Cutting Costs: 10 Ways to Minimize Business Costs

cutting costsCutting costs in the business really can happen, even though it’s very easy to become negative about cost-cutting. “Everything just costs more”, a business owner will say; the subtext being, “What’s the use?”. Don’t give up. There are ways to cut costs. The first step is to identify where the money goes…and why. Then look at creative ways to shave off the non-essentials while keeping the shape your business intact.

 

1. Take Advantage of that “Free Lunch”

It may be “food for thought” instead of a steak, but there are many free offers of benefit to business owners. Continuing education lectures, SBA seminars, informational evenings offered by local banks and corporations, are often free or inexpensive ways to hone business sharpness.

 

2. Offer Discounts; Take Discounts

By offering customers early-payment discounts, you can “borrow” their money instead of the bank’s. Compare the advantage of doing this against borrowing from a lending institution and see which works best for you. You can also be on the other end of discounting by checking out what may be available. It sometimes helps to join a professional organization, in order to get the best discounted rates on anything from advertising to shipping services.

 

3. Purchase from the Source

If you deal in a product, go to the source whenever you can. For example, the owner of a children’s clothing business specializing in in sweaters goes directly to the spinning mill for her yarns. Not only can she specify the exact colors she wants, but she can shop for bargains and negotiate the best prices without any costs added by the kitting factory.

 

4. Do Your Research, Shop Around

Don’t be a slave to recommendations. If your computer consultant has a “pet” equipment source, or your graphic designer has a favored printer, make a few calls or look on the Internet to see how the prices stack up to similar products or models. You could end up cutting costs with big savings for very little effort. The same holds for seeking financing. You should always talk to at least two banks, looking for the best loan terms and interest rates.

 

5. Look Beyond In-House

Outsourcing is the latest word in cutting costs, and it can mean more than one thing too. First–outsourcing labor. Temporary employees or contract workers are the answer for jobs that aren’t included in the daily running of a business. Temps make sense for holiday rush periods or for short-term assignments or campaigns. Outsourcing certain operations, such as photocopying  mailing, and telephone answering, is an increasingly popular way to cut down on carrying these costs in-house. Another, but less typical, kind of outsourcing is “hiring” temporary space. If your business needs a conference room only occasionally or only a small portion of a warehouse, consider subletting the space from another business and cut the square footage of your own operation.

 

6. Don’t Assume Outsourcing is Always Cheaper

It pays to keep some operations in-house. For instance, if your receptionist can do some online bookkeeping while waiting for the phone to ring, or if your warehouse worker can stuff envelopes for a mailing in between delivery deadlines, you should consider these as in-house candidates. In addition, there are some jobs that should stay in-house even if outsourcing may appear to be a bargain–those that involve issues of confidentiality or accounting operations that might help owners and managers to better understand the business.

 

7. Go Electronic…

If you haven’t already substituted a voicemail system for a receptionist, you are paying an unnecessary yearly salary. sing e-mail can replace the need for most correspondence–saving the cost of a secretarial salary, or at least full-time. Computer programs for bookkeeping and for riding herd on inventory and payroll can also reduce employee numbers or hours. Selling online is cheaper than traditional advertising, and the individual targeting may pay off in more”hits”, further reducing the cost of doing this particular type of business.

 

8. …But Don’t Get Shocked

The cost of sending faxes, using cellular phones, and certain online services can get lost in the glow of their convenience. For cutting costs purposes, monitor the use of all such devices. If charges seem unreasonable due to the service provider’s fees instead of employee usage, negotiate with the carrier or provider. When threatened with a loss of business, they will often lower fees or at least negotiate payment schedules. Another electronic cost-saver: run certain equipment during off-peak electricity hours and save up to 30% annually in electric bills.

 

9. Obtain Furry

Try to cultivate business favor by patronizing one operation per service. Be loyal to one printer, photographer, designer, or copy service, and they may repay you with reduced fees and/or discounts.

 

10. Understand the Deductibles Still “Cost”

A deductible expense is still a cost. The only “free” part is whatever your specific tax rate will allow you to deduct, which could be as low as 25%, perhaps even less. when tempted to splurge on a deductible expense, always looks at your profits and see how much you’d have to earn in order to justify it.

Finance a New Business

Finance a New BusinessThe epidemic of corporate downsizing in the US has made owning a business a more attractive proposition than ever before. As increasing numbers of prospective buyers embark on the process of becoming independent business owners, many of them voice a common concern: how do I finance a new business?

Prospective buyers are aware that the credit crunch prevents the traditional lending institution from being the likely solution to their needs. Where then can buyers turn for help to finance a new business, which is likely to be the largest single investment of their lives? There are a variety of financing sources, and buyers will find one that fills their particular requirements. (Small businesses–those priced under $100,000-$150,000–will usually depend on seller financing as the chief source.) For many businesses, here are the best routes to follow:

 

Buyer’s Personal Equity

In most business acquisition situations, this is the place to begin. Typically, anywhere from 20-50% of cash needed to purchase a business comes from the buyer and his or her family. Buyers should decide how much capital they are able to risk, and the actual amount will vary, of course, depending on the specific business and the terms of the sale. But, on average, a buyer should be prepared to come up with something between $50,000-$150,000 for the purchase of a small business.

The dream of buying a business by means of a highly-leveraged transaction (one requiring minimum cash) must remain a dream and not a reality from most buyers. The exceptions are those buyers who have special talents or skills sought after by investors, those whose business will directly benefit jobs that are of local public interest, or those whose businesses are expected to make unusually large profits.

One of the major reasons personal equity financing is a good starting point is that buyers who invest their own capital to start the ball rolling–they are positively influencing other possible investors or lenders to participate.

 

Seller Financing

One of the simplest–and best–ways to finance a new business is to work hand-in-hand with the seller. The seller’s willingness to participate will be influenced by his or her own requirements: tax considerations as well as cash needs.

In some instances, sellers are virtually forced to finance the sale of their own business in order to keep the deal from falling through. Many sellers, however, actively prefer to do the financing themselves. Doing so not only can increase the chances for a successful sale, but can also be helpful in obtaining the best possible price.

The terms offered by sellers are usually more flexible and more agreeable to the buyer than those offered from a third-party lender. Sellers will typically finance 50-60% or more of the selling price, with an interest rate below current bank rates and with a far longer amortization.  The terms will usually have scheduled payments similar to conventional loans.

As with buyer-equity financing, seller financing can make the business more attractive and viable to other lenders. In fact, sometimes outside lenders will usually have scheduled payments similar to conventional loans. Furthermore, sometimes outside lenders will refuse to participate unless a large chunk of seller financing is already in place.

 

Venture Capital

Venture capitalists have become more eager players in the financing of large independent businesses. Previously known for going after the high-risk, high-profile band-new business, they are becoming increasingly interested in established, existing entities.

This is not to say that outside equity investors are lining up outside the buyer’s door, especially if the buyer in counting on a single investor to take on this kind of risk. Professional venture capitalists will be less daunted by risk; however, they will likely want majority control and will expect to make at least 30% annual rate of return on their investment to finance a new business.

 

Small Business Administration

Thanks to the US Small Business Administration Loan Guarantee Program, favorable financing terms are available to business buyers. Similar to the terms of typical seller financing, SBA loans have long amortization periods (ten years), and up to 70% financing (more than usually available with the seller-financed sale).

SBA loans are not, however, a given. The buyer seeking the loan to finance a new business must prove stability of the business and must also be prepared to offer collateral–machinery, equipment, or real-estate. In addition, there must be evidence of a healthy cash flow in order to unsure that loan payments can be made. In cases where there is adequate cash flow but insufficient collateral, the buyer may have to offer personal collateral, such as his or her house or other property.

Over the years, the SBA has become more in tune with small business financing. It now has a program for loans under $150,000 that requires only a minimum or paperwork and information. Another optimistic financing sign: more banks and lending institutions are now being approves as SBA lenders to finance a new business.

 

Lending Institutions

Banks and other lending agencies provide “unsecured” loans to commensurate with the cash available for servicing the debt. (“Unsecured” is a misnomer, because banks and other lenders of this type will aim to secure their loans of the collateral exists.) Those seeking bank loans to finance a new business will have more success if they have a large net worth liquid assets, or a reliable source of income. Unsecured loans are also easier to come by if the buyer is already a favored customer or one qualifying for the SBA loan program.

When a bank participates in financing a business sale, it will typically finance 50-75% of the real estate value, 75-90% of the new equipment value, or 50% of inventory. The only intangible assets attractive to banks are accounts receivable  which they will finance from 80-90%.

Although he terms may sounds attractive, most business buyers are unwise to look toward conventional lending institutions to finance their new business. By some estimates, the rate of rejection by banks for business acquisition loans can go higher than 80%.

 

With any of the acquisition financing options, buyers must be open to creative solutions, and they must be willing to take some risks. Whether the route finally chosen is personal, through the seller, or third-party financing, the well informed buyer can feel confident that there is a solution to that big acquisition question. Financing, in some form, does exist out there.

Buying or Selling a Business: Why Do Deals Fall Apart?

arguing businessmen selling a businessBuying or Selling a Business: Why Do Deals Fall Apart?

 

In many cases, the buyer and seller reach a tentative agreement when selling a business, only to have it all fall apart. There are some reasons this happens, and once they are understood, many of the worst deal-breakers can be avoided. Understanding is the key word. Both the buyer and seller must develop an awareness of what the sale involves–and such an awareness should include facing potential problems before they swell into the flood-waters and “sink” the sale.

Now, what keeps a sale from closing successfully? Surveyed business brokers across the United States found similar reasons that were cited so often that a pattern of causality began to emerge. A compilation of situations and factors of which affect the sale of a business are explained below.

 

The Seller Fails to Reveal Problems

If and when a seller is not up-front about any of the problems with the business, that does not mean these problems will go away when the buyer takes over. The problems are bound to show up later, usually sometimes after a tentative agreement has been reached. The buyer then gets cold feet–hardly anyone in this situation likes surprises–and the deal promptly falls apart. Event though this may seem a tall order, sellers must be as open about the negatives of their business as they are about positives. Again and again, business brokers surveyed said: “We can handle most problems…if we know about them at the start of the selling”.

 

The Buyer Has Second Thoughts About the Price

In some cases, the buyer agrees on a price, only to discover that the business will not support that price, in his or her opinion. Whether this “discovery” is based on gut reaction or a second look at the figures, it impacts seriously on the transaction at hand. The deal is in serious jeopardy when the seller wants more than the buyer feels the business is worth. It is of paramount importance that the business be fairly priced when selling a business. Once that price has been established, the documentation must support the seller’s claims so that buyers can see the “real” facts form themselves.

 

 Both the Buyer and the Seller Grow Impatient

During the process of buying or selling a business, it’s easy for either party to let impatience settle in. Buyers continue to want increasing varieties and volumes of information, and sellers grow weary of it all. Both sides need to understand that the closing process of selling a business takes time. However, it shouldn’t take so long that the deal becomes endangered. It is important that both parties should use only those knowledgeable in the business closing process if they are using outside professionals. A business broker is one of the most competent outside professionals in a given business area, and these should be given strong consideration in putting together the “team”. Seller and buyer may be inclined to use an attorney or accountant with whom they are familiar with, but these people may not have the experience to bring the sale to a successful conclusion.

 

The Buyer and the Seller are Not (Never Were) in Agreement

How does this situation arise? Unfortunately, there are business sale transactions wherein the buyer and the seller realize too late that they have not been in agreement all along–they just thought they were. Cases of miscommunication are often fatal to a successful closing. A professional business broker is skilled in making sure that both sides know exactly what the deal entails, and can reduce the chance that such misunderstandings will occur.

 

The Seller Doesn’t Really Want to Sell

In all too many instances, the seller does not really want to be selling the business. The idea had sounded so good at the start, but now that things have come down to the wire, the fire to sell has all but diminished. Therefore, it is key that prospective sellers make a firm decision to sell a business prior to going into the market with the business. If there are doubts, these ought to be quelled or resolved. Some sellers enter the marketplace just to test the waters; they want to see if they could get their “price” if they ever get really serious. This type of seller is the bane of business brokers and buyers alike. However, business brokers generally can tell when they encounter the casual (as opposed to the serious) seller. But an inexperienced buyer may not recognize the difference until it’s too late. Most business brokers will agree that a willing seller, is a good seller.

 

Or the Reverse: The Buyer Doesn’t Really Want to Buy

What’s true for the mixed-emotion seller can be flipped around and applied to the buyer as well. Full of excitement and optimism, buyers can enter the sale process but then begin to drag their feet as they draw nearer to the “altar”. This is especially true today with so many displaced corporate executives entering the market. Buying and owning a business is still the American dream–and for many it becomes a profitable reality. However, the entrepreneurial reality also includes risk, a lot of hard work, and long intense hours. Sometimes this is too much reality for a prospective buyer to handle.

 

None of the Above

The situations detailed above are the just the main reasons why deals fall apart. However, there can be problems beyond anyone’s control, such as Acts of God, unforeseen environmental problems, etc. But the good news is that many potential deal-crushers can be handled or dealt with prior to the marketing of the business, to help ensure that the sale will close successfully.

 

A Final Note

Remember these four components in working toward the success of the business sale:

  • Good chemistry between the parties involved
  • A mutual understanding of the agreement
  • A mutual understanding of the emotions of both buyer and seller
  • The belief, on the part of both buyer and seller, that they are involved in a good deal
DISCLAIMER: TM Business Brokers, LLC does not offer securities for sale, real estate brokerage services, accounting, tax or legal advice, or financing negotiations. TM Business Brokers, LLC does not audit / verify any information provided by business owners and their third party advisers, and we make no representations or warranties thereto.