Now the concept of a leased fee estate comes up most often in MAI appraisals.  A good MAI appraiser will usually only bring up the concept of a leased fee estate when the property is leased out for a long term at far under the market rate or at far over the market rent.

Now Back to Grandpa Jack:

Let’s suppose the huge R&D building was not burdened with the below-market, long-term lease to Oracle.  If it was rented out at $20 per square foot (pop quiz:  per month or per year?), the building would be worth – at a 7.5% cap rate – $40.5 million.

But the property is NOT leased out at $20 per square foot.  It is burdened with a long-term lease of just $9.60 per sf, which is less than half the market rate.  At a 7.5% cap rate, the leased fee value of the property is just $19.5 million.

The Debt Service Coverage Ratio is a financial ratio, used when making commercial real estate loans, designed to determine if the property generates more than enough net income (typically 1.25x) to make the loan payments on the proposed loan.

The Debt Yield Ratio, in contrast, is a financial ratio, used when making commercial loans, designed to make sure that the amount of the new commercial loan never gets too large in relation to the net income thrown off by the property – no matter how low interest rates get.  This latter point is critical.

In the lead-up to the financial crisis in 2008, conduits brought amazingly low interest rates on commercial loans to prime commercial real estate.  Because interest rates were so low (in comparison to prior years) in 2005, 2006, and 2007 that investors were able to achieve historically sky-high loan-to-value ratios, sometimes as high as 80% loan-to-value!

Venture capital firms are different from private investors in that they have raised capital from a number of high net worth individuals with the intent to make investments on their behalf into promising start up companies and expanding businesses so that they can ultimately take the business public via an IPO or sell the business for a substantial earnings multiple. There is not a single business that does not face any type of specific business risk that should be addressed within your business plan. You should showcase, within your business plan, how you’ll deal with an economic recession as it relates to remaining profitable and cash flow positive. The primary difference between private investors and venture capital firms is that these individuals tend to live in areas where there are a number of other high net worth individuals. In some instances, you may be able to finance your business through credit card receivables if you’re already in operation as an alternative to expensive equity capital financing.

Angel investors usually have a net worth of $500,000 to $1,000,000 although this number may be higher in selected metropolitan areas. It should be noted that venture capital firms will typically take 30 days to 60 days to make a decision as it relates to the capital that you need. Most angel investors are prepared to make their investment decision within two weeks of receiving your proposal. In any document that is specific for a angel investor or venture capital firm should have appropriate disclosures as it relates to the risks associated with business which should be drafted by an attorney. When you’re developing your business plan for an angel investor or venture capital firm, it is extremely important that you dismiss your emotions in the product or services that you is that you sell.

We recommend that you have your attorney present during your first meeting in order to make sure that the individual is a legitimate investor or venture capital firm that is willing to make a significant investment into your business. It should also be noted that there are firms out there that can introduce you to angel investors or syndicated individual investment groups when you are seeking private equity capital.

The primary difference between an individual investor and a venture capital firm is the amount of capital that they are willing to provide you with as it relates to making an equity investment into your firm. As such, if you are seeking less than $5,000,000 then it may be in your better interest to work with an angel investor rather than a large scale investment firm.

Getting into a business partnership has its benefits. It allows all contributors to share the stakes in the business. Depending on the risk appetites of partners, a business can have a general or limited liability partnership. Limited partners are only there to provide funding to the business. They have no say in business operations, neither do they share the responsibility of any debt or other business obligations. General Partners operate the business and share its liabilities as well. Since limited liability partnerships require a lot of paperwork, people usually tend to form general partnerships in businesses.

Things to Consider Before Setting Up A Business Partnership

Business partnerships are a great way to share your profit and loss with someone you can trust. However, a poorly executed partnerships can turn out to be a disaster for the business. Here are some useful ways to protect your interests while forming a new business partnership:

Photo by Tim Mossholder from Pexels

1. Being Sure Of Why You Need a Partner

Before entering into a business partnership with someone, you need to ask yourself why you need a partner. If you are looking for just an investor, then a limited liability partnership should suffice. However, if you are trying to create a tax shield for your business, the general partnership would be a better choice.

Business partners should complement each other in terms of experience and skills. If you are a technology enthusiast, teaming up with a professional with extensive marketing experience can be quite beneficial.

2. Understanding Your Partner’s Current Financial Situation

Before asking someone to commit to your business, you need to understand their financial situation. When starting up a business, there may be some amount of initial capital required. If business partners have enough financial resources, they will not require funding from other resources. This will lower a firm’s debt and increase the owner’s equity.

3. Background Check

Even if you trust someone to be your business partner, there is no harm in performing a background check. Calling a couple of professional and personal references can give you a fair idea about their work ethics. Background checks help you avoid any future surprises when you start working with your business partner. If your business partner is used to sitting late and you are not, you can divide responsibilities accordingly.

It is a good idea to check if your partner has any prior experience in running a new business venture. This will tell you how they performed in their previous endeavors.

4. Have an Attorney Vet the Partnership Documents

Make sure you take legal opinion before signing any partnership agreements. It is one of the most useful ways to protect your rights and interests in a business partnership. It is important to have a good understanding of each clause, as a poorly written agreement can make you run into liability issues.

You should make sure to add or delete any relevant clause before entering into a partnership. This is because it is cumbersome to make amendments once the agreement has been signed.

5. The Partnership Should Be Solely Based On Business Terms

Business partnerships should not be based on personal relationships or preferences. There should be strong accountability measures put in place from the very first day to track performance. Responsibilities should be clearly defined and performing metrics should indicate every individual’s contribution towards the business.

Having a weak accountability and performance measurement system is one of the reasons why many partnerships fail. Rather than putting in their efforts, owners start blaming each other for the wrong decisions and resulting in company losses.

6. The Commitment Level of Your Business Partner

All partnerships start on friendly terms and with great enthusiasm. However, some people lose excitement along the way due to everyday slog. Therefore, you need to understand the commitment level of your partner before entering into a business partnership with them.

Your business partner(s) should be able to show the same level of commitment at every stage of the business. If they do not remain committed to the business, it will reflect in their work and can be detrimental to the business as well. The best way to maintain the commitment level of each business partner is to set desired expectations from every person from the very first day.

While entering into a partnership agreement, you need to have an idea about your partner’s added responsibilities. Responsibilities such as taking care of an elderly parent should be given due thought to set realistic expectations. This gives room for compassion and flexibility in your work ethics.

7. What Will Happen If a Partner Exits the Business

Just like any other contract, a business venture requires a prenup. This would outline what happens in case a partner wishes to exit the business. Some of the questions to answer in such a scenario include:

• • How will the exiting party receive compensation?
  • How will the division of resources take place among the remaining business partners?
  • Also, how will you divide the responsibilities?

8. Who Will Be In Charge Of Daily Operations

Even when there is a 50-50 partnership, someone needs to be in charge of daily operations. Positions including CEO and Director need to be allocated to appropriate individuals including the business partners from the beginning.

This helps in creating an organizational structure and further defining the roles and responsibilities of each stakeholder. When each individual knows what is expected of him or her, they are more likely to perform better in their role.

9. You Share the Same Values and Vision

Entering into a business partnership with someone who shares the same values and vision makes the running of daily operations considerably easy. You can make important business decisions quickly and define long-term strategies. However, sometimes, even the most like-minded individuals can disagree on important decisions. In such cases, it is essential to keep in mind the long-term goals of the business.

Bottom Line

Business partnerships are a great way to share liabilities and increase funding when setting up a new business. To make a business partnership successful, it is important to find a partner that will help you make fruitful decisions for the business. Thus, pay attention to the above-mentioned integral aspects, as a weak partner(s) can prove detrimental for your new venture.

More detailed information and useful advice can be found at https://www.funded.com/

The other day, I was talking with an individual, a seasoned entrepreneur looking to raise a little capital for his next business, and he noted that he only needed a little bit of startup money to get the prototypes going, to prove concept, and to start making money.

Yes, perhaps so, and perhaps not, but how can he come up with the money if he doesn’t have family members to fund it or any money of his own to invest? Okay so let’s talk a little about this case study, perhaps you are in the same boat as a small time entrepreneur?

Entrepreneur says: “I have a manufacturer and sources lined up to make these devices, and it doesn’t cost that much to make them, and I also have beau coups contacts to get them into the market, so I can be launched and operating for very little money.”

Still, contacts are not commitments. Sources are not firm guaranteed delivery. How much, do you have a rough plan? Go ahead and copy it into an email so I can read it. If it is really cheap, you could try the “micro-funding” online sources where folks can chip in small amounts – crowd source type funding, but you’d still need a strong business plan and go get real money to really make this vision happen. What are your thoughts on the crowd source funding concept, I was asked?

Well, here are some of my thoughts, you see first off; Hope and Change are BS right? I mean you have to make it happen, that means “step 1” is still only “step 1” and is no guarantee you can get to the real goal of creating a viable business that will launch these products into the market.

Now then, should you go the crowd sourcing route, does it make sense, is that a good way to raise funds? Well, it can be, and it has worked for some folks, of course a nice business plan helps, but then at the same time you are giving away your idea to the whole world, and describing your invention, innovation, or business model to entrepreneurs, foreign imitators, and others who will merely steal your concept.

But, if you can get your funding and go to step one, quickly, complete that, and get a second round of funding to keep going at a fast pace, it could work, and yes, people have done it, and it is one source of funding. So, please consider all this and think on it.

Lance Winslow has launched a new provocative series of eBooks on Business Subjects. Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank; http://www.worldthinktank.net

Purchasing an established business can be a daunting and complicated process for many individuals. Understanding the steps involved in the acquisition and doing the necessary planning and preparation will enable the buyer to increase their chances for a successful transaction. Following an established and proven process will not only reduce the stress that often comes with chartering new territory but also eliminate many of the risks and unknowns that often derail a business acquisition.

1. 1. PERSONAL ASSESSMENT

The first step in buying a business starts with introspection. This process should be a thoughtful and honest examination of the candidates’ strengths and weaknesses, skill set, as well as their likes and dislikes. This analysis will assist in narrowing the selection for the logical and best choice of business enterprise to pursue.

What talents, skills, and experience do you bring to the table and what are the types of businesses that can excel with these attributes behind the helm. Here are a number of questions that the introspection phase should involve:

1. 1. What type of business do you want to operate? Is it one where you are the owner/manager or do you prefer to have a management team in place?
   2. What hours are you available to dedicate to the business? Obviously, owning a small business will never be a 9 to 5 endeavor. Having said that, it will be important to determine the time available to manage the business. Do you prefer a B2B business that operates M-F 8-6pm or are you more flexible and would consider a consumer oriented business that is open late or often over the weekends?
   3. Are you successful at sales, meeting with clients, and being the face of the business or are you better suited to a managerial role and running the business from behind the scenes with an established sales force in place?
   4. Are you able to travel and be away from home for several days or do you require a business that keeps you close to the family each day of the week?
   5. Do you have a background and expertise in the manufacturing of products or is it the service industry or distribution model that is more your forte?
   6. Do you have any licenses or certifications that qualify you for a certain business? If not, are you prepared to obtain the necessary credentials required for successful ownership if the targeted business requires such certifications?
   7. What are the things that you really enjoy doing? What are the things that you prefer not to do? The best advice is to start considering businesses in industries that the buyer is passionate about.

These are a few of the questions that will help an individual assess the types of businesses that they are best suited for and assist in narrowing the range of enterprises where the buyers skill set, experience, capabilities and passions can be leveraged.

1. 2. DEVELOP INVESTMENT CRITERIA

Now that you have established the type of business that is a ‘good fit’ the next step is to put pen to paper and concisely define your investment criteria. If you will be seeking bank financing it will be important that the investment criteria match your resume or the transferrable skills that you are bringing to the table. The investment criteria will state the following:

1. 1. 1. What is the price range of the business that you can afford to buy?
      2. What is the geographic location for the business you seek to buy?
      3. What type of business are you looking for?
         • Manufacturing
         • Wholesale/Distribution
         • Service
         • Retail
         • Web-based
      4. What industry should the business be in?
      5. Management structure (owner managed or management team in place)?
      6. Size of business. In terms of:
         • Revenues
         • Profits/Earnings
         • Number of employees
         • Number of locations
      7. Recurring revenue model vs. project based

1. 3. LENDER PREQUALIFICATION

If you plan to use bank financing to acquire a business it is important that you obtain a prequalification before your search process. Not only will this the ‘prequal’ provide you with the data as to how large of a business you qualify to purchase but it will also demonstrate to the business broker and seller that you are a serious buyer. If you are serious about buying a business and will need to obtain financing, receiving a bank prequalification is a required step at some point in time. Therefore, what would be the reason for procrastinating and not having this in place at the outset? There is zero downside and only considerable benefits. Contact your business broker as they will be able to recommend a financial institution that does business acquisition lending for the type of business you are interested in purchasing. This is an area where having the right lender is critical.

1. 4. BUSINESS SEARCH (Individual or Retained)

What is the process that you are following to locate and qualify businesses for purchase? Will you be conducting the search on your own or will you utilize the services of a professional business intermediary or broker. There are literally thousands of business for sale at any given moment. A process needs to be established for conducting the search and qualifying businesses. Few of these businesses are of the quality, caliber, and profit level that distinguish them as being best in breed. What have you done to ensure that you will stand out and be given the proper consideration when engaging a broker regarding a business for sale? The business-for-sale marketplace is plagued by unprepared and non-serious buyers inquiring about any enterprise listed for sale. It takes the right preparation, message, and professional team to establish contact and quickly get to the point where the business can be qualified as a legitimate candidate or one that should be dismissed. Too many prospective buyers fall prey to the late business internet search process and clicking on any business that catches their interest. Unfortunately, serious buyers get lost in the field. This is where the prior steps come in handy – having a personal bio, an established investment criteria, as well as a lender preapproval.

1. 5. QUALIFICATION

A business that is professionally represented for sale will have a number of documents available for review by prospective buyers (e.g. Financials, Asset list, Business Summary, etc). Buyers will need to execute an NDA in addition to demonstrating that they are qualified both from a financial standpoint as well as an experience standpoint to be considered a serious candidate.

At this stage the buyer should already have completed individual research or have first-hand knowledge on the industry. For those without direct industry experience there are trade magazines for just about any business sector not to mention the wealth of data available on the World Wide Web.

The buyer should have a list of questions already prepared, designed for one purpose – determining if the business meets the majority of elements within the investment criteria. The buyer should understand the value of the business. If the business is priced outside of their financial ability they should not be evaluating the business and wasting anyone’s time, most importantly their own. It will be important for a serious buyer to recognize that there is no such thing as a perfect business and each will have different strengths and weaknesses. Most buyers are seeking businesses with growing revenue, a stable customer base, excellent staff, established policy & procedures, and increasing profits. What are the most important qualities that you are seeking? Ranking the criteria is often helpful when qualifying businesses. Finding a business which meets some but not all of the criteria is more the norm than the exception. In many cases, the buyer may be positioned and experienced to improve certain business aspects that are deficient. Following this approach will also enable the buyer to quickly and efficiently eliminate those businesses which will not be a suitable fit, an endeavor that will save all parties considerable time. A quick no is far better than a slow no for everyone’s sake. Lastly, the buyer should recognize that the better the business is, the more they will be expected to pay.

After the initial information exchange the buyer should prepare a second set of questions based upon the particulars of the specific business. After receiving this information the time has been reached where the buyer knows whether their basic criteria has been met. The buyer is clear on the business valuation, the financials, and the business operations and the seller (through the broker) should be clear on how the candidate will be financing the transaction.

A teleconference should be arranged by the business broker to fill in any gaps of information and to allow specific business questions to be asked by the buyer and answered directly by the seller. Should this interaction satisfy the requirements of all parties a personal meeting and site visit is often arranged. During this meeting the buyer, seller, and broker can discuss the framework for a transaction that will satisfy the needs of each party. Only serious contenders should be involved at this point. Now is not the time to waste anyone’s time as a tire-kicker if the goal is not to proceed. Buyers should be clear that regardless of signing the NDA, data such as names of specific clients will not be divulged, not just at this point, but until the transaction closes.

1. 6. LETTER OF INTENT – TERMS SHEET

A Letter of Intent (LOI) and Terms Sheet are typically non-binding documents which are used for one fundamental purpose… to determine if there is a meeting of the minds between the buyer and seller on the price and terms of the sale. The LOI will outline the strategic points of the agreement. Investing time at this stage and preparing a more detailed document will avoid misunderstandings and prevent key terms from being renegotiated later. Some of the broad points that should be addressed include:

1. 1. Who is buying the business?
   2. What is being acquired (Assets, Stock)
   3. Transaction price and how that money is being paid
   4. Loan commitment letter date.
   5. Proposed closing date.
   6. Is there a consulting agreement and if so, what are the terms?
   7. What are the contingencies for the transaction to close?

1. 7. LOAN COMMITMENT LETTER

With an executed (signed) LOI in hand the buyer will now need to obtain a ‘Loan Commitment Letter’ from the lender. A loan commitment letter is produced by the bank and will confirm that the buyer is approved for financing to acquire the business. The Loan Commitment Letter is generated after a thorough review of both the buyer’s data as well as the target business’ data.

1. 8. DUE DILIGENCE

Most business acquisition transactions will require bank funding. The bank will have a proven, structured, and very detailed due diligence process and it is this methodology that the buyer should rely upon when acquiring a business. Why attempt to recreate the wheel? The bank works solely on behalf of the buyer and their fundamental interest is in ensuring that the buyer is acquiring a business that has the required financial framework for the new owner to be successful and positioned to repay the principal and interest on the acquisition loan. The bank will provide a DD checklist that covers a wide variety of documents, including but not limited to the following areas:

1. 1. Financial Statements & Tax Returns
   2. Asset & Inventory List
   3. AP & AR
   4. Corporate Books & Records
   5. Contingent Liabilities
   6. Sales & Marketing Materials
   7. Employee Agreements & Benefit Plans
   8. Equipment, Vehicle, & Property Leases
   9. Customer and Supplier Contracts or other Agreements
   10. Insurance Policies

1. 9. PURCHASE CONTRACT

The business for sale contract aka Definitive Purchase Agreement (DPA) is typically drafted by the Buyer’s ‘Transaction Attorney’ after the LOI is in place. If the proper care was taken in developing the LOI, the DPA should be a much easier document to produce. In circumstances where the major deal components were not properly negotiated or addressed in the LOI, the DPA becomes much for complicated and a higher risk level is associated with the transaction closing.

Upon execution of the LOI, the DD period commences and the DPA should begin being drafted. The DPA is the binding contract covering all aspects of the transaction. The DPA will cover all assets that are connected to the purchase, including but not limited to:

1. 1. Assets/Stock being acquired
   2. Price, Terms, & Payment
   3. Representations & Warranties
   4. Covenants
   5. Indemnification
   6. Non-Competition Agreements
   7. Lease Assignments
   8. Landlord Consents
   9. Consulting Agreements
   10. Asset Allocation

In most transactions the DPA is executed at the closing table but this is not a requirement. In certain circumstances, the buyer and seller will elect to execute this Agreement prior to the actual close.

The DPA is the actual contract that consummates the sale of the business. It will include a number of Schedules and Exhibits detailing all of the terms of the sale. This is a custom Agreement and the level of detail, length, and companion schedules and attachments is predicated on the particular business.

During this stage the buyer should already have their new business entity established (assuming it is not a stock sale), business bank accounts created, insurance policies prepared, merchant credit card accounts (if applicable) in place, etc.

1. 10. THE CLOSING

The closing should be the easiest part of the process. Why? Because all of the above steps have been followed diligently by both parties. For business-for-sale transactions the “closing” is simply the process by which both the buyer and seller execute (sign) all of the documents that have already been discussed and agreed to. Having the right transaction team in place from the start (transaction attorney, business broker, and lender) will make this a smooth process. Each of the advisors has their role and when done properly the closing becomes an uneventful step.

1. 11. TRANSITION

The terms and conditions of the business transition will vary based upon the type and complexity of the individual business. Obviously, the specifics will have already been spelled out and agreed to in the DPA. For some businesses, a customary 4 week transition period is all that is required. For others, the Seller will assist for an extended period of time, often under an employment or consulting contract. When bank financing is involved, especially the SBA, the Seller is typically restricted to a consulting or employment contract that does not extend beyond 12 months. The transition period is the stage where the seller and new owner implement the change of ownership and how that is communicated to employees, customers, suppliers, etc.

The transition of ownership represents a big change and the goal is (often) to make it as seamless as possible. To be effective, this process must be planned in advance with all stakeholders in agreement

Do you actually consider that a company with no real asset can value so much as $40 billion? Well, you are going to find out in this short article today.

Today, I believe you will benefit from some of the simplest elements in valuing a company. So let’s begin, the 7 essential elements most companies consider when they value themselves based on milestones.

I was searching for a topic this morning when I came across a discussion on Reddit “How Companies such as Uber and Ashley Madison Value Themselves”? The discussion caught my attention when one of the participants said, “I was reading about Ashley Madison scandals and how it has sales of $115 million but values itself at $1 billion.

Even a company like Uber that has no real asset value at $62.5 billion, where did they get those values from?” and I know that some of you out there might have also wondered how they got those values?

Well, most companies value themselves based on their milestones. Let me give you one example, if you watch Uber news you will see that they always talk about their milestones.

The company proudly announced that they have reached the new milestone on April 14, 2015. Wayne Ting said, “the number of Bay Area driver-partners on Uber platform exceeded 20,000 for the first time… And we were not even halfway there just one year ago”.

Then again on June 28, 2015, they also exceeded their milestone in South Africa, and this year 2016, their target is to hit another milestone in China. Okay, in that case, let’s briefly brush over the 7 essential elements that most companies look at when they value themselves:

#1: Business plan – The number one thing they would be proud of is that they have a business plan. They know the purposes of a business plan, that you can use it when you want to raise funds. You can also use it as a marketing tool and as a planning tool.

#2: Money – Money is a very important tool in every business, you know that. They go and raise some cash.

#3: People – They also hire people, and Remember the number 1, 2, 3 things investors look at when they value a company is people.

#4: Products – Another thing is that they build their products, and take them to the market. It might just be a company’s app or something like that.

#5: Customers – When there are no customers, there would be no sales, and when there are no sales definitely there would be no profit. They carefully figure out who their major customers are, or their target market. They may base their target on demographics, or university students of lower or upper grade, geographical or what have you.

#6: Marketing – This is very, very important. Marketing is the propeller that propels their products to the desired market, I mean the right market. It also helps your brand name gain exposure, when handled effectively.

#7: Risk – So what most venture capital firms do is that they look at a company’s risk factors, if the stage of the risk of the company is less, generally, they worth more money on all those stages.

Conclusion: what else do you think that was not added to the list of the 7 essential elements? In one of my training articles we talked about business plan purposes, money, people, customers, products, marketing and risk. Share this content with your friends, and have a nice day.

In order to get your business off the ground, or to continue operating, you must be able to obtain the financing you need. It’s not easy to get that money – especially if you lack business experience and don’t have a very good credit score. There are things you can do to increase your chances of getting approved. Here are a few tips on how to apply for a small business loan:

• Write a detailed business plan that explains why exactly you need the funding, how you’re planning to spend the money, and what you are going to do in order to pay it back. The last part is especially important, as you must demonstrate that you will be capable of gaining profits, and that through those profits you’ll be able to repay the lender with interest.

• Research the different types of loans and determine which would be the best one for you to send the application to. The SBA loans are backed by the US Small Business Administration, but they typically have strict eligibility requirements. There are term loans that are offered by financial institutions such as credit unions and banks, and can range from short-term to long-term solutions. Other options include lines of credit, merchant cash advance, microloans, crowdfunding, etc.

• At some point when you learn how to apply for a small business loan you should take the time to review your credit history and score. If your business has been around for less than three years, you probably won’t have much of a business credit history. You might have to use your personal credit history, and if it isn’t very good, you might have some problems getting approved. Review the credit reports and consider working with a credit repair agency that will help you remove any potential errors and clear some issues up.

More Tips About How to Apply for a Small Business Loan

• Compare different offers and terms. Pick at least 3 lenders that seem to offer the ideal terms and conditions for you. If you don’t take the time to review multiple options, you might miss out on a lower interest rate. Don’t apply for TOO many loans, however, since it could hurt your credit score.

• Read reviews about each lender you are considering to see what other businesses of similar size of yours are saying about them. Which lender seems to have a good rating with companies in your industry? Which ones are in solid financial standing?

Now that you know how to apply for a small business loan, start getting all of your credit info and reports ready, and create a good business plan. Start with a company like US Business Funding, which has an A+ rating with the BBB.

To get closer to financial freedom, visit George’s website: https://www.financiallygenius.com/us-business-funding/