Buy Your Own Business With Other People's Money

ROBERT A. COOKE, CPA, has been the owner or co-owner of three successful small businesses. He is the author of six books, including Doing Business Tax-Free and How to Start Your Own 'S' Corporation, both from Wiley.

• INTRODUCTION xiCHAPTER 1 The Good and the Bad of Owning Your Own Business 1The Fictions and the Facts about Owning a Business 2Fiction Number One: No Boss 2Fiction Number Two: Short Work Hours 3Fiction Number Three: You Will Have Lots of Money 4Fiction Number Four: You Will Enjoy thePrestige of Owning a Local Business 5Do the Advantages of Entrepreneurship Outweigh the Disadvantages? 6Decide on the Type of Business That Is Best for You 6Determine Your Preference or Need as to Geographic Area 7Consider the Hours of Operation 8Experience and Knowledge Are Important 8Pick a Business You Enjoy 9Creating Your Experience 10CHAPTER 2 How Much to Pay (Borrow) to Buy a Business 11How Much Is the Seller Asking? 11What Do Similar Businesses Sell For? 12What Is the Value of the Business’s Assets? 13Value the Assets at Their Book Value 14The Book Value of Equipment 14The Book Value of Accounts Receivable 15Inventory 16Patents and Copyrights 17The Book Value of Other Assets 17The Asset Called Goodwill 18The Capitalization of Earnings 19How to Determine the Real Net Income of a Business 19Determine the Price of a Business Based on Its Earnings (Income) 24Capitalization of Earnings and Return on Investment 26The Sales Multiplier 28Third-Party Information 29Solicit Information from Employees of the Business 29Check the Bank Statements 30When Real Estate Is Part of the Business 31In Summary, the Eight Methods of Valuing a Business 32CHAPTER 3 Sources of Money for Your Business 35Borrow the Purchase Price from the Seller 35The “Business for Sale” Ads 36The Seller’s Motivation to Sell 38Enticing the Business Owner to Sell to You 40Find Cash Inside the Business 41The Equipment Owned by the Business 42Intangible Assets 44Accounts Receivable 44Excess Inventory 45Actual Cash in the Business 46Personal Assets That Can Generate Cash 47Obtaining Money from Commercial Banks 48Choose a Bank That Is Small-Business Oriented 50Have the Requisite Experience 51Buy a Business That Has Loyal Customers or Clients 52 Buy a Business That Is in the Right Location 52Prepare Projections of Income and Expenses of the Business 52Your Presentation to the Bank 53Loans from Suppliers 55The Shortcut—Buy Out Your Boss Using His or Her Money 57Buy a Franchise, but Not with the Franchisor’s Money 58Friends and Relatives as a Source of Borrowed Funds 58The Government—The Small Business Administration (SBA) 69To Summarize 61CHAPTER 4 Do You Want Partners? 63Why You Might Have One or More Partners 63The Partner Has Money 64The Partner Has Expertise That You Lack 67The Partner Has Contacts 67The Partner’s Personality Complements Yours 68The Seller of the Business Can Be Your Temporary Partner 69The Part-Time Family Business Has Grown Up 70Your Down-and-Out Relative Needs a Job 70You Want to Include Your Best Friend in Your Deal 71People Who May Help You Find Potential Partners 71Stay Out of Trouble with the Government(s) 75Companies in the Business of Being a Partner 78Venture Capitalist 79Small Business Investment Company (SBIC) 79The Form That Your Partnership Should Use 80The Business Form Choices 81General Partnership 81Limited Liability Company (LLC) 82Corporation 83What If You Go It Alone, without a Partner? 84More Information on Forms of Doing Business 85CHAPTER 5 Technicalities of Buying a Business 87Buy Just Certain Assets of the Business 87Cash 88Accounts Receivable from Customers 88Other Accounts Receivable 89Inventory 89Equipment 89Bulk Sales Law 90Assume the Liabilities of the Business When You Buy the Assets? 90The Seller Takes on Risks, Too 91Using the Business Debts in Your Negotiation 92Buy the Business as One Package—A Corporation 92APPENDIX A The Business Plan 95What Is a Business Plan? 95Why Every Business Needs a Business Plan 96What Is the Format of a Business Plan? 97Using Professional Assistance in Preparing a Business Plan 99Help in Reading This Sample Business Plan 100APPENDIX B Finding Investors and Navigating the Regulations 131Securities and Exchange Commission Brochure 132Active Capital—Frequently Asked Questions 149What Is Active Capital? 149Who Needs Active Capital? 149Who Manages Active Capital? 149How Is Active Capital Different from Other Internet-Based Investment Programs? 150Can Any Investor Enroll with Active Capital? 151Can Any Entrepreneur Enroll with Active Capital? 151How Much Does It Cost to Enroll with Active Capital? 152How Do Active Capital Fees Compare to “Go It Alone” Costs? 153How Much Capital Can Be Raised Using Active Capital? 153How Much Does Active Capital Itself Lend or Invest? 154Do I Need a Lawyer to List on Active Capital? 154If I Fill Out My Form but Do Not Post It Right Away, Do I Need to Sign Up Again? 155After I Have Filled Out All My Forms, May I Change My Answers? 155Must I Notify Active Capital After I Have Made a Deal? 155Can I Use Active Capital If I Am a Canadian or Other Non-U.S. Company? 156Can I Get Other Forms of Non-Equity Financing through Active Capital? 156How Do I Learn When Potential Investors Read My Plan? 156How Many Investors May Review My Plan? 157Do All Investors Demand to Play a Role in Each Company? 157How Can Lawyers or Accountants or Consultants Register on Active Capital? 158Can I Register on Active Capital if I Have Filed for a Public Stock Offering with the SEC orHave Not “Blue Skyed” in Every State in Which I Am Seeking Investment? 158State Securities Regulations Administrators 159APPENDIX C Small Business Administration Loan Programs 167Basic 7(a) Loan Program 168What SBA Seeks in a Loan Application 169Eligibility Criteria 170Small Business Size Standards 170Eligible Businesses 173Business Types and Applicants with Additional Considerations 173Ineligible Businesses 176Use of Proceeds 177Ineligible Use of Proceeds 178Availability of Funds from Other Sources 179Character Considerations 179Other Aspects of the Basic 7(a) Loan Program 179Maximum Loan Amounts (Updated as of 10/1/2004) 180Interest Rates Applicable to SBA 7(a) Loans 180Percentage of Guaranty on 7(a) Loans 181SBA Fees for 7(a) Loans 181Fees Associated with SBA Loans 181Combination Financing 182Prohibited Fees 182Prepayment Penalties 183APPENDIX D SBA Forms 185INDEX 217