Accounting and Business Operational needs

We support your entire accountancy and business operational needs.

We provide organisations with a flexible solution to compliance, back office accounting and employee-related services whether in Jamaica or international. We can provide on-site teams to Jamaican businesses.
We deliver a global solution to international businesses who have operations across multiple jurisdictions who require local finance and payroll support in each country but managed by one provider.

Our suite of finance, accounting, tax, payroll and HR services is designed to overcome the obstacles associated with your international expansion, giving you peace of mind, knowing that we have made you compliant with all rules and regulations, with a first-class solution for all your day-to-day operational needs in territories that may not be familiar to you

Whether you are making your first hire in a new country or looking for a more streamlined way to manage your multiple international operations, we provide a tailored solution to meet your requirements, in your time zone and to your budget.

We can help with:

  • business registrations, registered office and company secretarial services
  • corporate structure advice
  • fully outsourced bookkeeping and accountancy
  • bank account management
  • management reporting
  • tax compliance returns
  • payroll, HR, reward
  • expatriate tax services
  • immigration and global mobility
  • year-end statutory financial statements and audit

For additional information email us at :info@crowehorwath.com.jm

Share

Jamaica:Payroll and HR Services

Crowe Horwath Jamaica offers fully managed payroll and HR solutions to businesses, designed to meet individual needs. Our tailored service is suitable for any organisation regardless of size.

Our services:

  • calculation of monthly/weekly payrolls
  • production of payroll reports bespoke to your business needs
  • production of payslips and  e-payslips
  • real time information submission
  • Construction Industry Payroll services
  • all payroll-related statutory year-end returns
  • HR services
  • continuous access to payroll expertise
  • ongoing compliance with latest legislation
  • International Mobility Services, including expatriate advice
  • international payroll services

For additional information email us at: info@crowehorwath.com.jm

Share

Why Strategic Planning Is Important Even For Small Businesses

Small business owners mistakenly believe that the size of their business negates the need for strategic planning but the opposite is actually true. Its inherent size is actually what makes strategic planning more important because it can be means for a small business to gradually evolve into a huge and thriving multinational corporation.

What Small Business Owners Need to Know about Strategic Planning

Planning is one of the five important functions of management, but it’s arguably the most important of all because it’s the first function that any manager or business owners should focus on. Planning sets the goals, mission-vision, and direction for the company. Without it, the other functions may be impossible to achieve.

A business can’t, however, benefit from just any kind of planning. It must be strategic in essence to be effective. Strategic planning is a methodical process of deciding where you want your company to be in a given time frame and what you propose to do to get there.

There are different ways to let your company benefit from strategic planning so don’t worry about following the so-called rules. Whatever works for your company is good enough.

Elements of Strategic Planning

Internal and External Assessment of Strategic Planning – A coach of a basketball team won’t be able to map out an effective play if it doesn’t know its players well, which team it will be playing against, and other related factors. The same can be said for any business manager. Before you can start working on the details of your strategic plan, you must first focus on compiling data about the external and internal environment of your company.

Outside your business, politico-legal, economic, and socio-cultural factors can affect how your business will fare in the next few years. Inside, factors such as management style and the type of workforce you have can also help or hinder your company from attaining your goal.

Setting Your Company’s Goals – Small or big, the important thing is for your business to have goals. If you’ can be satisfied with small and short-term goals then that’s good; if you secretly desire for bigger goals then that’s even better. To know if the goals you plan to work on are indeed workable, determine if they adhere to the SMART rule – specific, measurable, attainable, realistic, and time-bound.

Rule of Majority – Of course, as owner or manager of a business, you reserve your right to approve or naysay any suggestion but as much as possible, allow the rule of majority to stick. Plans can only come to fruition if everyone in the company works together and you can assure yourself of their cooperation by showing them that you care about what they think.

Devising an Action Plan – Finally, it’s time to concentrate on the nitty-gritty of your strategic plan. List down possible and specific courses of action then choose what all of you deem as most suitable. Make sure that you set a definite schedule or timetable for everything but give allowances for unexpected delays and concerns. Set a budget as well.

The Ever-So-Popular Plan B – Last but not the least, devise a Plan B in the event that your first plan doesn’t work and list down indications to know when’s the right time to put Plan B to action.

Good luck on strategic planning for your business! Contact us for support

Share

Winning at Business With Your Marketing Game Plan

Annette from Montego Bay had talked to a number of marketing firms and gotten estimates for designing and printing her marketing materials and building a web site for his business producing Swimwear. One firm quoted J$200,000 to build her web site alone. She sensed something was missing or wrong, but couldn’t put her finger on it, so he called me.

I asked Annette how the various marketing pieces and activities were going to work together to help her generate leads. I asked her what was the marketing strategy was. She drew a blank. The marketing firms he had talked to had provided detailed information on what they were going to produce for her, but none had discussed a coordinated plan to generate leads and sales.

Marketing without an integrated strategy is like playing poker, tennis or football without knowing the rules, keeping score or having a game plan. You could put in a lot of time, energy, and capital, and still end up losing the game. Has this happened to you?

Winning at business is the same as any other game, whether your objective is to beat the competition or just to be the best in your industry. To be successful, you need to know the rules of the game, have a clear strategy and track your progress.

The Rules for Winning at Marketing and Sales

Here are some of the most essential rules to follow to succeed at marketing your business.

1. Written goals are motivating and can help you succeed.

Define your objectives for revenue, lead generation and conversion rates for the year and then break those down for each quarter. Commit them to writing. Next list the weekly and daily tasks you and/or your employees need to accomplish in order to reach your goals.

2. The more qualified prospects you can attract, the more clients you’ll have.

A clearly defined lead generation strategy will bring in the new prospects you need to be profitable.

3. It’s easier to convert prospects to clients when they are looking to solve a problem. 

It’s much harder to convert people who don’t have a current need or concern, even if they are members of your target market. Instead of seeking prospects, prompt prospects to look for you.

4. You’ll get a better response from marketing messages that are focused on client problems and concerns, not on your credentials or descriptions of products and processes.

If you’re not getting the response you’d like from your mailings, ads or web site, take a second look at your marketing message. A few changes in your marketing copy can increase response by factors of ten or more.

5. Integrate your tactics and message across your marketing materials, ads, and web site to prompt people to seek you out and contact you.

Trying to generate leads without an integrated strategy is like playing football without a set of plays for the quarterback to use with the team. He’d end up throwing the ball only to find the receiver had gone the other direction or go for a field goal on the first down.

6. The purpose of having a web site is to generate leads.

Once you have a lead you can use it to generate sales. Once you get prospects to your web site or reading your marketing materials, make sure you prompt them to contact you.

7. Most sales are the result of a relationship based on your credibility and the value of your products or services.

Developing these relationships can take weeks or months to build. Your marketing strategy should facilitate this process of building relationships over time, with multiple opportunities for contacting prospects.

8. The easiest people to sell to are past customers. Prompt first time clients to buy from you again and again.

Keeping Score

In order to know if your marketing is working you need ways of keeping score. Which marketing results are you tracking?

Which additional ones should you define each month and quarter to track?

Keep track of these important ‘scores’ to evaluate your marketing:

1. How many prospects seek your firm out each month? Is this number growing each month by five to ten percent?

2. What percentage of people who are exposed to your ads, your web site and other marketing materials give you their contact information so you can stay in touch with them?

3. How many people are on your house list of qualified prospects? How fast is this list growing each month?

4. How many people buy from you each week? What is the dollar volume of each sale?

5. How many sales come from repeat customers?

Whether we’re talking poker, tennis, or marketing your small business, the objective is to improve your performance and succeed more often. When you have a game plan, know the rules and track your scores, you can continually find ways to improve your marketing and be more successful.

Share

A Marketing Strategy for Winners

A marketing strategy can either make or break your business. As you know, there are many different aspects to a good marketing strategy. You may be wondering which marketing strategy is right for you. Also, how do you know which marketing strategy really works? The best marketing strategy is the one that gains profits. In this article, we will discuss the various aspects of a great market strategy.

The first marketing strategy you should look into is your website. Make sure your web design is eye catching and easy to maneuver. A marketing strategy you can add to this is to have attractive pictures or illustrations that get your customers attention. This is always an important marketing strategy.

A second marketing strategy is to promote you product. Any marketing strategy will tell you to get yourself noticed. Different aspects of this marketing strategy are to send out flyers, business cards, post cards, etc.

A third marketing strategy is to use an autoresponder. This automated form of a marketing strategy is commonly used. Using an autoresponder to send out advertisements of your product is fast and convenient. Everything is done by email.

Another marketing strategy is to use a slogan or logo. This is a great marketing strategy because it is a way for people to easily remember your business. If they remember or recognize you, they are likely to use your website.

Another powerful marketing strategy is to use an SEO (search engine ptimization). Using this will attract more people to your sight. This is because when they do a search for a particular service or product, the SEO will make sure your site is listed at the top of the search results.

A very important marketing strategy is to have a great price for your products or services. This marketing strategy is an absolute must. If your prices are not great, you will never have any business. Try to show people why your prices are so great to entice them to make a purchase.

Finally, the last marketing strategy is to have good public relations. With good public relations, your business will prosper through word of mouth. Allow customers to submit feedback of your business. Place positive feedback and testimonials on your website. It makes your business look good and customers tend to prefer to use businesses that have positive feedback.

As you know, you want a marketing strategy that will not leave you with empty pockets. In reality, any marketing strategy is going to cost you a little bit of money. But if you look in the right places and follow some good advice, your marketing strategy should leave you coming out on top

Share

Courting the Millennials

Recruitment of top notch young talent who can enter your work force and provide that kind of long term growth potential that can only come from a smart and productive staff is always a challenge. One of the big reasons any business works to keep its public image high and to project the concept that they are an employer of choice is to recruit the best and the brightest from the youth ranks.

Young employees bring a lot to a business that can compliment an older work force and make the business much more vital. Younger employees are savvy to the wants and needs of their peers. So instead of trying to guess how to market to the current generation of 18-28 year olds who are the age segment with disposable income, by keeping such employees on staff, you have the inside track to the priorities of the current generation. Further youthful employees are often optimistic and out to change the world. Their sense of mission and belief in the system as a means to make the world a better place results not only in a better morale internally but in business philosophy that shares those values.

The tendency to name the upcoming generations can be a bit trite but it helps in knowing who the target group for recruitment are. And that group of youthful future employees that will be hitting the job market in the next few years has been dubbed “the millennials”. And despite the traumatizing events of world terrorism, war and the decay of the environment, the millennials come to you with that youthful enthusiasm and desire to make a big difference in the world that sets them apart from previous generations.

To lure the brightest minds coming from the nation’s colleges, some rethinking of what we put in front of these young people is in order. They are not leaving academia strictly with the objective of making a lot of money. So to turn the head of youth workers who can make a change for the better in your business…

  • Don’t just make the potential job about money or your recognizable business name. The reputation of the company can be as much a negative as it can be a positive. The millennial recruitee will look past the sign on the building at what the company is really all about.
  • The millennial is more internet savvy and wants to use modern technology to accomplish business goals. It’s in our best interest to facilitate that goal because it will keep us in touch with the marketplace.
  • Corporate culture is an important factor for both recruiting and retaining good employees from this generation. Millenials are looking for a business climate that is creative, able to change when new things become available, highly accessible upper management and responsive.
  • Corporate values mean a lot to the millennial crowd. That means that those high minded values printed on posters and plastered all over the Human Resource department have to actually mean something. By demonstrating that the business lives up to its ethics and values, that will appeal the idealistic side of youthful workers.
  • The values that the business supports must reflect a modern attitude toward diversity and “going green”. If you walk a millennial around the office during his or her interview, they will notice the recycling bins scattered about. They will notice the diversity of culture and race in the employee mix.
  • Be prepared to recruit from various disciplines. Even if you are recruiting for a financial services function or some other specialization, keep your mind open to recruiting students with a focus on liberal arts or teaching. These millennials can be trained to the specific job and they bring a fresh approach to the job description that comes from their college area of focus.

These are things that might take time to change if the corporate culture is behind the times. But it’s worth the effort to start now to attract the kinds of workers that mean long term growth for the company. By doing some serious analysis on how up to the date the business is, you can begin to affect change now so by this time next year, you will be in better shape to court the millennials.

Share

Five Steps To A Flawless Interview

Are you prepared for your next job interview? Do you know the secrets of pulling off a flawless interview and getting the job of your dreams? Use these five easy steps to prepare yourself and leave the best impression possible with the hiring manager.

1.Be Early – The worst thing you can do is show up to an interview late. What does that tell the hiring manager about your commitment level? Why would anyone want to hire a person who doesn’t have the organization skills to show up on time? By showing up early you are demonstrating and showing respect of the company and the hiring manager. You are also giving them the opportunity to take you early, which could give you more face time. Face time is important, the longer you have with the hiring manager the better your chances will be to get the job.

2.Research the Company – Never walk into an interview without knowing anything about the company. Do some research; find out how many facilities they have, who is the CEO, and what recent news has come out about the company. Look at the financials from their website or other investor news. Be prepared to ask some questions about what you have discovered. At the end of every interview that I have conducted, I always ask “Do you have any questions for me?” I am always impressed with people who have done their research and are serious about working for the company.

3.Listen, Don’t Talk – It may seem counter-intuitive, but get the hiring manager to do most of the talking. It is a proven fact, that hiring managers will think the interview go better if they do a lot of talking. So use your research and ask a lot of questions to get the interview talking.

4.Carry Copies of Your Resume – Hiring managers are busy people and many times they do not have a copy of your resume when they enter the room. Even if they do have a copy, a lot of the time, it will be a fax copy from the recruiter. This is the time to hand them your resume on a quality piece of paper. Resume paper is thicker and has a very good feel to it and that is what you want the interviewer to associate with you… a good feel. Later, when the hiring manager is reviewing your resume you will stand a better chance of getting the job or at least the second interview.

5.Follow-Up – After the interview, it is always a good idea to follow-up with the hiring manager is some shape, way, or form. If the interviewer gave you his/her card then make use of it. Call them and ask a few follow-up questions and thank them for taking the time to meet with you. If you didn’t get a card during the interview, then send a polite thank you letter. The goal here is to get the hiring manager to think of you again. And the more he/she thinks of you, in a positive manner, the better your chances are to get the job.

Share

How To Boost The Value Of Your Business

All too often banks, potential investors, and creditors will determine a company’s value based on financial statements. This is a mistake. Financials don’t come close to telling the true story. Sure, they present the tangible value. But what about the intangible value? Company valuation is emotional—a company is worth what an acquirer will pay, what the market will pay, what the interested parties perceive. We see evidence of this frequently when companies with a trickle of revenue are acquired for gushing millions or even billions of dollars.

Maybe you aren’t planning on raising financing, securing a credit line, being acquired, or one day going public. You still need to continually boost the value of your company. A higher-value company has more options. It gets the right partners, preferential terms, and often a more glorious future. There’s an art to value-boosting, and I am going to tell you how to do it. First, know the facts:

• Company valuation is emotional.

• Intangibles often matter more than tangibles.

You can’t build value if your business isn’t enticing.

• You should always be selling: to financiers, customers, strategic partners, staff, and strangers.

I’ve used some or all of the following seven value-boosters to quintuple the value of my clients’ companies and my own. These value-boosters have also worked for companies such as Google (GOOG), Microsoft (MSFT), YouTube, and many, many more.

1. A killer team and a killer business plan.

2. A hot board of directors and/or advisory board.

3. Specific strategic alliances. An LOI (Letter of Intent) with a partner ain’t gonna cut it. You need a binding contract spelling out exactly what the terms of your deal are. Clarify how many widgets they will buy/distribute/co-market, the time period, as well as what happens if they default on the agreement.

4. New sales channels. Distributors, value-added resellers, outside sales forces, affiliates, joint-venture partners—all boost the value of your company. Of course, you’ll track the performance of your sales channels. Use the affiliate tools in your online shopping cart to track the performance of your online sale channels, and use your accounting system or sales force management software to track all others.

5. Product line extension. Let’s assume you sell a supercool widget. What’s next? Son of Widget? Platinum Widget? Widget Extraordinaire? Map out your future product lines so financiers, partners, and staff can see where you are headed and how you plan to get there.

6. Intellectual-property (IP) portfolio. Protect your corporate jewels! A patent portfolio can be worth gold. A friend of mine sold his company for $425 million (with about $30 million in trailing revenue) because he had locked in so many patents. That’s what the acquirer bought. They didn’t give a hoot about the business.

7. Compelling prototype of product. This is key when you’re in the zero or near-zero revenue range, as you’ll see below. People need to see/touch/feel what the product will be like. Then they can envision your fabulous future.

Consider this example. A professional services firm with an initial value of $2 million hired me to help boost its value. But the trouble with services firms is they are often valued at only revenue times one. Ick. So we beefed up the board and advisers (adding $1 million in value), helped nail down specific strategic alliances ($3 million), mapped out a line of “productized” services ($2 million), and developed new sales channels ($2 million). About six intense months later, the firm sought financing with a respectable pre-money valuation of $10 million. It closed the financing in three months.

Then there is the example of the Internet promotion company I was asked to assist. It started with no revenue. Before seeking financing, my team and I had to answer the question: How do you make an idea into a hot commodity? The solution consisted of pulling in a rocking team and coming up with a hot business plan (adding $1 million in value), developing a compelling product prototype ($1 million), locking in killer alliances ($1 million), and building an IP portfolio ($2 million). We took its value to $5 million in four intense, somewhat sleep-deprived months. Then we raised $2.5 million in financing with a pre-money value of $5 million, and a post-money value of $7.5 million. The $2.5 million invested bought one-third of the company.

Value is about potential. Potential today, potential tomorrow. The main reason you keep building value in your company, in all the tangible and intangible ways (and as I’ve shown you, the “intangible” ways often do have dollar values attached to them!), is because a high-value company gets the financing it wants on the terms it wants. It also gets multiple acquisition offers at fabulous terms. The high-value company gets the alliances, the staff, and the opportunities it wants, too.

Remember, you are selling the future as you are selling the present. The present must look promising for the future to be potentially glorious. What are you doing to boost the value of your company today? Contact us

Share

Due Diligence 101 or What You Do Not Know Can Kill You!

Introduction:

This article is written as a general discussion on the subject of “Due Diligence”. It is for informational purposes and not intended to be a definitive guideline for your exact situation. You should consult the appropriate professionals with regard to your specific transaction or situation. Further, this article is in no way advocating, suggesting or implying that anyone engages in any type fraudulent activities whatsoever. These are simply the things a buyer should be aware of when doing due diligence in buying a business.

You spent months finding the right business. The seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.

I think it was Benjamin Franklin who said, “A fool and his money are soon parted.” Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you millions of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does.

I hope that the point is made. Never buy a business on someone’s word. Actually, you should never buy anything on someone’s word. Confirm everything, believe nothing and understand that you are still going to find out things, after the close of escrow, which is going to surprise you. A similar example is one known by every employer. A staff worked for a company for 4 months and complained to the personnel officer that the job was just too difficult. He kept complaining that he needed more training and lower quotas. You feel sorry for him. You talk to him and talk to him about it. You listen and believe all the excuses he gives you for poor production. Finally he quit, blaming you for something that you did, this just before you were going to give up and fire him. Then you started to take over the work of finishing his incomplete projects. This is what happens when you buy a business. You find out all the actions that the seller, not his staff, had stopped doing, from the day that he decided to sell the company.

Many businesses are doing well. Sometimes the owners have personal things going on in their home life. Sometimes they have medical problems. Many times the business is not doing well and the seller is frustrated. It is very common for a seller to work hard to build his business, but because of many reasons, it doesn’t produce what the seller wants. He gets frustrated and one day he gives up. That is usually the day he calls that business broker he met and asks the big question. How long will it take you to get me out of this place? In his mind, he is gone. He just counts the days until he physically walks out.

Have I scared you? Good. There is a plus side. It is worth all the grief that you go through to buy a business when you get in to the drivers seat, put all the marketing actions into place and start driving your own business.

In 2005 I had a client who buy a manufacturing business for $5 Million dollars. The seller swore it was making $500,000 profit per year. Due Diligence showed it was only making $300,000. When presented with the auditors report, the seller claimed the audit was wrong. The buyer bought the company, knowing he was overpaying for the business. Why? He had done his research on the production department and sales department. He went out on the deliveries with the drivers, and met customers. He determined that he could double the sales and profit within one year. After he bought the business he found two things to be true. The profit was $300,000, as my audit found. He could double the sales and profit within 12 months, and did. The seller tried to screw the buyer, but in the end, justice was served. The seller screwed himself more than he screwed the buyer by not running his business correctly. If he had he could of sold it for a lot more than $5 Million dollars.

Ok, enough with the fun stories for now. Lets get down to the details of what to look for when doing “Due Diligence.”

Due Diligence Defined:

The phrase is composed of two words. “Due” which the dictionary defines as “Proper or Adequate” and Diligence, which is defined as “Degree of care or caution expected of a person. Especially as a party to an agreement.” Caution: is the watchword in this definition.

Financial Statements – What to look for:

If you bought the business through a business broker you should have received the business financial statement with a separate worksheet showing adjustments to those statements. These adjustments show the owner’s benefits received from the business besides the profit and salary he receives. These can also be defined as personal expenses that need to be added back to the profit. Depreciation, incomes taxes, interest expense are add backs that are not personal. Personal includes such things as family auto expenses, owner life insurance, owner health insurance, business entertainment that was not really spent on clients, business trips not really for business, home office expenses, family cellular phones and much much more.

Make the seller show you the details on some or all of these expenses to verify that they are really personal and not actually business expenses that shouldn’t be added back to profit. Spend time asking detailed questions with the general ledger in front of you. Go through individual charges and what they mean, until you fully understand what is being added back and why.

Inventory:

Inventory of resale merchandise must be checked for two reasons. One is you have to pay for it. Be careful, you do not want to buy merchandise that is old, worthless and not saleable anymore. Only pay for current marketable product. The price you are suppose to pay for the inventory is the seller’s cost. The price for old slow inventory is negotiable. Always spot check the price and count the merchandise listed on the inventory list. Do people put down that there is three of an item when there are only two? Of course, especially when they think no one is going to be checking them out. Comparing prices from purchase invoices is how you check prices. You cannot check every item against the actual cost but you can do 5% of the items. Pick at random, not by any suggestion made by the seller or others. If you do not understand how marketable the inventory is that you are buying, hire an expert, from that industry. Your Accountant should be able to help you in finding someone. Do not be cheap, and think you do not need to spend the money on an expert adviser. I will take a lunch bet that they will pay for them selves many times over.

The second reason for checking inventory is that if a seller doesn’t take inventory at least yearly and adjust his inventory value in his accounting records, accurately, the profit figure you are receiving will not be accurate. As a rule, the higher cost of goods sold, the lower the profit. Some business owners reduce the inventory value on the books, intentionally, to a lower value so as to make the business show a higher cost of goods sold, which then creates a smaller taxable profit. If they do this year after year, the profit may or may not be accurate for the current year. It might take a CPA to figure this one out for you, if you do not have a background in retail.

Next thing to check on the financials is the real, current value of the equipment you are buying with the business. The balance sheet might, if it shows all the equipment the company owns, give you the cost of the equipment when it was purchased. If you are buying assets rather than cash flow, the equipment valuation becomes more important. No one wants to overpay for used equipment. Also check that the equipment works and is actually being used rather than sitting behind the building with other junk.

Cash Sales:

If all income is being reported, check sales volume activities that you have observed against the daily records during your “Due Diligence” to see if the volume corresponds to what was reported last year in the same month. If you see income of $500 per day but the seller shows sales of $1,000 per day, you need to find out why. Some smart buyers sit in the business all day, watch the sales and observe the activities of the staff. This works if the seller is not putting on a full fledge production fraud for you the buyer.

Fraud:

How does a seller defraud a buyer on current sales activity levels? Sellers who keep poor records or no records, many times, suggest the buyer doing a 15-day visual inspection. This helps but it is very dangerous to rely solely on physical inspections alone because the seller can still defraud the buyer. Here is the most famous of the stories I have heard over the years.

Seller owns a dry cleaner. The buyer and seller have opened escrow and the deal is subject to a 15-day physical observation period. The seller doesn’t want the buyer to find out that business volume is very slow. The seller tells all his friends to bring their drycleaning in to the shop for a two-week period, at no charge. They bring in the clothing, get it cleaned, pick it up and pay for it. Later the business owner meets the customers and reimburses all of them for the cost of their dry cleaning. The day after escrow closes all that business traffic stops. Think it never happens? The same is true of restaurants. Seller tells all his friends to bring all of their friends in for a free meal. Customers pay the bill and some time later or at home, the business owner reimburses all the customers for the cost of their meals.

Actual time sellers spends working:

Determine how many hours the seller really works. You are buying an income stream based on a known number of hours of work. Make sure the seller isn’t working 80 hours and telling you he is only working 40 hours, per week. I had an absentee fast food owner tell the buyers and me that he worked part time – 5 hours per week. Closer inspection showed he was working 25 hours per week. One auto repair seller, we’ll call him Bob, said he never was at the business, because he had a second full time job. Inspection found he was working 30 hours a week (4 plus hours every night, and 8 hours on Saturdays).

Find out what job functions the seller does:

Get a list of functions that the seller does. Is one of them bookkeeping? Sometimes the wife does the books part time and this is never said. Again you may find the owner does the bookkeeping, at home, every night, for an extra hour. In an auto repair shop, you may find the owner is doing auto body repair work, personally, on Saturdays, which is work that you, as a buyer, will never be able to duplicate. You need to be sure you know how to do every job function that the seller does or learn them. The time to find out what technical knowledge you need to have to take over the business is when you are doing your investigation, not the day after escrow closes.

Verification of things that are not on the Financial Statements:

It is a common occurrence that businesses do not record all of their income on their financial statements. Yes, this is true. Many people do not, in fact, report the truth on their tax returns. In fact, when I am talking about small retail or service businesses that deal with the public directly, I find it is over 50%. “Will the people with an honest set of books, please leave the auditorium. There are two golf carts outside waiting to chauffer you home. You do not need to hear this.”

The balance of this article will discuss how a buyer might do their “Due Diligence” for different types of businesses. These types of businesses include Restaurants, auto repair shops; real estate services contractors, non-real estate repair/ services, and retail stores.

Restaurants- Non-Franchise:

Restaurants compose over 25% of all businesses for sale in some countries. This is not because they all go broke, as the SBA reports. It is because 28% of all retail businesses are food service or food sales. It is the largest segment of the consumer market. Because it is a retail consumer business, it deals in 33% cash. Every independent-non-franchise food service business I have been into shows zero profit on the books. Some even go overboard and show a tax loss. It is because they do simple tax planning that does not require an MBA degree to figure out. If the business doesn’t show all of its cash, or any of its cash, the expenses will equal the reported income. This alone makes it attractive to many buyers. We will not discuss the moral issues of this attitude; it is what it is. What we have to discuss is how do you, the buyer, can prove that the business is making a profit? And if it is, how much?

Restaurants come in two categories. 1. Fast food-counter sales. 2. Sit down. Fast food restaurants have computerized cash registers that record the sales into its computer, which has a memory. This memory has daily totals going back to the beginning of the computer’s history. Most owners close out their cash registers at the end of the day and print out the tape of each day’s activities. This does not automatically wipe out the information for the day. The computer does, I am told, have a delete button on it allowing the owner to wipe out the full memory in the computer, in the event of an audit. I have also been told, but do not believe, that an electrical blackout can wipe out the memory in the computer and that is why one seller said he couldn’t give me access to this information.

If we are talking about a sit down restaurant sales information, you can use the daily order ticket, which are then imputed into the computer. This gives 3 sources: tickets, computer and daily tape totals.

When this information is not available, for any reason, an experienced restaurant consultant can tell you the sales activities just by inspecting the restaurant and counting the number of customers eating at 4 key times in a day, and on several key days per week. Then the consultant can figures out what the average sales ticket amount is. With this information like magic the consultant knows the gross sales figure, for the year.

A double check procedure for restaurant consultants is to then look at the food purchases and its costs and can confirm that it matches the actual sales figures. One consultant that was hired to review a restaurant did the audit and put together a marketing program for the buyer. The marketing program included delivery and catering. Both of which do not normally show up on the computerized cash register.

Restaurants – Franchise:

You would imagine that franchise restaurants records would be very accurate because the franchise company gets a percentage of the gross income. The bigger ones connect up to the individual franchise and know what is happening faster then the owner. As stated above, the only sales that can be made and not declared to the computer are catering or delivery orders, which could be done without ringing them up.

Some franchises do not hook up to the individual franchise computers and do not do audits regularly. This allows the franchise to report reduced income to the company and the IRS. In case either comes to audit, they press the delete button on the computer. If you as a buyer can get access to the computer you know the numbers are correct even if they are not complete. It is impossible for the staff or the owner to change the computer records. The information can only be deleted. Again catering and take out may not be on the computer. Theft from employees can only be in the form of 1. Employees that give free food to friends. 2. Employees not ringing up an order, which is difficult when businesses put up signs saying, “If you do not get a receipt, your order is free.”

Some sellers are so paranoid of the IRS, they are not willing to show anyone their private records or computer tapes for fear that the buyer could be an IRS agent. My personal opinion, and what I advice sellers to do, is to get their books legal and honest and hire themselves a top notch CPA firm, like Crowe Horwath Jamaica , and use every legal trick in the book. Martha Stewart didn’t go to jail for inside trading. They got her on lying. There are legal ways to avoid taxes so that fraud is not necessary. If you cannot find a good accountant, I will recommend one.

If you ask someone “Are you a government employee or IRS agent?” and they lie to you; that might be considered entrapment and a good possible defense in court. But, I ask you. Is it worth the grief?

The normal action of sellers, in this situation, is to require that the buyer take the business based on the recorded records and guess as to how profitable the place really is. This is a very difficult situation for the brokers and buyers, since sellers do not price their business based on these reported numbers but base their price on the real numbers.

I hope this is of some help to you in doing due diligence on a restaurant you might be interested in buying.

Auto Repair Shops:

Auto repair shops are almost as bad as restaurants when it comes to under-declaring cash. The normal procedure for most, I have run across, is to declare only the checks and credit card charges. The cash they put into their pocket. The good thing, in doing audits is that almost every one of these owners keeps their work orders-invoices. These are kept in monthly manila folders and put into a drawer or file cabinet. They never tell you that they keep these records, but they do. They even tell me, as the broker, that all backup documents have been destroyed, but they are not. When I insist that they cannot sell their business without providing these invoices, they tell me of their existence. With the sales invoices an audit of income becomes simple. Since the sellers keep them in a manila folder by months, you only have to pick monthly folders at random and total the actual invoices. Then compare them to what the “State Board of Equalization” report says and calculate what percentage of the total was declared. If you do this for a few months, a pattern will develop. Some sellers have even run a calculator tape of the month’s activities and/or written it in a private ledger. You can check the actual invoice tapes against the private ledger records to confirm the private ledger information is correct.

Real Estate Services/Repairs Contractors:

Real estate service contractors include new construction general contractors and sub-contractors, contractors that come to your house to offer repairs on your house (plumbers, heating and air-conditioning contractors, gardeners, landscapers, termite companies, roofers, carpet cleaners, cabinet re-modelers, carpet/drapery stores, tile stores, pool service providers, pool installation contractors, landscapers, etc.) These contractors, if the owner does the work himself, do not keep their job tickets-invoices after they are paid for their services, in cash. If the company has service men, then the owner is usually the dispatcher or other administrative person. In this situation seller, most likely, will have kept all of his invoices, so as to be able to look up prior history records of their customers. They might not have recorded the income on their records but they will have the basic records. Theses records may in a total mess, but the records do exist. If they do not, then buy the business based on what the seller can prove to you, or what you can reasonably estimate based on what percentage of the business you think is cash. What they are only going to prove to you is the total of checks and credit card charges, which is what the seller has declared on the tax return.

Non Real Estate Repair/ Services:

Non real estate repair/service companies include such things as large and small appliance repairs, barbershops/hair salons, nail shops, massage parlors, health clubs, pet grooming, wedding photographers, and movie theaters. These businesses usually do not even write up a ticket so unless a central cash register is used for recording income there will be no record at all. Again this is like a restaurant with cash register tapes. If the work is done at the customer’s location, then you study the serviceman’s truck schedule. If you only have some work records, from some work done in the field, you can determine what the average repair dollar volume is and then if you calculate how many calls are made on an average day, you only have to multiply the two numbers.

If we are talking about hair salons, nail shops or barber shops we can gather information about how many chairs there are, how many chairs are rented on a weekly bases and what rent the owner is collecting. If the technician is not paying rent then they are on a commission split. If you know the rental income and the income split you are well on your way to determining the real profit of this kind of business. Remember to ignore the income of the owner since you as a hairdresser or non-hairdresser owner would not get the income of the old owner. The old owner will probably rent space from you so you only add another rented chair to the income.

Retail Stores:

A retail store is a store that carries an inventory of products that they resale. Sometimes they offer installation, which then might put them into the service company instead of a retail store. The main distinction is that they sell a product instead of a service. This includes everything from Home Depot, pet stores, clothing stores, gift shops, supermarkets, vitamin stores, and sign shops. Retail stores have cash registers and daily tapes of their sales. This is handled similarly to a restaurant and should be audited in the same manner. (See Restaurant Section Above) In addition to the cash register information, you also have purchase records, which can be studied to determine the cost of the merchandise as a percentage of the selling price. With this relationship-percentage of cost to sale price known you can calculate either the cost of goods sold or gross sales if you have either to start with. A few smart owners buy some merchandise for cash in order to prevent a tax auditor from catching them by using this same manner. If the seller does this, he will admit it to you, if you ask.

When All Else Fails With a Retail Business:

The only way to protect yourself is disclosure so that you have grounds to sue for fraud. Make the seller put the real sales numbers, cost of goods percentage and any other information you are given and can not document down on a piece of paper and then have the seller sign and date the paper. If after the close of escrow you find the seller lied to you, the document will give you grounds to sue for fraud or misrepresentation. The important thing is be able to show a judge in writing what the buyer told you and to be able to show that he did this in writing. If the seller told you but never did it in writing you cannot prove it. “If it isn’t written, it isn’t so”

Medical Professions and Non Medical Professionals:

Professionals are a form of service business; except they charge a higher hourly rate and they have to keep patient/client files. Most people pay their professionals by credit card or check, because these expenses are usually tax deductible as medical or financial advice. If the seller doesn’t declare all the income, ask what back up records there are. Clients always get receipts for services and payments. There are records, find them and you will have all the income.

When all else fails in Figuring Cash Income:

If you have followed all of the earlier advice on documenting cash income and they in truth do not have documentation, you are in big trouble. You may have reached the end of your rope. You now have Two option left. 1. Walk away. 2. If you still want to buy this business I only have one last suggestion. It is not fool proof but it is a method. Cash appears to be approximately 30%-35% of total sales. You could make this assumption to come up with a real total. Add 50% to the sales showing on the books, this amount is from credit cards and check sales. This is not an exact science; it is only a close estimate. Cash sales could actually be anywhere between 25% or 35%. I never figured it that close.

Cash Expenses Verification:

When you think of unrecorded cash transactions we usually think of undeclared income. Undeclared income is the biggest category, but not the only one. The other is cash expense not deducted on the books. The biggest expense item in this category is cash payroll.

Unrecorded Cash Payroll:

In an attempt to reduce the payroll expense, business owners will pay some of their staff’s payroll in cash. Why would they do this? Workman’s Compensation Insurance, FICA Taxes-Employer and Employee portion – Federal and State Income Taxes. Any accountant would scream at his client “You are missing out on a legal tax deduction.” Let me explain why someone would forego the tax write off by paying cash expenses.

When you pay an employee $100.00 per day, on the books, the employee gets about $70.00 net on his check. If you give him $80.00 in cash, he is happy. He doesn’t have to worry about going into a higher tax bracket.

The employer has to pay approx 10% to cover the employers FICA and other Federal employment taxes. You, as employer also have the workman’s compensation insurance premium. If we are talking auto repair mechanics compensation insurance alone costs 15%. If we are talking new real estate construction workers we can be talking a cost rate between 25% up to 120%. A roofer’s compensation premium is greater than his gross salary. Lets look what payroll taxes cost for a normal worker. The auto mechanic insurance rate of 25% is added to the 10% Federal costs plus the wages give us an expense that equals 135% of the wages. This comes out with the employer paying $135.00 and the employee receiving $70.00. There is a loss of $65.00 per day per employee. Some employers would rather save the $65.00 and not get the income tax deduction for the expense. Also with all the unrecorded cash the business shows, it isn’t important to have a loss on the books, since there is no need for more deductions to lower taxes. The business is already not paying any taxes.

Because there is a danger that an employee might be injured and file a claim under workman’s compensation insurance, it is common among small businesses to show part of the wages on the books and the balance in cash. This means that an employee earning $40,000 per year might have $18,000 recorded on a W-2 form, creating a very low federal tax rate or no tax due at all. Since the employee is being paid part of his wages on the books if he is injured on the job he is fully insured for accidents with State Workman’s Compensation Fund, State Disability Funds, State unemployment insurance and all Social Security benefits. A win-win for employer and employee, even if not for the government. As a buyer you must figure all this out, and adjust the expenses accordingly.

Because owners are collecting so much cash, they need a place to spend it. If you make a major purchase, you cannot just walk in and pay cash for a car. The IRS will be notified of this cash transaction. Owners with a lot of cash will pay for all repairs, gardeners and everything for the home that costs less than $10,000, in cash. Why $10,000? That is the recording cut off that a vendor or bank is required to report when receiving funds in cash. If a business owner still has too much cash, sellers will start paying for business expenses. They start with the expenses where a service man gives a discount for cash. I found two restaurants that were paying for the hood cleaning service in cash, partly because they got a discount for paying in cash. By asking the correct questions, you can discover what is being paid in cash.

Unrecorded Labor:

Because we are talking small businesses, the wife comes in to the business full or part time. One of the children may come in to work part time. You must be aware of these employees who may or may not be paid. This is another form of cash payroll. If you have to replace these people with paid employees, these expenses need to be calculated in to the adjusted profit and loss calculation. .

Sometimes the family member is being paid some wages but not full market value. The adjustment is still needed but in this case only by the difference between actual payroll and the fair market payroll amount.

Conclusion:

It is a hard life when you own your own business; you work long hours. Many people feel that is better than the alternative, which is to work for someone else, pay high taxes, never know if you will be laid off and after years of hard work, never have anything to show for it all.

If you are going to buy a business with your hard earned money, you want to make sure you get what you paid for. Many people believe it is all right to cheat the taxman but otherwise are very honest citizens. Others feel it is all right to cheat any poor sucker that comes along. Don’t be a sucker, do your due diligence and get what you paid for.

Then build your new business into something you can be proud of and enjoy. While building your new business make a point to study everything you can about Tax planning, tax avoidance and reducing taxes legally. I started my professional career learning about the tax codes, and there are so many ways to save taxes legally, you would never believe it. You will sleep better at night, I promise you. Then 10-20 years from now when you want to sell your business, you can ask top dollar and get it. This because a buyer can do a simple due diligence and know that your business is doing exactly what your books say you are doing.

DO YOUR DUE DILIGENCE and buying your own business can be a pleasant and rewarding experience!

Share

Ten Entrepreneurial Mistakes

It’s hard to avoid certain mistakes, especially when you face a situation for the first time. In fact, many of the following mistakes are hard to avoid even if you’re an old hand. Of course, these are not the only mistakes CEOs make, but they sure are common enough. Take the following self assessment: give yourself ten points for each of these entrepreneurial blunders you are in the process of making. Deduct five points for those you have narrowly avoided. Your score, of course, will be kept confidential, but do seek help. Fast!

1. Big Customer Syndrome

If more than 50 percent of your revenues come from any one customer you may be headed for a meltdown. While it both is easier and more profitable to deal with a small number of big customers, you become quite vulnerable when one of them contributes the lion’s share of your cash flow. You tend to make silly concessions to keep their business. You make special investments to handle their special requirements. And you are so busy servicing that one big account that you fail to develop additional customers and revenue streams. Then suddenly, for one reason or another, that customer goes away and your business borders on collapse.

Use that burgeoning account as both a cause for celebration and a danger signal. Always look for new business. And always seek to diversify your revenue sources.

2. Creating products in a vacuum.

You and your team have a great idea. A brilliant idea. You spend months, even years, implementing that idea. When you finally bring it to market, no one is interested. Unfortunately you were so in love with your idea you never took the time to find out if anyone else cared enough to pay money for it. You have built the classic better mousetrap.

Do not be a product searching for a market. Do the “market research” up front. Test the idea. Talk to potential customers, at least a dozen of them. Find out if anyone wants to buy it. Do this before anything else. If enough people say “yes” go ahead and build it. Better yet, sell the product at pre-release prices. Fund it in advance. If you don’t get a good response, go on to the next idea.

3. Equal partnerships

Suppose you are the world’s greatest salesman, but you need an operations guy to run things back at the office. Or you are a technical genius, but you need someone to find the customers. Or maybe you and a friend start the company together. In each case, you and your new partner split the company 50/50. That seems fine and fair right now, but as your personal and professional interests diverge, it is a sure recipe for disaster. Either party’s veto power can stall the growth and development of your company, and neither holds enough votes to change the situation. Almost as bad is ownership split evenly among a larger number of partners, or worse, friends. Everyone has an equal vote and decisions are made by consensus. Or, worse still, unanimously. Yikes! No one has the final say, every little decision becomes a debate, and things bog down quickly.

To paraphrase Harry Truman, the buck has to stop somewhere. Someone has to be in charge. Make that person CEO and give them the largest ownership stake, even if it’s only a little more. 51/49 works much better than 50/50. If you and your partner must have total equality, give a one percent share to an outside advisor who becomes your tie-breaker.

4. Low prices

Some entrepreneurs think they can be the low price player in their market and make huge profits on the volume. Would you work for low wages? Why do you want to sell at low prices? Remember, gross margins pay for things like marketing and product development (and great vacation trips.) Remember, low margins = no profits = no future. So the grosser the better.

Set your prices as high as your market will bear. Even if you can sell more units and generate greater dollar volume at the lower price (which is not always the case) you may not be better off. Make sure you do all the math before you decide on a low price strategy. Figure all your incremental costs. Figure in the extra stress as well. For service companies, low price is almost never a good idea. How do you decide how high? Raise prices. Then raise them again. When customers or clients stop buying, you’ve gone too far.

5. Not enough capital

Check your business assumptions. The norm is optimistic sales projections, too-short product development timeframes, and unrealistically low expense forecasts. And don’t forget weak competitors. Regardless of the cause, many businesses are simply undercapitalized. Even mature companies often do not have the cash reserves to weather a downturn.

Be conservative in all your projections. Make sure you have at least as much capital as you need to make it through the sales cycle, or until the next planned round of funding. Or lower your burn rate so that you do.

6. Out of Focus

If yours is like most companies, you have neither the time nor the people to pursue every interesting opportunity. But many entrepreneurs – hungry for cash and thinking more is always better – feel the need to seize every piece of business dangled in front of them, instead of focusing on their core product, service, market, distribution channel. Spreading yourself too thin results in sub-par performance.

Concentrating your attention in a limited area leads to better-than-average results, almost always surpassing the profits generated from diversification. Al Reis, of Positioning fame, wrote a book that covers just this subject. It’s called Focus.

There are so many good ideas in the world, your job is to pick only the ones which provide superior returns in your focus area. Don’t spread yourself thin. Get known in your niche for the thing you do best, and do that exceedingly well.

7. First class and infrastructure crazy

Many a startup dies an untimely death from excessive overhead. Keep your digs humble and your furniture cheap. Your management team should earn the bulk of their compensation when the profits roll in, not before. The best entrepreneurs know how to stretch their cash and use it for key business-building processes like product development, sales and marketing. Skip that fancy phone system unless it really saves time and helps make more sales. Spend all the money really necessary to achieve your objectives. Ask the question, will there be a sufficient return on this expenditure? Everything else is overhead.

8. Perfection-itis

This disease is often found in engineers who won’t release products until they are absolutely perfect. Remember the 80/20 rule? Following this rule to its logical conclusion, finishing the last 20 percent of the last 20 percent could cost you more than you spent on the rest of the project. When it comes to product development, Zeno’s paradox rules. Perfection is unattainable and very costly at that. Plus, while you getting it right, the market is changing right out from under you. On top of that, your customers put off purchasing your existing products waiting for the next new thing to roll out your doors.

The antidote? Focus on creating a market-beating product within the allotted time. Set a deadline and build a product development plan to match. Know when you have to stop development to make a delivery date. When your time’s up, it’s up. Release your product.

9. No clear return on investment

Can you articulate the return which comes from purchasing your product or service? How much additional business will it generate for your customer? How much money will they save? What? You say it’s too hard to quantify? There are too many intangibles? If it’s too difficult for you to figure, what do you expect your prospect to do? Do the analysis. Talk to your customers, create case studies. Come up with ways to quantify the benefits. If you can’t justify the purchase, don’t expect your customer will. If you can demonstrate the great return on investment your product provides, sales are a slam dunk.

10. Not admitting your mistakes.

Of all the mistakes, this might be the biggest. At some point you realize the awful truth: you have made a mistake. Admit it quick. Redress the situation. If not, that mistake will get bigger, and bigger, and… Sometimes this is hard, but, believe me, bankruptcy is harder.

Assume your costs are sunk. Your money is lost. There is good news: your basis is zero. From this perspective, would you invest fresh money in this idea? If the answer is no, walk away. Change course. Whatever. But do not throw any more good money after bad.

OK, everybody makes mistakes. Just try to catch them quickly, before they kill your company.

To avoid some mistakes in the future, it sometimes helps to ask good questions ahead of time.

 

Share