Finance & Grow Your New Business. Angie Mohr

years

       ROI = 24,192 ÷ 50,000 ÷ 5 = 9.68%

      The option to purchase the existing business yields a return on your $50,000 investment of 9.68 percent, while the start-up would only yield 5.27 percent. All other things being equal, purchasing the existing business makes more financial sense.

      Just to reinforce the concepts, try calculating the roi analysis if all cash flows were the same but you had to invest $95,000 to purchase the existing business. Would this be the better option? The answer is no. If you have to invest $95,000 of your own money to purchase this business, the roi drops from 9.68 percent to 5 percent, thereby giving you less reward for a higher risk than starting a business from scratch.

      What’s Right for You?

      As we have discussed in this chapter, there are many considerations when you are deciding whether to start a business from scratch or to purchase an existing business. Many of those considerations relate back to your personal and business goals and will be determined by the reasons that you want to be a business owner in the first place. You will need to balance those goals with solid financial analysis to determine which option will give you the best opportunity for success.

      Chapter Summary

      • Building a business, managing a business, and working in a business are three very different activities and it is important that you analyze which ones are most important to you before you start any business.

      • The two ways to become a business owner are to build a business from scratch or to buy an existing business. Each has its own pros and cons.

      • Calculating the discounted cash flows of each business option will ensure that you are properly comparing future cash flows with each other.

      • The return on investment is the amount of funds available to the owners of a business after all the expenses have been paid.

      4

      Getting Your Personal Finances in Order

      Before you start your business, you need to make sure that the rest of your financial house is in order.

      Introduction

      One of your personal goals may be to make enough money out of your business to be wealthy, or at least be comfortable. You may see starting a small business as a way out of your current financial woes. This is a very dangerous way of thinking. You are likely to manage your business the same way you manage your personal life. If you have problems managing personal debt, that may be true in your business as well. If you don’t know how much insurance you need to cover off your personal assets, you may under-insure your business assets and unknowingly be exposed to risk.

      It is important to clean up your own financial house before you start or buy a business. A bank will undoubtedly review your personal financial situation before lending the business any money. Suppliers who extend your business credit may also want to review your credit history and personal wealth. Your personal financial situation might end up crippling your business’s ability to attract investment capital. From a more practical perspective, if you don’t have your personal financial life under control now, where will you find the time to do so while building your business empire?

      Integrating your personal financial planning into your business planning gives you a more holistic and global view of your entire financial life and will help you to define your financial and retirement goals.

      Case Study

      Craig and Marnie discussed the implications of being business owners. Craig was looking forward to the adventure but Marnie had some reservations.

      “We still have so much credit card debt. I doubt the bank will lend us the money we need to buy into this business.”

      “Why don’t we go talk to the bank about consolidating our credit cards?” said Craig. “We have some equity in the house that we’re not using so maybe the bank can help us out.”

      The next day, Craig met with his accountant, Vivian. Vivian confirmed Marnie’s suspicions that they needed to re-arrange some of their personal finances before they could approach a bank or another lender for funding to purchase the business.

      Vivian recommended that they increase their mortgage to be able to pay off their revolving debt, namely, their credit cards.

      “Lowering your revolving debt will increase your credit score,” Vivian said, “and that will make a bank more likely to lend you some of the capital you will need to invest in this business.”

      Craig was more confident than ever that he was going to be able to buy into this business, but Vivian brought up some other issues that he hadn’t thought about.

      “What will happen if you can’t work in the business? How will you support Marnie and the baby?” Vivian asked.

      Craig hadn’t thought about this before. He scheduled an appointment for the next day with his insurance agent to ensure that he would have adequate coverage for any adversity that may arise.

      Your Retirement Goals

      So you’ve decided to jump into the role of entrepreneur. You have fantastic vision and insight and are looking forward to managing and growing your business for a long time to come. Have you thought about what happens then? Do you still plan on coming into the office every day at 9 a.m. when you’re 60? 70? How about 90? Most likely, you have at least a vague concept of what you want to do when you’re older. You may even have decided that you want to make enough money in your business to retire when you’re 40 or 50.

      Analyzing your retirement goals involves more than just vague concepts. It is the basis for your business and personal financial plans. If you’re planning that your business will provide you a steady income for your working life and then a small gain on sale when you sell, you need to ensure that these funds will be sufficient to meet your financial needs when you retire, otherwise, you’ll need to keep working longer than you had anticipated.

      The minimum financial goal for your retirement is to be financially independent. Financial independence means that you will be able to live off your financial capital for the rest of your life without working, if you wish.

      Let’s look at an example to illustrate how this works. We will walk through a simple example, which will exclude some complexities that exist in real life, like the impact of taxes and income from other sources such as pensions. When you are making your retirement calculations, I highly recommend that you do so with the assistance of your accountant or independent financial adviser (by independent, I mean someone who doesn’t make commissions from the products he or she sells you).

      Start by getting a handle on how much income you need per year to live on after you have retired. Keep in mind that you will have (hopefully!) no debt or mortgage payment and that your assets will be owned free and clear. You will simply have your ongoing living expenses (e.g., property taxes, utilities, food, clothing, medical) and any money that you need to carry out your retirement dreams, such as travel costs. Your post-retirement income needs are likely to be much lower than your current ones. Let’s say that you have decided that you want to have $50,000 per year to live on when you retire. You are 35 right now and plan on retiring when you are 60. Therefore you have 25 years to save for your retirement. You want to make sure that you are being conservative and plan to live until you are 90 years old, so you will need the $50,000 per year for 30 years. You have life insurance and therefore have no need to have any cash left at death. There are two questions that need to be answered mathematically:

      • How much will you need to have saved by the time you are 60 in order to meet your income requirements? and