Many toy with the idea of buying a business for themselves; but it’s such a risk most never take the chance. Here are 10 rules that will guide anyone to making better choices.

1 YOU are the most important consideration
It’s a mistake to first value a business as a financial investment. Most importantly it's a career investment. Your life to date has given you valuable skills and experiences. Use Reflection exercises to understand your Personal Business skills first; then seek an opportunity that will utilize them. Lesson 8 (free preview available) of the online Fit for Life workshop is a great starting point. Also the book Business Model YOU.

2 Discover your preferences 
In addition to skills, your business performance is affected by preferences. Clarify the business preferences that make a difference to you. You can download the Franchise Business Model worksheet which is further explained in the online workshop Lesson 11 (free preview available) as a guide for this. Be comfortable with your risk and sales orientations as discussed in this lesson before buying a business.

3 Search in specific business categories and geography
If you don’t know what you’re looking for, it will be extremely hard to find. Online businesses for sale directories estimate that 90% of the people registering for their services are unable to purchase a business. Most of these failures are those going there to find easy, secure sources of income. They aren’t obvious. What you can find are opportunities that may or may not fit YOU. The directories are organized by business category and geography, so having a set of these criteria to focus your search gives you a reasonable chance of finding those opportunities. Even if you use a business broker, they can do little to help you without focus from you.

4 Creatively research your financial situation
A profitable business or franchise, with good books and records, can be partially financed; however, each opportunity will have a downpayment. You may be surprised at the financing opportunities available to you with a little research. The SBA offers a number of programs, plus there are alternatives to SBA loans that are often even more attractive. Combine your risk preference with your potential financial capabilities to set the financial scope of your search. This can also be added to your search criteria.

5 Have a personal contribution for your business
A business brings resources to a market. In most cases, the owner makes a significant contribution to one of these two areas. If your potential contribution is resource management, look for opportunities with established sales assets. Look for an established brand, location, or sales network. If your contribution is sales and market management, look for established resources like a desired product line or service that appeals to you. The same logic applies to finding the right franchised business to buy.

6 Utilize Key Partners
No one is successful by themselves. Even the Lone Ranger had Tonto. Learn to develop and use Key Partners as soon as possible. These are going to be the people in your life that will help you through difficult decisions. If looking at franchises, ask other franchisees how much support is received from the franchisor? If looking at independent businesses, look for people who will be able to add to your expertise. They can be the former owner, key employees, vendors, and professionals such as financial advisors and business consultants. If married, take time to communicate wholly with your spouse. They may or may not be able to help on any given specific; but they can help you understand YOU; and you will be a big part of the business.

7 Be able to Model any target business
When you find an interesting business to buy, be able to quickly answer the question, so what makes this business work? Financial statements will not tell the story. It’s a Value Proposition that has to make sense to you and that you can easily explain. The Business Model canvas is a proven tool here. Use it or anything similar. You are going to be be buying that Value Proposition, not its cash flow.

8 Understand the cash flows
Most business opportunities are priced on cash flow. The problem is that cash flow is a concept, not something physical that can be easily measured. That allows for a lot of “creativity” in its calculation.  In general, wherever there is a reason to add to profit for cash flow, there is also a reason to subtract from it. For example, if cash sales are not completely reported on tax returns, then suspect that there are cash expenses that may also be missing. If depreciation is added-back to profits, then also be sure to subtract also capital replacement costs. If interest is added-back, then debt service should be subtracted, etc. After  first understanding your reasons to buy a business, then work on understanding the financials to establish reasonable pricing. If you are not comfortable calculating cash flows, find a key partner to help you in this area.

9 Respect the seller
Almost every independent business on the public market is there because the owner has burn-out. This could be from age, sickness, changing personal opportunities, or changes in the business. However, this doesn’t mean they don’t value their business. It’s an extension of themselves as much as a child might be. Deals happen when the owner sees in the buyer someone who can take care of their child as well as pay reasonable value for it. Franchisors are expanding their operations and are looking for team players who can help them. They are looking for someone who can compliment their system as well as afford to participate as an owner. In either case, both sides must first respect each other enough to make any financial considerations worthwhile.

10 Begin with the End in Mind
Do you want to be the one selling this business in the future due to burn-out yourself, or would you rather have used it to achieved the financial goals necessary to move to the next stage of your life? Start with clear ideas for your exit plan. A business is more than a cash flow; it’s a stage of life and will best serve you when seen in that light. Having some idea of what should come next and when you want it to happen will guide you in making better business decisions.

Many aspire to buy a business but can't quite seem to get started. While there are many low cost opportunities to buy a business or buy a franchise, often the budding entrepreneur doesn't know how small deal financing works.

There are 2 types of business loans - term loans and lines of credit. Term loans are really designed to serve long term capitalization needs and provide large sums of money for long period of time. SBA loans are usually for at least $250,000  for 10 to 25 years and are term loans. The payments make sense when this large amount is spread out over this long period. They stop making sense for the lender when the amount borrowed is too small and not worth the effort to create them. They also stop making sense for the borrower when the term is too short and the high payments cause a problem with their cash flow.

Smaller amounts and/or smaller loan periods are the domain of lines of credit. We need to be looking here to solve the issues we find in smaller deals. 

When you start looking for business lines of credit you will find 2 types, secured and unsecured. The interest charged on the line is a function of the risk involved, so secured lines have better rates, often 3 to 6 percent over prime and unsecured lines are more expensive, often 6 to 12 percent over prime. So the next question becomes, does the borrower have some personal security to put against the business Line of Credit or not?

The 2 best ways a business buyer can provide security for an Line of Credit are:
1) A Home Equity Line of Credit (HELOC). If you already have a mortgage, your mortgage company already has your home appraisal and may be able to setup a HELOC at little to no cost.
2) A Securities Line of Credit. This is a relatively new entry in the market. If the the buyer has a securities account that they are willing to transfer to the lender, the lender can use that as the security for a line of credit. The risk here is that if the stock market crashes. Then lender will sell off all your stock at low prices when they call-in the loan. If you have ever purchased stock on margin, it's the same idea.

The advantages to the borrower on both of the above is that they get to keep and enjoy their assets while they are simultaneously used to secure a business line of credit.

Unsecured business lines of credit are next. Everyone in the unsecured Line of Credit market has gone to using credit cards as the primary instrument to manage the account. Issuance is based on your personal credit history. If you go to a large business credit card lender, say Capital ONE (the "what's in your wallet" guys), they will gladly issue you a business credit card but you will find the activity on that card is reported against you personal credit. We work with over 300 lenders who will base the initial issuance of a business credit card against your personal line of credit; but the activity on it is only posted to the business PAYDEX score and not your personal score. 

The advantages of this are it allows you to continue to increase your available credit by getting more cards over time and should the business cash flow have problems, it will not effect your personal credit (probably the main reason our clients like this.) This avenue is best for $25k to $50k of quick credit; but makes sense up to $100k. You can only use your personal credit history so quickly before raising a red flag. This means getting $25k to $50K can be done in around 30 days, getting more generally takes longer. 

There is a website at http://www.prequalifyhere.com that explains this program in detail. The process is the borrower sets up a credit reporting account (cost will be about $50) and then submits their user-name and password. A credit counselor can then examine their personal history and advise how much credit it may be worth. 

With the possible exception of a HELOC from an existing mortgage company, these loans will have an origination fee. The true cost of the loan needs to be determined by also including the terms and the anticipated usage. For example, while the origination cost of an unsecured business line of credit may be higher than a secured line, the lenders generally have introductory offers with their credit cards that can be used to bring down their total cost. What may not be so attractive at the beginning can be the best solution in the end.

_Customer Discovery is the process of having potential customers review your Personal Business Model and finding out if you really have a market, or just an idea that excites only you. Seeking investors before you have a proven your market is not only difficult, but if successful, the business is often lost to those same investors.

Finding sources of small business financing at this stage is often a better alternative than finding investors. Some businesses will eligible for term loans, such as the Small Business Administration backed loans offered through banks. Generally, all term loans, such as SBA notes or mortgages, are secured with collateral. A business still in the customer discovery phase may be short of collateral which is why many  business owners often jump right to finding investors. However, there is another alternative, the unsecured business line of credit.

A warning is needed here. Even though a business line of credit is not secured with specific collateral, it will still require the personal guarantees of the business owners, as do most other sources of small business financing. The advantages of an unsecured business line of credit over a term loan are:

1. They are based on the creditworthiness (Credit scores) of the borrower and not the value of a secured asset; And
2. You only pay interest on what is actually borrowed. As borrowed funds are paid back, not only is interest reduced but your credit "reserve" is increased.

The amount of funding you will need can determine the the sources for an unsecured credit line. There are two general approaches.

Business Credit Cards

A credit card is a line of credit. Credit card strategies are often used for amounts up to $100,000 (sometimes more). Lenders will issue these to business owners; however, there are many considerations to a credit card strategy, including cost and impact on the owner's personal FICO score. Consider using a business credit card consultant to assist in the development of an appropriate strategy for your specific situation.

Business Line of Credit

A line of credit arrangement with a lender becomes appropriate for amounts over $100,000. These can range as high as several million dollars as long as the creditworthiness of the owners and the use of funds support it. The costs are somewhat higher than term loans and typically lower than pure credit cards. Unsecured business lines of credit went away during the banking crisis; however, sources, are starting to appear for small business financing providing sales have reached at least $500,000 and there is 3 years of business history.

Raising cash through selling equity has it's place, especially in financing ongoing growth. However, selling ownership can be too expensive at the wrong time. Consider alternative sources.