types of owners: doers and thinkers. Very rarely have I encountered individuals that can both do and think at high levels. Let me clean this up a bit because I don't profess to be a high functioning doer AND thinker myself. You let my wife tell you, she'd say all I do is think and don't DO ENOUGH. And yes, I'd agree with her for the most part. 

Oddly, when we're coming up in age, the difference in being a doer and thinker impacts us in a sneaky way and before you know it, you're either labeled a doer or thinker but rarely both. In the arena of being a small business owner, you will often discover that you need to be both a doer and thinker or at least have the wherewithal to grow into these skill sets if you desire to have a business worth having.   

Action With A Purpose

While playing college basketball, my coach would often tell me to practice 'at game speed'. I was like, what do you mean, Coach? It wasn't until after my playing days were over (and after 2 ruptured patella tendons!!!) that I realized the deeper meaning of Coach's encouragement: don't just practice just to practice, practice with a purpose!!! In other words, I failed to realize at the time that I was practicing with the purpose of doing my role to help the team achieve our short and long term goals. It wasn't only about me and the improvement of my game only, but ultimately it was about the bigger picture. Again, I've observed over the last 20 years how the small business owners that worked with a purpose, with a bigger picture mindset, were the ones that not only survived, but thrived.

When you first get into running a business, you have no choice but to be a doer. Things have to get done and usually, you as the owner are the only person available to do them. As your business grows though you'll begin noticing that you have to start thinking things through before just jumping in to do them. This is when strategy and planning become important (asking yourself, why am I doing what I'm doing and to what end am I doing it?) and the charge of getting things done soon follows. 

Please sign up for the blog!!!

Fighting the Good Fight as a Small Business Owner

Last evening, I was looking up YouTube videos on "Top Business Ideas Post Pandemic" and I was able to find some great info... truly material content. I've had the privilege to work with small businesses in many industries over the last 20 years, and there's a certain kind of energy I get when working with small business owners to help improve and make their business better. Well, there's no shortage of helping small business owners during this pandemic because most are suffering in some way whether that's from a disruption in sales, the need for advice on financing, or maybe even being able to help provide some strategic consulting on both short and long term business plans. 

During this time, though, I've been intrigued by the small business owner's 'WHY"... in terms of starting and operating the business in the first place. I'm sure there're a lot of small business owners that have pondered this question over the last few months. I wanted to write a quick post to help those individuals that are thinking about jumping into the small business ownership arena either willingly or even for those that have been forced due to the pandemic. I hope this guide helps in making this choice a thoughtful yet actionable one. 

Know Your Why

First things first... you have to be clear on your "WHY". Before the pandemic, most of us were looking to jump into the small business ownership arena as an option rather than being the only choice you have to feeding your family, sustaining a certain way of life, or just plain ol' survival. In spite of these different reasons for starting a business, you still have to know your WHY. What do I mean? Simply, you must have a deeper purpose other than just saying I need more more or I want to buy a shiny, new toy such as a bigger home or luxury car. You have to tap into the deeper levels of yourself and implant a purpose that transcends both time such as operating a small business for not only the well being of my family, but for future generations once I'm worm food. Or maybe even founding a business to sustain the welfare of a family member or community that suffers from mental illness ailments that render these individuals unable to care for themselves and your business provides the resources necessary to take care of these individuals. Here's the lowdown: the purpose you have for starting an operating a small business has to be BIGGER THAN YOU!!!

Who Are You Serving? 

What will keep you going once you realize that running a small business is really hard and time consuming? Or what keeps you motivated to keep pushing when you have a string of bad sales days or maybe even weeks to the point that you don't get paid let alone having to worry about paying your employees? Or how about this one: you have to have a hard conversation with your spouse or partner about not being able to make the mortgage or car payment this month because you weren't able to close enough sales or maybe even had to refund an irate customer that threatened suit because your product or service delivery did not meet their expectations? What's keeps you going during this moments of absolute horror and shame as a small business owner? Quite simply, the customer, client, member, etc. Remember, you didn't get into business to serve yourself. Now, you may have came up with your product or service because of a personal dissatisfaction, but ultimately your small business exists to serve others and to serve them well. Thus, when you do encounter a day , week, month, or hell, maybe even a year like this, get outside of your own selfishness and remember who you're serving and to what end (hint here... it has to be more than just a transaction where you do just enough to get the customer's $$$). For more insight on the selflessness of business, check out an article I wrote CLICK HERE. 

What's the Solution? 

If you don't know, now you know... you are not only in business to serve others, but you do so in a way that helps to provide a solution to a problem that your client is having. Again, in watching the YouTube video the other night, it remembered me again that successful businesses are ones that provide relevant and actual solutions to problems that people are dealing with IN REAL LIFE!!! This ain't no game out here as if you needed reminding from how the pandemic as affected and impacted small business. Excuse my language here, but YOU BEST TO BE providing solutions and answers or you're going to get cancelled by the customer. Especially with the rise in artificial intelligence and automation, you may need to revisit the perceived and actual value that your product and / or service offering(s) provide to the client. Here's a lasting thought, your small business is only as good as the solutions / answers it provides to clients in terms of making their lives more fruitful, stress free, and overall more enjoyable. 

Hope you enjoyed this post. 

Please subscribe to my blog.  

Also, get ready for the new business planning course that I'll be releasing soon. 

THANKS!!!