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Business Planning Basics
THE information you can put into a business plan is unlimited.
One of the benefits of writing down your plan is it clarifies your thinking. It forces you to be more specific about your rough and woolly ideas.
Visualise your business as you want it to become in, say, five years. If you can write this down clearly and can stay focused on it, you will improve your chance of success. I stress the word focus. Many people are undisciplined in business, so they never achieve real success.
Start your planning by thinking of your business under these six headings:-

1. Products
Can you specialise and become an expert in one aspect of your field? Pick something which others find difficult to achieve. You can charge more because you will have less competition: the greater the difficulty, the greater the reward. For example, a builder seeks out the most complex jobs from architects. He enjoys the challenge and seldom has to compete based on price. You’ll find accountants specialising in liquidations and lawyers who do only workplace law.

2. Customers
Not everyone is a possible customer, especially for small businesses. A city plumber will service a restricted area because it will be uneconomical to travel from one end of the city to the other. Be selective. Your objective is to make a profit and a good one. Start by culling customers who are slow to pay their bills. You may have heard of the Pareto principle: 80% of your customers will provide only 20% of your income. Try to increase the 20% of big spenders. The smaller your market the more easily you can become well known in it.

3. Equipment
Make a list of the plant you will need. You do not need to buy all of it. See Finance, below.

4. Premises
Will you be working from home or have an office or factory? Will you have premises at several different locations? If you decide in five years’ your business will be run from home, then plan suitable facilities, storage, etc, as part of your home. If you plan to open several shops, start thinking about their location and the best order for creating them.

5. Staff
Describe the staff you will need; it will help you in your selection process. Consider all the functions you will want carried out, group them and finally allocate the people. Do not start with the people, even if you already have a sizeable staff. Go for talent and attitude in your staff selection. Often staff are chosen on the basis of what they know - a big mistake. Anything which can be taught is less important than attitude. List the essential skills and then list those which are desirable but not absolutely necessary. You should refer back to this part of your plan when engaging new staff.

6. Finance
List your finance requirements. Unless you can afford to pay for everything you need, consider all the ways you can think of to get funds. See next page and our two previous newsletters for ideas to improve your cash flow. When the Body Shop started, the owner gave away a half shareholding in the business to establish her second shop - an enormous price to pay for finance! Outsourcing is often a useful way of using other people’s equipment. You might also be solving an employment problem at the same time.

Some ideas for short-term borrowing

Bank
Many clients assume they should use hire purchase to buy their vehicles. They keep their bank accounts permanently in credit. If they were to use an overdraft for such purchases and fluctuate in and out of credit they could save significant amounts of interest. Surplus cash in the bank provides a comfortable feeling. However, using your surplus cash costs nothing and interest on the overdraft is a cheap source of money. Avoid using your overdraft to its limit. The unused credit limit is a quick
source of cash in emergency.

Creditors
If you are having a temporary cash flow problem, approach a major supplier for some extended credit. If you habitually pay your creditors on time, you are more likely to be trusted with special credit terms. You could ask for 90 days to pay. This extended credit will often be interest free. There’s no cheaper source of funds. If you have to forgo a discount, this could be an expensive way of financing. Use it sparingly.

Credit cards
A credit card has the potential to be a quick source of money. It can be useful to handle a surprise ACC or tax bill. The interest rate is high but the loan may be quite short term so the total interest you pay will be small. It is a hassle free source. There are no extra bank fees and it is on demand. See credit card borrowing as your last choice for quick cash. The interest will cost you less than IRD penalties and is tax deductible. Drive up your credit card limit as high as possible in case it is required for that rainy day. Do it now or you will never get round to it. Another way to use your credit card is for business purchases. Provided you pay on time, there is no interest.

Life Insurance
It usually takes a few days to arrange a loan on life insurance policies. The interest rate is comparable with the bank and insurance companies do not usually charge a fee. This is another way to finance a vehicle. You can borrow at much lower rates than hire purchase and enter into a similar instalment arrangement for repaying the debt.

Don’t be too quick to sign your lease

MANY people do not take enough care when signing a lease. If you are about to sign a lease, consider the following:-

Who pays the rates and insurance?
If you pay the insurance, what does it cover? Fire, loss of rents, flood, indemnity or replacement? The cost will rise the more cover the landlord wants, so ensure this is defined.

How long will it be until the landlord can increase the rent?
Could your business be easily moved if necessary? If not, then you should go for a long lease, with the right to get out if you need to. A lease for three years with the right for you to renew for three more years gives you the opportunity to stay for six years, but the ability to cancel at the end of three. Your lease should contain some control on the amount the rent can be increased, when you exercise your right to renew. There is no control over the rent when you have to negotiate a fresh lease. Therefore, consider now going for as many rights to renew as you can get.
Landlords commonly require tenants to pay the cost of preparing the lease. Why not seek a 50:50 split?

How about the right to put up signs, restrictions against competing tenants or troublesome tenants – noise or smell?
Some leases state the landlord does not warrant the premises are suitable for your needs. Cross out a clause which says this. Watch out for a demolition clause. This is one which gives the landlord the right to demolish the building at any time without compensating you.
If you cannot avoid a personal guarantee, can you impose a limit? Say, a maximum of 12 months’ rent if you have to move out or sell and assign the lease. If you cannot pay the rent, there may be a default interest rate. Now is the time to set that figure as low as possible.

Who will be responsible for internal and external maintenance and cleaning?
The extent needs to be specified. Can you make the landlord take some responsibility for making the premises safe from burglary?

Finally, there is likely to be an arbitration clause.
Arguing the case before an arbitrator is expensive. Try a pendulum clause instead. It is excellent when renewing a lease. The landlord and tenant each state the amount they think the rent should be. The arbitrator determines a fair rent. The rent to pay is the figure closest to the arbitrator’s. Landlord and tenant have a big incentive to be fair and thus costly arbitration is often avoided.

WOULD you like to be able to take more money out of your business? Here are some ways to improve the money supply when you need new equipment.

Do not fund everything yourself. Consider borrowing for your business and having the interest tax deductible. Before buying equipment look at these alternatives:

A finance lease means you pay no deposit but may have to pay a balloon (lump sum) payment at the end of your contract.

An operating lease means you can never own the equipment. You pay to hire it.

Hire purchase means you pay a lump sum at the start and spread the balance of the debt.

Could you just borrow from the bank?

Do you need the equipment at all? Have you considered contracting the work out, using someone else’s equipment?

Things to consider when buying a business

Income
How much is the total income to owners, including any company profit?
• Ask for five years’ accounts.
• Have these accounts been prepared by a qualified accountant? If not, how do you know how the figures have been put together?
• If not supplied, insist on having the balance sheets. They provide a wealth of information such as:-
1. Has the owner tried to manipulate the figures?
2. Could bad debts be high and not written off?
3. Is the business in financial difficulty?

Profit arises only after a fair wage has been paid to the owners. Many businesses for sale do not make a profit. The income they generate is barely sufficient to cover the owners’ wages. This ought to mean there is no goodwill. However, many people buy businesses and pay goodwill even though the wages they will earn are low. Sometimes they see opportunities to make a greater profit but often they are merely buying a job.

When buying a business, look at what you are going to get out of it and deduct a fair wage. Is what is left over a sufficient return for the risk you are taking with your money? In my view, you ought to get at least 25% back on the money you outlay. This takes care of the interest you would have got and also the risk you are taking. Never overlook the very real possibility of losing your money.

Sales
What is the trend of sales over last five years? Are sales steady or fluctuating? How does the future look?

Check the sales over the last three months. Compare this with the same time last year. Are sales going up? Go by money banked rather than vendor’s records. Remember bankings could include non sales income.

GST returns can be useful for additional evidence of income. They contain all sales including equipment so are not 100% reliable. Use the IRD assessments as well as the copy of the GST returns to ensure figures have not been altered.

Owner runs a second business
Ensure the owners do not run a second business. If they do, they can inflate the income of the business they are selling with sales from the other business.

How to minimise risks
Take a security (like a mortgage) over the business assets. If the business goes broke you will have a prior claim over ordinary creditors. This is very useful if you still owe money to the bank. Alternatively, the security can be in the favour of the bank.
Avoid guarantees like the plague. Negotiate where ever possible. Try and limit your guarantee. Refuse to allow your spouse to be a guarantor. Renegotiate previous guarantees whenever you have the chance.

Agencies such as Lotto
Beware of dependence on one source of income and the ease with which it could be removed. Also look out for expensive demands by the firm granting the agency.

Make comparisons
Shop around and make comparisons with similar businesses for sale.

The following may be signs of a good buy
• Retirement - outgoing owner may have been undercharging and you can put up the prices
• Trouble with the landlord. You may be able to negotiate a good lease.
• Owners fighting amongst themselves including matrimonial
• Vendor prepared to leave substantial money in at a favourable interest rate
• Business is making a loss but assets being sold at less than their break up value.
• Business has excessive owner overheads which can be trimmed.
• Ratio of staff wages to sales out of kilter compared with normal for industry - may indicate inefficient use of labour or under pricing.
• Illness
• Dependent on key employee who has left

Set up yourself
Look at the option of setting up a business, instead of buying.

Competition
What is competition or possible competition in the area like? Could someone set up in opposition to you?

Interest
Remember you pay interest on borrowed money. This will reduce your profit.
If you use your own money to buy the business, you will no longer get interest. Allow for this. You need a higher return to compensate for the risk of being in business.

Health requirements
For food businesses check to see health requirements are up to date.

Lease
Check the terms of the lease. Will the rent be going up shortly? When does the lease expire? If leasing premises you should check the lease with your solicitor. Be sure there are substantial rights of renewal. You do not want the landlord able to take over the premises when you have paid goodwill to be there. If necessary, make it a condition of purchase that you obtain a fresh lease acceptable to you.

ACC
If you take over someone else's business either by "buying the business or by taking over the shares in the business" you may be given the experience rating of the previous owners. This can mean you could face a loading on your ACC. It’s worth checking with ACC.

Product life cycle
Is this a growing, mature or dying industry. Do you really want to own a business in a dying industry?

Sale and purchase agreement
Most assets (but not goodwill), can be depreciated for tax purposes. Therefore, if buying a business be sure to list the assets and state the price paid for each. Negotiate for goodwill to be as small a share of the total price as possible.

Vendor warranties
Anything a vendor has said can be put into your sale and purchase agreement. If promises have been made, be sure to include them.
Be sure to include a warranty by the seller concerning the level of sales. Also insist on seeing the final accounts so you can confirm the sales were as warranted.

Include in your agreement figures for liquidated damages. This means the agreement states how much the selling price will be reduced if certain conditions have not been met. This will save you any arguments later.

Skills
If special skills needed, the market for the business is limited to those who have the skills.

Stock
Is some obsolete? Don’t buy the other person’s purchasing mistakes.

Finance
Will vendor leave money in? If the seller misrepresents information to you, you can withhold payments.

Threats
Consider possible threats from:-
Customers - E.G. Do it yourself market
Competitors
Economic changes
Government regulation - eg changes to parking or one way systems
Law Changes
Technology change
Social changes

Hidden benefits
• Costs shared between business and private.
e.g. car registration, insurance etc.
• Opportunity to purchase stock at wholesale prices
• Sometimes cheap accommodation
• Better way of life being your own boss
• No fear of redundancy

When you have bought
Take over as quickly as possible. A person who has sold a business loses interest rapidly and their service to the customers deteriorates.

Require the owner to assist you fully, as you require. This should be a condition of purchase. EG to be available to work for the new owner without charge for up to 20 hours a week for the first month after purchase. You may find you only need a few hours of instruction and it is better to get rid of the old owner as quickly as you can. Some people can be reluctant to give up the reins and they get in the way.

When to use your accountant
Finally, before signing any contract, contact your accountant who will be able to check the business for you and help with financing.

Important business advice
When you have bought your business you should also make enquiries about:-
• How to make your business grow and become more profitable
• Keeping Books and Records
• Income Tax, GST, Fringe Benefit Tax etc

Cash under the table
You may be told, as the business takes a lot of cash, we do, of course, take money out of the till. These statements are not always true. There are ways of determining whether this may be true and perhaps getting an idea of the degree of dishonesty. You can never be sure of these statements and it is best to disregard them.