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The Main Reasons For The Growth Of The Home Based Business Industry

“Opportunity does not knock, it presents itself when you beat down the door.” – Kyle Chandler

What is the Home Based Business Industry?

An entrepreneurial business is mainly operated from home, mostly by the business owner himself. Some people refer to it as micro enterprises, working online, or small businesses. A small or micro business may not necessarily be a home based business.

It is important for the development of our home business opportunity to achieve financial independence in the global economy of the 21st century, to have a view of the total size of this industry and some views on possible future development and growth. This evaluation of the trends of the industry will help to dream-it-plan-it-do-it.

Very reliable statistical information is not freely available because these businesses are not well defined and are not part of governmental statistical planning and strategic information data. Some research and other information are available and will help us to get a broad view of the importance and trends of this industry.

Some general trends of and comments on the Business Industry:

The prospect of working from home has gained credibility over the years. It is no longer seen as a kind of part time job that the wife is doing from home while caring for her children. Take into account that most companies, about two-thirds of all companies, begin at home. That includes big companies like Apple Computer, Baskin-Robbins ice cream, Electronic Data Systems, Hallmark cards, the Lillian Vernon catalogue, and Purex.

In the USA, the average income generated by the home based business is substantial, as indicated by the following:

“Plus many home businesses do generate substantial revenue. About 35% have revenues of more than $125,000 and 8% more than $500,000. The median household income is $50,233 for households in general and roughly $75,000 for home entrepreneurs. The income for home based business owner is thus substantially higher than it is for the population as a whole.”

The home entrepreneurs business employs about 13.2 million people in the USA. It is estimated that about 50% of these are home based businesses. The assumption is that the home based businesses employs about 6.6 million people in the USA.

The home business industry is developing fast and becomes more important due to the following:

• The growth in the internet and the people connected to the internet. Two billion people are connected via the internet and this number grows by 200 million each year.

• Growth in the availability and lowering of the costs of broadband communication and connections worldwide has a positive influence on people connecting to the internet.

• The internet, increased online purchasing, money transfer mechanisms (notably PayPal), reliable global shipping, the decline in informal trade barriers and networks created through immigration have all made it easier for small businesses to serve global markets. The internet has been particularly important in enabling small businesses to cost effectively serve small market niches (the ‘long tail’ phenomenon).

• The development of computer technology, software, printers, dedicated telephone lines, and mobile phones creates new opportunities for the home based business and makes it more viable to operate a business from home. Affordable and powerful new technologies will continue to create new opportunities for the home based business. These technological developments will help to keep this industry growing.

• New innovations like:
o Express parcel delivery, distribution, cloud based IT services.
o Outsourcing, freelancing, communication technology, and the availability of skilled people in foreign countries makes it possible to not to have to perform all tasks at the premise of the home based business. It is easier to operate from a small premise at home.
o New business models have created new job opportunities for the development of home based business. Two examples are the network marketing industry, or multilevel marketing, and franchising.

• The growth of the knowledge and service based industries requires little office or working space and economies of scale does not apply.

• People are making lifestyle changes and prefer to work from home as it gives them flexibility, it saves time, and it eliminates commuting costs.

• The computer home business is not exclusively dependent on the local market to generate income, or for its financial existence; that makes this kind of business less vulnerable to economic cycles.

• Many people do need an extra source of income due to debt or other financial reasons and start their own home based business part time to generate a second income stream.

• With employer benefit packages being cut and the chances of losing a corporate job increasing, many view starting a home based business as no more risky than traditional employment. Job and income security drives people to start looking for and to develop an extra source of income for them.

• Due to demographic and social shifts. Aging baby boomers, women, Gen Y and others are all seeing home based business ownership as an increasingly viable work option. An interest in achieving work/life balance, flexibility, the opportunity to pursue a passion and working for your self are some of the reasons given for starting a home based business.

• There is a lack of corporate jobs. Large corporations have been battered by the recession. Even if the economic recovery is strong, it is unlikely that these companies will dramatically increase hiring. Instead of hiring full-time staff, they will stay flexible and lean through the increased use of technology, contractors, partnerships, and outsourcing. As a result, starting a home based business will be the best, and in many cases, the only option for corporate refugees.

“Nevertheless, owners are much more satisfied with their quality of life than other small business owners. However, the majority of owners do not appear to have made a financial trade-off in order to secure this quality of life.”

The number of people connected to the internet is growing very fast. Broadband is becoming more available in the world. The internet support technology and mobile applications of communication is growing at an astronomical rate. These developments create new opportunities for the internet related businesses.

It is being considered by some researchers that these developments will have a greater influence on the world economy than any economic revolution in history.

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas A. Edison

“The first one gets the oyster, the second gets the shell.” – Andrew Carnegie

These technological developments and innovations will create more and new opportunities to dream-it-plan-it-do-it big. The home business opportunities and the industry will boom. The true entrepreneurs will grab them. Do you want to be part of this? Join the team.

Reasons For Selling A Business

A business sale is not a “one size fits” all situation. The details that apply in a specific situation will not all be the same. Before proceeding further, it’s important to step back a bit and look at the big picture for business sales in a variety of circumstances. Not all business sales are for the same reasons, and the circumstances of the sale can have a big impact on how a sale should proceed.

What KIND of Buyer is it?

Before considering the various sale situations, it helps to consider the KIND of buyer. In almost all cases the buyer will be either another company or an individual.

If the buyer is another company then it is likely the buyer will be able to run the business successfully. The buyer’s ability to pay may be fairly secure. Training the buyer may not be critical, but assistance with customer retention after the sale may be critical. The buyer may be more sophisticated, or at least have more sophisticated advisors. Consideration for the sale may include some form of performance based incentives (i.e., an “earn-out”).

If the buyer is an individual, training the buyer may be even more important than assisting with customer retention. Since the buyer’s ability to run the business successfully may not be as certain as it would be if the buyer were another company with a proven track record, the cash and/or collateral the buyer brings to the table may be a major factor in the sale.

The Most Common Sales Situations

These are the most common sales situations. Whether you are a buyer or a seller, one of these situations most likely fits you. Additional details applicable to each are covered later in subsequent articles.

Very Small Business – This is the most common business sale situation

  • Sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc.
  • Most of these businesses do not actually sell.
  • This is usually a sale to an outside individual (an “External Sale”).
  • Sometimes (although rarely) the sale will be to an insider (an “Internal Sale”).
  • It is rare to have an employee with both the interest and the ability.
  • The person needed can sometimes be recruited.
  • Can often be creatively structured as a win/win, even if the buyer has little money.

Somewhat Larger Small Business – External Sale

  • More likely to sell than a Mom & Pop, but many never do.
  • Internal Sale
  • Easier to structure than for a Mom & Pop, but still difficult to find the right successor.
  • Family Sale
  • The IRS has insanely complex rules designed to make sure they get all the tax revenue they think they are entitled to. Which is A LOT.
  • Will most likely need an appraisal to support the price.

Divorce

  • Often VERY contentious, with expensive appraisal and attorney fees, and the eventual price and terms set by a judge.
  • Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Partner Buyout

  • Can also be contentious.
  • Can sometimes be greatly simplified with advance legal planning (such as Shareholders Agreements).

Sale for Health Reasons

  • If the seller is in ill health but not clearly dying
  • Time is not as critical as for a dead or dying seller.
  • Potential buyers may try to take advantage of the situation.
  • The seller’s help with the post-sale transition may be affected.
  • If the seller is still alive but clearly dying
  • A sale planned to occur upon death can sometimes be arranged.
  • This has the potential to save a LOT of tax.

Seller (business owners) has passed away

  • The company may be in turmoil.
  • Can be VERY difficult to find a buyer.
  • Tax issues can be VERY complex.

Financially Distressed Sale

  • If the business is in trouble, the buyer will need to see a way to fix the problem, or a sale will not happen.
  • Often involves simply liquidating the assets and walking away.
  • May be forced by the company’s lenders.

Sale to a Large Buyer

  • Likely to be fairly sophisticated buyers.
  • Likely to include an “earn-out” as part of the “price”.
  • Publicly traded buyers
  • May involve tax-advantaged strategies involving the buyer’s stock.
  • Large, closely held buyers
  • May be easier to attract than a publicly held buyer.

Start-ups

  • Often done with personal funds.
  • If funding is from family and friends, then their ownership must be decided.
  • If Venture Capital is involved, then complexity goes way up.
  • Usually only available if the upside potential is very high.
  • Initial Public Offerings (“IPO’s”)
  • Basically, this is selling part of the company to the public in the form of company stock.
  • Often involves venture capital at an earlier stage.
  • VERY complex.

Employee Stock Option Plan (ESOP)

  • Very complex and expensive.
  • Can have significant tax advantages.
  • Might have motivational effect on employees.
  • Not as popular as initially expected when these were created.

Very Small Businesses

These businesses are sometimes referred to as “Mom & Pops”, “Main Street Businesses”, etc. Although each company is small with only a few employees, they represent a huge part of the goods and services available in our economy, and are the embodiment of the American Dream for many people.

Attempted sale of these businesses is the most common business sale situation. Unfortunately, most of the time they never actually sell. Some estimates are that only one in seven of these businesses will actually sell once they are listed for sale. Many more simply shut down once the owner decides to move on to something else.

Unrealistic expectations on the part of the seller, particularly the value of the company, are one of the reasons blocking sale of many of these companies.

The value of these companies is NOT the value of the company to the seller, which may be quite high. Instead, the maximum value is limited by the cost a potential buyer would incur to start a similar business instead. That means the value may be determined by the value of the equipment, plus something extra for the “running start” available to the buyer from buying the existing business instead of starting a similar operation from scratch.

Formal valuation approaches based on the net present value of expected future cash flow, net of reasonable compensation to the owner, often do not apply. Instead, rules of thumb based on some multiple of sales plus the value of the equipment acquired are often used. These rules of thumb have even been published in a book, theBusiness Reference Guide, The Essential Guide to Pricing Businesses and Franchises, compiled annually by Tom West and available through Business Brokerage Press and available on the web at www.bbpinc.com. (One of the authors of the article you are reading right now is one of the contributors to this book.)

It is important to remember that these rules of thumb are GENERAL rules, and may not be valid for a specific situation. It is also important to remember that these rules of thumb were developed based on businesses that actually sold. That means they are biased in favor of the most attractive businesses offered for sale. The businesses that never sell have very little impact on these rules of thumb.

Ultimately, the value of these businesses is determined just like the value of any other business: What a willing buyer and willing seller agree on. Both sides must see it as in their best interest to do the deal, or it will not happen. In other words, it must be a win/win or it will not happen.

One way to sell these businesses is to arrange an internal sale. The key to this is finding a person(s) who has the necessary skills and entrepreneurial drive. Entrepreneurs are often harder to find than the people with the necessary skills. For companies that do not already have that person, it may be possible to recruit them based on the possibility of their buying the company in the future.

Sales of this type can be arranged even for buyers who do not bring much of their own money to the table. Finding advisors who can assist with this can be challenging as well.

Somewhat Larger Small Businesses

Once a business has grown past the “Mom & Pop” size, it may be a bit easier to sell. There is no generally agreed minimum size for this, but these businesses often have ten or more employees.

Many of these businesses are only marginally profitable, and will be priced using similar methods to their smaller cousins. Those that are profitable enough will be priced based on the adjusted profits a buyer can reasonably expect in the future. The key to their sale will be the ability of the buyer to continue operating the business profitably in the future, which often means the seller will need to help with the transition.

Much of the literature on buying and selling a closely held business is focused on businesses this large or larger, and assumes the buyer will be either an outside individual, or another business. Little attention is paid to the possibility of an inside sale.

These businesses are easier to arrange internal sales for than their smaller cousins, although it is still rare to see this done. Finding entrepreneurs is always hard, and few advisors understand the issues enough to help.

Divorce

A divorce often means half the business must, in effect, be sold to the spouse who runs it. If both spouses worked in the business prior to the divorce, one of them most likely will seek employment elsewhere.

The biggest question in these sales is usually price. Terms tend to be based on asset trade-offs, with cash paid for whatever value cannot be offset by other assets. Bank financing is sought as necessary to provide the cash. Appraisals are used to establish value, with a judge determining the final result if the appraisers used by each side differ in their opinion of value.

Advance legal planning, including agreement on how value will be determined, can help simplify the process dramatically. Most owners are aware of the possible use of a pre-nuptial agreement but do not have one. Less well known is that a proper Shareholders Agreement can simplify the divorce issues, including valuation, by quite a bit.

Shareholder/Partner Buyout

Buying out a fellow shareholder/partner may or may not be a contentious process, but it is still likely to involve disagreement over value. EVERY multi-owner business should have a Shareholders Agreement (or equivalent) to address the multitude of issues that need to be spelled out in advance in this situation. How value will be determined, as well as the terms for a buyout, is just one of the topics that should be covered in this agreement.

This is a huge topic with its own article later in this series.

Sale for Health Reasons

Many sales are triggered because the owner is in ill health but not clearly dying. The seller has a very good reason to want to sell, but is not under pressure to do so immediately. These sales are very similar to any other sale for a similar business except the seller may not be able to provide as much help during a transition. If an internal sale is desired there may not be enough time to recruit key employees, and longer term planning may not be an option.

If the seller is facing a potentially terminal disease, the sale will be much more complex. Seller assistance post-sale is much more problematic, thus lowering the value to a potential buyer. Likewise, the business itself may be suffering from neglect by the owner because health matters take priority. The seller will be at a disadvantage in negotiations as well, since potential buyers may sense the seller HAS to do the sale.

Tax planning for the seller’s heirs may play a major role for a seller facing a terminal illness. The tax issues include potential estate taxes, plus potentially dramatic differences in how the sale itself will be taxed.

It is possible to plan a sale in advance, with the sale itself being deferred until the seller’s death. As a protection to the buyer, the sale generally includes a “no later than” sale date, and may include provisions for the buyer to operate the business prior to that date as well. In the right circumstances this can reduce taxes substantially, provided the sale itself is structured properly. The technical elements in the sale structure for this situation may be quite different than for a typical sale.

Financially Distressed Sale

Some businesses are put up for sale as a last ditch attempt to avoid bankruptcy or being forced to shut down. In some cases the business will go through a formal bankruptcy process, with the court eventually approving a plan to reorganize the business or mandating the business be liquidated if a credible plan to return the business to profitability cannot be developed.

If an outside buyer is sought, the potential buyer will need to see a way to fix the problem causing the financial distress, or the buyer will not buy. Sometimes this will involve buying only the profitable parts of the business, leaving the difficult parts behind. This can also lead to unexpected legal complications on both sides of the sale, so be sure to include experienced legal counsel in the process.

If no way can be found for a buyer to solve the underlying problems, or the profitable portions of the business (if any) cannot be sold separately, then the business is unlikely to be salable as a going concern. In that event the business will most likely be forced to simply sell off its assets, apply the proceeds to its liabilities, and then go away. If liabilities remain and the owner is legally liable for them, the owner may have to personally make up the shortfall.

Sale to a Large Buyer

Larger buyers are likely to be another company, often in the same industry. They generally have the ability to run the acquired business successfully, and are often more sophisticated that the typical individual buyer.

These buyers are not typically interested in “Mom & Pop” businesses. The “price” they are willing to pay is likely to include a portion of the consideration in the form an “earn-out” based on performance of the acquired company after the sale. If the buyer is a publicly traded company, the sale may sometimes include use of the buyer’s stock to help improve the tax effects on the seller, and to reduce the cash required by the buyer.

Start-ups

Starting a company is often done with personal funds and does not involve sale of part of the company. If family and friends are used to help with funding then a loan will be required, or the other investors must have some equity in the company (or both).