James wanted to be his own boss, but couldn’t decide whether to start an enterprise from scratch or buy a small business for sale.

It would be very satisfying, he thought, to be the originator of a going concern. And that way he’d avoid having to pay someone else for “goodwill,” a necessary cost when purchasing a company. There were advantages to an acquisition, however, in that he’d have an operating business from day one, with customers, employees and suppliers in place, and immediate income.

Then it came time to borrow some money to make his dream come true, and the answer was obvious.

“It may be difficult to raise money to help you buy a business,” a loan broker told him. “But it’s next to impossible to get funds for a brand new business.”

After talking to lenders and giving the matter some thought, James realized the importance of “borrowability” and why it is highest for a small business for sale.

Here are key reasons why lenders are more inclined to loan money for a business for sale, contrasted with a start-up.

1.   The plan for creating a new business might provide interesting reading for a prospective lender. But no matter how well articulated, it’s just an idea with no history to substantiate its validity.

By comparison, the business plan that accompanies a loan application for a purchase will include balance sheets, profit and loss statements and related documents–all information based on the track record of an actual business. It’s what lenders want to see and why the request will go to the top of the pile.

2. While demonstrating that a company is real by showing what it has accomplished in the past, the record of earnings also provides the foundation for predictions about what is expected in the future. There is no basis for making projections about an enterprise that does not yet exist. To a lender, it looks like an invitation to take a big risk. But that same lender will be reassured about the reliability of the applicant’s plans and expectations, if they are presented as a continuation of documented past performance.

3. If there is one phrase in a business loan proposal that is likely to persuade a banker to give it the green light, it is: “Seller will carry back part of the purchase price.”

The willingness of a seller, who knows the business better than anybody, to act as a lender for the new owner, is a strong vote of confidence that the business, and the buyer, will be successful. And will be able to pay the debt.

There’s no way, in a request for start-up funding, to be that convincing.

It should be noted, of course, that the buyer’s business experience is a critical factor for consideration by the proposed lender. So are credit history and net worth. But just as important, if not more so, are the arguments for and against the likelihood that the loan will be repaid on time.

If an entrepreneur is going to need borrowed funds to get established as owner of a business, the most success-oriented strategy is to forgo the idea of starting from scratch in favor of buying a suitable existing business.

About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business.  He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

When offering a small business for sale, the owner often has to explain that he or she has been reducing taxable profits by charging the business for products and services not really needed to operate effectively.

If the restaurant, manufacturing firm, retail store or service company is paying for the owner’s vehicle expenses and life insurance premiums, it will show reduced, taxable earnings. Meanwhile, the owner is reaping the benefits of those costs.

But when the business is offered for sale and the objective is to show the most amount of profit, the seller may  “restate” the profit and loss figures, adding back those payments made by the business but not necessary for its successful operation. When examining a P&L that has been restated in this way, a buyer will notice that some business expenses have been added back to earnings.

This practice can be abused, however, with the risk to the buyer that some of those add- backs are actually necessary operating costs.

Three common-sense ideas can help when evaluating add-backs so buyers can determine if they are legitimate.

1. Rather than accepting what the small business seller says is an expense item that can be added back to profits, a buyer should ask questions meant to determine if the seller’s statements are accurate. Vehicle expense may be a legitimate add-back if the car is merely driven to work and back home. The buyer should determine, however, if the vehicle also is used to pick up supplies and make deliveries. If so, it’s a misrepresentation to claim that fuel and other vehicle expenses should be added back. The buyer who believes the statement is in for an unpleasant surprise.

2. While there may be some expenses charged to the business that aren’t necessary for successful operation, it’s possible that a portion of the costs in a category are needed to conduct business. Is all of the company’s travel and entertainment expense used by the owner for fun with family and friends? A buyer should learn what percentage of those expenses are actually required for taking prospective clients to lunch and attending important trade shows.

3. Buyers of small businesses should remember that a seller who, for tax purposes, is “stretching the truth” about what are legitimate business expenses, may apply the same standards of honesty when making representations about the business. And what should be carefully considered is just how much the seller is willing to exaggerate. Most small business owners with company vans might run an occasional personal errand in the vehicle, but not take the time to record each outing and precisely calculate the portion of the trip not related to business.  An argument can be made that this is a minor disregard for the rules, the seller more trustworthy, compared, for example, to the liquor store owner who claimed he’d remodeled the business premises, when all $60,000 spent for construction actually went into his home.

Yes it’s nice to discover that a small business being considered for purchase is earning more than the stated bottom line once personal expenses are added back. But it’s important that the buyer make sure those expenses are not necessary to run the business.

BizBen.com is California’s leading online marketplace for buyers and sellers of small and mid-market companies and has been the state’s exclusive source of small business sales statistics for more than 10 years. The site offers thousands of independent and franchised enterprises, and it features a number of resources, articles, news items, practical tips, information, and ideas for business sellers, buyers, brokers and agents.

About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business.  He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

For any small business start-up, one of the biggest issues facing them in today’s business world is how to get the right IT operation up and running on a shoestring budget or without a dedicated IT staff.

While this issue is relatively straightforward for a sole proprietor, it can become a headache when multiple employees are involved and they need to be networked together.

An article in the September 11th edition of the Financial Times (www.ft.com/cms/s/0/0c78be2e-9e51-11de-b0aa-00144feabdc0.html) offers some practical advice for aspiring employers.

In it, Paul Taylor outlines one solution to this problem in his Personal Technology column that is available from Microsoft.