It’s not that difficult to “buy” a business but what is hard, is running it and being successful.
The buying part you may already be involved in and I have given you some guidelines about that process. You have the two independent variable theory along with information on what it takes to finance a business. You got the check-list on due diligence and have “made an offer”. Now what should you be thinking about would be 90 days from today or next year at this same time. Here are some general thoughts that you might incorporate into your plan for buying.
First, would be understanding that incomes from small businesses may not come on the 1st and 15th of each month and that your business and personal living expenses need to reflect the real world of consumers, customers and clients. As an example, if you sell Christmas ornaments, you may not be very active on the 4th of July. That simple example is one that will take you “3” years to understand, even with past history and records. You will need to be, as Roy Rogers once said, “in the saddle” for a while before you understand the cycles of incomes and revenues for your business. So understanding that, what can or should you plan for?
The magic “3” comes into play here too. I would recommend that you add up all the monthly required or true expenses in a business you’re buying. Things that cost you money each month even if no revenue comes in. Things like rent, wages, insurance, etc,. Items that you have to have even if no one is buying the small Santa’s. You should also look at your own personal needs each month. What about food, rent, auto and medical? After you have the totals of both business and personal needs for a month simply multiply by 3. The end result is 90 days of financial needs to get by if the business takes a turn or people decide that Christmas is bah-humbug and don’t buy stuff.
Having the ability to ‘borrow” the 90 days of working capital is important. You may not need 90 days but having the ability to do so will get you through the days with the Ada county highway district put up orange barrels in front of your Christmas shop and no one, not even the Mayor, can drive to your location for a week or so. You lose a weeks revenue in a small business ( or any business) and you most likely lose profitability for that month and if you lose a month, you might not make it that year. You can either go out and move the barrels or put up a detour sign, but in the short run you may have to “borrow” from your working capital account to get you to next week. Plan for the “3’s” now, and you will be thankful later after they take down the barrels.
MORE IMPORTANTLY you should save “daily” for those fixed expenses that are due monthly. As an example, state sales taxes are due the month after they are collected but will you have that money when the bill is due? What works well, especially for small businesses, is to look at all your monthly fixed expenses, like: rent, insurance, employee taxes, and any and all utilities. Add them up and see what percentage they would be of your monthly ( actual or anticipated) revenue. That percentage would be the same for daily or weekly, then, and here’s the wisdom, save that amount DAILY OR WEEKLY in a separate checking or saving account. If not daily, then at a minimum each week. By doing that you will actually have that money when the bill for them comes in. If you don’t, it won’t be there in your account on the 31st.
Information provided by Kip Moggridge, Arthur Berry and Company, from the book “Buying a Business, you must be nuts” at Kip@arthurberry.com or 208-639-6169