Chapter 20

From Micro to Macro: Growing and Selling Your Business

In This Chapter

Bringing on permanent employees

Financing your business

Considering business franchises and dealerships

Selling your business

If you have done everything right (and sometimes even if you didn’t), you can see your budding enterprise go from a one-person operation or home-based company to a sizable entity. In due course, you may decide to grow your business and become larger. If so, you’ll inevitably encounter some growing pains. You may need permanent employees. You may need additional funding and other resources. You may consider expanding with dealerships and franchises. You may even consider selling your business. This chapter can help you with these concerns if you get to that point.

Hiring Permanent Employees

Hiring an employee isn’t a light decision, so if you decide to add permanent people, I want you to tread carefully. In other chapters (such as Chapter 19), I discuss how you can outsource workers if you need certain tasks completed that you may not be able to do. But outsourcing is a temporary and limited solution for workload issues where the need is, well, temporary and limited. When your business grows and you need regular, daily assistance, you can consider hiring people.

Before you hire any permanent employee, however, you should consider the significant associated labor costs (even for a part-time employee). A permanent employee is an ongoing expense (the total labor cost), week in and week out, whether your business is generating revenue or not. In fact, the labor cost will probably be higher than you expect. For example, an employee’s $50,000 salary isn’t the same as labor costs.

A general rule is that the cost of an employee will be at least 30 percent higher than the gross pay. In some states (such as California), it may be higher. Make sure you do the math and see whether hiring an employee will benefit your enterprise and perform functions that either increase sales or decrease expenses (or a combination of both) to a greater extent than the labor cost of having an employee.

These sections briefly discuss the labor costs that go above and beyond the mere costs of a salary or hourly wage. When you hire permanent employees, you open some significant doors that you shouldn’t take lightly. You should seriously consider the decision and hold off hiring employees until you absolutely need to.

Identifying payroll taxes

As an employer, you’re responsible for paying the payroll taxes for each employee you have. Payroll taxes come in several different forms, including the following:

Federal taxes: The single biggest cost, above and beyond the gross pay that the employer pays the employee, is the employer’s share of federal statutory taxes, including FICA (Social Security), Medicare, and FUTA (unemployment) taxes.

FICA and Medicare taxes for the employer mirror those of the employee; 7.65 percent of gross pay (up to the level of $113,700 in 2013). In other words if you pay $50,000 in gross pay for the employee, then the employer will pay $3,825 ($50,000 times 7.65 percent) on top of that pay (and you, as the employer, are responsible for submitting both your portion and the employee’s portion to the IRS during the tax year).

State and local taxes: Every state and local jurisdiction is a little different. Some have high payroll taxes and some don’t. Check with both the state’s tax department and your tax person. Some state unemployment taxes are paid fully by employers while others are shared by both the employee and the employer.

Recognizing other employee-related costs

The associated cost to having an employee goes further than you may expect. In addition to the payroll taxes that I mention in the previous section, here is a laundry list of the most common mandatory costs related to having an employee:

Worker’s compensation insurance: This cost differs in every industry and is more prevalent in those industries with a higher degree of risk for occupational injury.

Reports: There are indirect costs of having employees. Many businesses need to file various government reports that are filed annually, quarterly, and/or monthly with appropriate government agencies. Filing these reports cost time and effort. Your accountant may also charge you for doing so.

Costs not mandatory but usually covered by the employer include

Paid vacation: When you have an employee, providing two weeks of paid vacation is standard practice.

Benefits, such as health care insurance: The employer may share these costs with the employee.

Access to retirement plans, such as 401k: To get and keep good employees, it’s important to provide them access to ways to save and invest for their future.

Avoid hiring an employee until it’s necessary and you have the cash flow to pay for the cost. For more information, speak to your accountant or refer to the resources such as the following:

Inc. magazine (www.inc.com)

Service Corps of Retired Executives (www.score.org)

Small Business Administration (www.sba.gov)

Getting Your Hands on Money to Finance Your Business

At some point, your business may need financing to help pay for things, such as expansion. Maybe you’re a home-based business that does mail order and the operation has grown to the point that you need warehousing for your growing inventory. You’ll likely need financing. These sections explain some of your financing options for your business.

Eyeing the debt financing route

Debt financing refers to loans and other types of financing where money is loaned to you and your company that requires repayment. Debt financing can mean taking out a business loan from your local bank or borrowing in other ways to get the funds you need. Many micro-entrepreneurs borrow money from sources, ranging from credit cards to getting a second mortgage on their house. Of course you want to be careful because carrying debt and paying back loans can be difficult if you have cash flow problems.

To gain funding, an existing and operating business has an easier time gaining financing than one that is a start-up situation. Think about it from the lender’s point of view. If you were the lender, which type of business would you give a loan to: a business that is currently operating and has customers or a business that is brand new and untested and has no customers yet?

Therefore, to increase your chances of success at qualifying for a loan (if you’re a start-up situation), start your business immediately no matter how modestly. Then, consider getting the financing you want six months later. At that point, you aren’t seeking start-up or seed money. At that point, you’re technically seeking expansion financing, which is easier to get.

Here are some resources to help you understand and navigate the lending process:

10K Right Away: This self-published book written by Scott Jordan (www.10krightaway.com) is a must-read with great financing pointers.

Get Your Business Funded: This book written by Steven Strauss (John Wiley & Sons, Inc.) (www.wiley.com) provides solid guidance on funding strategies for your business.

Lending Tree: At www.lendingtree.com, you have the opportunity to submit your funding needs and have various lenders compete to provide you with lending programs to meet your needs.

LinkedIn: Business lenders and investors (and advisers) have their own groups at www.linkedin.com. This site provides you with contacts to inquire and help you with your funding needs.

Small Business Administration: This site (www.sba.gov) has an amazing amount of resources for businesses seeking funding.

Trying equity financing

Equity financing refers to who is investing in your business and receiving some type of equity (or partial ownership) in your business. Many firms (such as venture capital firms) get involved in this type of funding because it can be lucrative if the business does well.

You as the owner need to give this type of funding serious consideration, because it can mean that you relinquish control of your business to some degree. Speak to an experienced business attorney about all the ramifications before you do this type of financing.

Here are some resources for equity financing, Refer to the resources in the previous section for guidance as well:

Funded: This site (www.funded.com) is a network of investors and lenders that work with small businesses that need funding.

Gust: This site (www.gust.com) lists more than 40,000 accredited investors.

Microventures: This site (www.microventures.com) helps small business owners connect with a network of investors and lenders that can provide financing of up to $30,000.

On Deck: This site (www.ondeckcapital.com) has insights about small business loans and business credit.

Considering joint ventures

You can also go the joint venture route with other firms to leverage your activities. A joint venture is when two or more people or organizations agree to launch a cooperative effort to accomplish an objective for mutual gain.

Always be open to joint ventures because they can work better than getting loans or giving away too much equity. Many entrepreneurs team up with others to make great sales. Find affiliates for your business (Chapter 11 is all about affiliate marketing).

Some entrepreneurs were able to successfully sell their products with a joint venture with mass media, such as QVC (www.qvc.com) and the Home Shopping Network (www.hsn.com). You can even read a book on the subject — Make Millions Selling On QVC by Nick Romer and published by John Wiley & Sons, Inc. (www.wiley.com).

Several active groups of entrepreneurs and investors are on LinkedIn (www.linkedin.com). In addition, here are some active groups on LinkedIn to help you find creative ideas for financing your venture (or seeking joint ventures):

Joint Venture Bank

Second Bounce: Web Entrepreneurs and Investors

On Start-Ups: Community of Entrepreneurs

New groups form all the time on LinkedIn, so regularly do a group search.

Going public

You may even consider taking your micro-entrepreneurial enterprise and going public with it. Going public is the process of turning a private company into a public company that the investing public can buy shares to profit in the venture (like stocks that are purchased on Wall Street). It’s also known as doing an initial public offering (IPO).

How cool it would be for me to see your business jump from this book (on micro-entrepreneurship) to my other book (Stock Investing For Dummies)! Every major business that you can think of, from IBM, Amazon, Google, and Apple to General Electric, Proctor & Gamble, Exxon, and so many others all started as micro-entrepreneurial enterprises. Look at Hewlett Packard, for example. It literally started as two guys tinkering in their garage. As they created their technology products and grew their business from a two-man operation to becoming a larger enterprise with employees, they went public. An investment banking firm helped them create an IPO, and they became a public company where anyone could buy their stock.

Now, it doesn’t just mean that you find an investment banker and a team of lawyers and accountants, get an IPO issued, sell stock, and become a millionaire (when you tally all of your shares at whatever the stock price is on the day it starts to trade in the stock market). Your potential wealth can come in a variety of ways. You can still run the enterprise as a Chief Executive Officer (CEO) and essentially become the top employee of the firm (but you would have to answer to a board of directors, which oversee the company’s general management and have decision-making power over you and the company).

Maybe you don’t want to be a CEO. Instead, you could do what other entrepreneurs do. They sell the company and aren’t formally involved in the company. Instead, they negotiate (as part of the sale) to become a well-paid consultant to the company’s new management team.

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For more information on going public, check out these sites:

Going Public Information (www.goingpublicinformation.com)

NASDAQ (www.nasdaq.com)

Securities and Exchange Commission (www.sec.gov)

For more information on IPOs and stocks of all stripes, check out the book the latest version of my book, Stock Investing For Dummies (John Wiley & Sons, Inc.). You can find it at www.dummies.com.

Looking At Franchising and Dealerships

If your business has done well and it’s a business model that can be copied and sold, then you may want to consider franchising or creating dealerships. You can grow your business and make more money going this route in many ways. These sections give you a quick glance at each option.

Franchising

A franchise (or franchise dealership) is a type of license that someone (the franchiser) gives someone access to a business’s proprietary processes, knowledge, and trademarks so the franchisee can sell products and services under the business name. In this arrangement, you would be the franchiser that grants these rights.

In the franchise, the franchiser exerts a great deal of control in how the business is run. Everything is virtually run according to the franchiser, ranging from the type of accounting system to uniforms, suppliers, advertising, and so on.

In the same way many other entrepreneurs will take a single-location business and grow it to a multiple-location business. A micro-entrepreneur can go big by utilizing the franchising model. When you create a successful methodology for running a business, other entrepreneurs pay you (probably a large amount) to be a franchisee.

To find out more about franchising, head to these resources:

American Association of Franchisees and Dealerships (www.aafd.org)

Franchise Associations Directory (www.franchiseassociations.org)

Franchise Direct (www.franchisedirect.com)

International Franchise Association (www.franchise.org)

Independent dealership and service marks

An independent dealership (also called a distributorship) is a different animal. This type of arrangement is typical in the automotive retail industry. The biggest difference between a dealership and a franchise is the level of control involved by the franchiser (or company that sold the dealership). In a dealership, the entrepreneur that bought the dealership maintains a lot of independence and personal control.

In the automotive industry, for example, you may have a Ford dealership called Bob’s Fords. The Ford Motor Company doesn’t exert any control over how the business is run except for how they represent their cars. The Ford doesn’t mandate that the dealer has to wear uniforms or adhere to a particular methodology.

Another good example is when some businesses service marks (SM) their model. A service mark is similar to a trademark, but it applies to a service and not a product. Say that you do a successful business that is in seminars and training. You can brand your business and sell it to other entrepreneurs. They pay you and you do this particular program your way. The entrepreneur that paid to be able to do your program your way is really only buying permission to do your program and the rules and regulations only apply to that particular program and nothing further.

For more information on service marks, go to the US Patent and Trademark Office site at www.uspto.gov.

Selling Your Business

The business that you started, nurtured, grew, and managed all these years is ready to give you one last profit — hopefully a windfall! As I have told people for nearly three decades, when you start a business, remember a very important point from day one: Your business is a product in and of itself.

Businesses are bought and sold everyday. Some businesses are very cheap to buy, whereas some will cost a fortune. When you’re ready to sell your business, I certainly hope you sell it for a fortune — how sweet that would be! The main draw for people getting into business is to generate current income (or revenue), but don’t forget capital gain (in this instance, the idea that you create value to sell at a great place later on).

Sometimes the best way to make a fortune in business is to package your business the right way and sell it. Making another six or seven figure from the sale of your business is a nice kicker.

If you’re seriously contemplating selling your business, you’ve come to the right place. These sections can help you with the important points.

Figuring out what makes a business sell

If you have a business with a customer base, you can get a lot of money for it. Businesses being sold generally fall into two basic categories:

Those that have customers

Those that don’t

Imagine that two businesses are being sold: Business A has a list of customers, and Business B is functioning, but it has no customers. Which will be sold for a lot more money? This may qualify for the “duh!” question of the day, but it’s important to emphasize. Businesses that don’t have customers are sold for next to nothing; some can’t even be given away! But businesses with customers can be sold for a fortune.

Say that you were going to buy a business and make believe that the business you want to get into is hamburgers. Some people will buy a McDonald’s franchise whereas others will spend a fraction of the amount to buy a hamburger joint. They bought a business to sell hamburgers, but the McDonald’s franchise will be sold for millions whereas the generic hamburger stand could probably be up and running for next to nothing (comparatively speaking). Why?

When people buy a major franchise, they’re also buying a built-in customer base that didn’t come with the hamburger stand. Customers are already familiar with the big name brand; they’ve been presold. Yes, the buyers paid a steep price, but when they bought the franchise, they bought the company’s marketing and reputation, too. In a nutshell, they bought the customers as well as the company.

Sticking to the steps to sell your biz

When the time comes to sell your business, here are the steps to keep in mind.

Step one: Put together your team

Selling a business (or buying one) can be a complex transaction that will need an accountant, an attorney, and maybe a broker (a business broker).

Accountant: The accountant helps to prepare the financial data that your buyer will need to assess the financial condition of the business. The accountant prepares financial statements, such as a balance sheet (to show the assets and liabilities of the business), the income statement or profit and loss statement (P&L, for short) for the business, and any other necessary financial documents. In addition, the accountant helps you with any potential tax impact of the business (such as figuring out if you will have any tax on the gain from the sale of the business).

Attorney: The attorney prepares all the legal documents for the transaction, such as the contract for the sale of the business.

Business broker: A business broker can help you find a buyer. A business broker is similar to a real estate broker in that he or she can find a buyer and receive a commission, which is typically a percentage of the final purchase price of the business.

Step two: Determine why you’re selling the business

If your decision is to sell your business, then any buyer will ask you why. Make sure you know. The most common reasons are as follows:

Retirement

Health reasons

Partnership issues

Moving on to new ventures.

You simply don’t have it in you to keep the enterprise running. Maybe you’re tired of running it, bored, or are looking for a different routine.

If you’re selling your business because it’s no longer profitable, have a good explanation for the potential seller or take steps to make it profitable. After all, if the business can’t show a profit, then it makes a sale more difficult. Confer with both your accountant and the business broker on strategies to make the business more attractive to buyers.

Step three: Time the sale

Selling your business isn’t a decision that happens that morning after you have your breakfast. You should plan long before you actually put the “For Sale” sign on your front door. Some advisers tell you to plan at least a year before you decide to sell. This gives you enough lead time to prepare the business for an optimal sale. You can work on increasing the revenue, decreasing expenses, and preparing your business records for when you will need to show them to prospective buyers.

Step four: Determine the value of your business

Decide whether you will get paid for the full value of your business or whether the amount will fall short. Considering how long and hard you worked to build to your business, you should do what you can to figure out the full worth of your business (business valuation). Your accountant can help you with this step.

Step five: Prepare documents for the sale

Put together all the necessary documents (financial statements, tax returns, and so on). For income statements and tax returns, give three years’ worth for the buyer to review with his or her advisers. Also provide information regarding any partners, suppliers, vendors, and such. You should provide a summary for business activities and your mission statement (refer to Chapter 2) so the buyer sees what kind of philosophy drove your business during that time.

The buyer of the business may also have documents. A buyer will commonly ask the seller to sign a noncompete agreement so that the seller doesn’t re-enter the market with a new business in the same field as the buyer.

Step six: Market your business

If you’re selling your business to a trusted buyer, such as a key employee or a family member, then selling or marketing your business isn’t an issue. However, if you need to find a buyer, you can market your business yourself or get a business broker to help advertise that your business is for sale. In the same way a real estate broker can be of great assistance, a business broker is equally helpful (maybe more so because a business is more complicated than a house).

Although you only need a single buyer, keep in touch with all prospective buyers just in case a sale isn’t consummated with the initial buyer. Find out if the buyer is qualified for financing or if you plan to help the buyer finance the transaction.

Sometimes you have a situation where the seller does financing and the buyer makes monthly payments to the seller. This arrangement can work out well if the seller is heading into retirement and needs that type of cash flow.

Step seven: Know what to do after the sale

After the sale is made, many entrepreneurs continue in a consulting capacity with the new owners to make sure the transition goes well. Find out if the buyer requests your assistance. In addition, discuss with your accountant how to handle the gain from the sale of the business in terms of federal, state, and local taxes. Some type of estimated tax payment may need to be done.

Looking for additional help for selling your business

These resources regularly cover the topic of selling (or buying a business) and related issues such as franchising, business succession, and so on:

All Business (www.allbusiness.com)

Entrepreneur (www.entrepreneur.com)

Inc. Magazine (www.inc.com)

Small Business Administration (www.sba.gov)

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If you want specific sites on the Internet where businesses are bought and sold, check out these:

Biz Quest (www.bizquest.com)

Biz Buy Sell (www.bizbuysell.com)

Businesses for Sale (www.businessesforsale.com)

BusinessBroker.Net (www.businessbroker.net)

Business Opportunities Weblog (www.business-opportunities.biz)