Tag Archives: Q&A

Q&A: I Need a Loan to Fill Orders

This is another question I received via the ask-me form on my website:

I have master service agreements with [omitted for confidentiality] in the midwest.  I am also working on an agreement with a company in South America.  I have a great reputation with upper management and they want to use my services.  The only problem I find is carrying payroll until the invoices start coming in, in this case they are net 60.  I literally have facilities telling me here are multimillion dollar contracts, but I cannot afford the payroll.  Any suggestions?

Yes, I do have suggestions. And the problem that solutions depend a lot on who you are, what resources you have, and your past history. Still, here’s my offer of help: 

cash flow working capital Shutterstock pot of gold

  1. What you’re running up against is banking law that prevents banks from taking risks with depositors’ money. Banks can loan money for a business plan or a possibility. 
  2. The SBA (small business administration) can guarantee up to 70% of the risk so banks can loan you that money without violating the law. You need to submit paperwork, a business plan, and an application. More than 1,000 banks work with the SBA, so there is probably one near you. Ask the small business banks in your area. The deal is done by the bank, but guaranteed by the SBA.
  3. What most entrepreneurs do, if they have the resources, and they can deal with the risk, is borrow off of existing assets. For example, my wife and I had a lien on our house for years to support a credit line for Palo Alto Software. We didn’t like it. It was risky. But we did it, and it worked out, because the company survived and grew. But you can lose your house or whatever assets you pledge, so be very careful. Never bet something you can’t afford to lose. And business is betting. It’s not something I haven’t done myself, but it’s not something I recommend comfortably.
  4. Before Palo Alto Software, when I was still doing business plan consulting, I found a local non-bank financial company to loan me against invoices from a major local corporation. They charged high interest but they advanced me 80% of every invoice and they didn’t take the risk because they had a hold on my bank account and if an invoice hadn’t had been paid (that, thank goodness, never happened) they would have subtracted the amount from my bank account. Google credit line on receivables to see what comes up. And the difference between that situation and yours is I was getting advances on invoices for finished work. 
  5. Some people find investors to advance them money for a non-bankable situation in exchange for a high interest rate, a small share of ownership (called an equity kicker), and drastic guarantees that give them your company if you can’t pay the loan. All of the terms are negotiable. Search the web for “angel lending” and see what you come up with. Ask your local small business development center (SBDC), chamber of commerce, or business school if they have any leads. There is no paved road for this kind of transaction, so you have to beat the bushes. This is hard to feet, and a lot will depend on who you are, your resources, your business plan, and your past history. It’s asking people to bet on your future. 

(image: shutter stock photo)

Q & A: Selling Out to a Partner

Question: I own a business with my brother for the past 16 years. I decided to buy my partner/brother out of the business. The business has been running a loss for the past couple of years. How do we put a value on the business without incurring the expense of a Business Expert?

OK, stop immediately and rethink your question. Doing this deal “without incurring the expense of a business expert” is a really bad idea. The biggest danger in this deal isn’t paying too much or too little, but rather doing a deal that leaves either one of you thinking it was unfair. If ever there was a good place to spend some money on an expert, this is it.

Why? Because there are so many different ways to calculate fair value, with so many different results, that without a very good expert and full understanding as you do the deal, somebody is sure to question it later.

Start by thinking about the value of a house. Its value depends on many different factors, including size, condition, the land it’s on, the neighborhood, the needs of the owners, and changing market conditions such as interest rates and local economic factors. Valuing a business is like that but even more complex, because the underlying worth depends on future earnings, and both buyer and seller have to guess future earnings.

There are some simple standards to start with. Consider that large, publicly traded companies are worth some multiple of their annual earnings, traditionally 5 or 10 times earnings or so, but that depends on market conditions. The market values some high-tech growth companies at 50 times their earnings … that’s the play of market factors. Investors like these companies so their relative value goes up.

  • When you have a small, privately-owned company, the earnings multiples go way down. Generally buyers realize there is more risk in a small company than a big one. The increase in risk reduces the valuation.
  • Another frequently-used formula is based on sales. Your company might be worth as little as half its last year’s sales, as much as 2 or 3 times its last year’s sales, depending on the specifics of what industry, how much growth, how much future potential, etc. This is more important than the earnings-based formulas for you, of course, because you don’t have earnings. It’s quite common with high-tech companies. As with real estate, you can get data on other transactions by industry and size, which could help give you some idea of the latest trends. The formulas change quickly as market conditions change. And although the data is called “comparables,” just like in real estate, it’s a lot harder to interpret because so much depends on the specific case. Growth increases your value, decline decreases it, and there are lots of intangibles related to the future, such as location, intellectual property, etc.
  • There are lots of other formulas that might apply. Book value is assets less liabilities. Professionals might take book value and adjust for different factors.
  • To make this even more confusing, there are valuation experts certified by the IRS who will assign a value used to determine tax liabilities when companies change hands because of death of divorce. Their valuation can go very low; I know of one case in which a company worth several million dollars was certified worth only a few hundred thousand, for tax purposes, by a registered valuation expert whose verdict was accepted by the IRS.

So getting back to your question, I recommend you and your brother find somebody you can both trust, either an accountant or an attorney or maybe a consultant with great references — be more careful with consultants because there is much less regulation in consulting, therefore it’s harder to determine true professionalism — and go over all of the various formulas, together, and understand how they might yield different results.

Your goal should be getting on the same page, together, in a way that protects you against the danger of doing a deal and then, afterwards, having some new expert coming up with some logically sounding new formula that makes one or the other of you think the deal was unfair. The key to fairness is to base the transaction on a true market value, a real market value, one which will leave neither one of you vulnerable to some half-baked expert opinion after the fact.

Don’t get adversarial.  This should not be about negotiation.  Avoid having the two of you represented by two separate experts, each voicing a slanted point of view. Look for somebody you can charge with creating a fair deal, somebody who feels like he or she will be available for a pleasant lunch a year later, not taking sides. You should both be clients.

Keep in mind that the goal isn’t winning or losing the deal, it’s making this change fairly, so there are no losers, and probably (up to you) in a way that preserves the relationships.


Q&A: When to Quit the Day Job and Start On My Own

This Q&A post is different. Usually I highlight questions here for my answer, meaning I’m answering a question I think others are asking, for which I’m hoping my answer might be useful. In this case, however, I’m posting because of the question itself: It’s extremely common, very important, and doesn’t have any obvious single answer I can think of. 

This question came through my ask me form on timberry.com: 

I am at a crossroads in my working life. The company I am working for is going through retrenchments and no-ones job is secure. I have good experience in the industry and was aproached by a former employer who suggested that start my own business and sub contract to them. I do not have capital and because of the problems that the company I am working for have had my finicial situation is not looking good. I have always wanted my own small business and this seems a great opportunity except I am worried about the finances. My question is simply this: Do i take the risk and go on my own or find a another better paying job and sort out my finances at the risk of loosing this opportunity?

Your advice would be greatly appreciated.

My first reaction to this is not to answer out of respect for the importance of the question, and how little information I have.  Yes, this is one of the most important questions I get, and I get it a lot, although not often as well worded as this one. And in my case respecting the question means I’m afraid to answer it simply. It’s a life-changing decision and no thoughtful person should answer it from afar, with an email answer. 

My follow-on reaction is easy answers that are cliches: things like follow your gut that sound good but don’t really help. 

My best answer is you should do a business plan. Not a formal written business plan, a plan-as-you-go business plan, a simple practical plan that’s just big enough to reduce the uncertainty; that may never get printed; that may be as simple as a target market and business offering, key milestones, and projected sales, costs, expenses, and cash flow. 

The right kind of business planning is the best way to break the huge fear and doubt down into more manageable pieces. 

(Image: shutterstock.com)

Q&A: What To Do With Those Web App Ideas

This is question I received over the weekend via my Ask Me page at timberry.com:

I have 3 great app ideas that I think many people will benefit from. I am only 18 and I am absolutely clueless on how I am going to turn my ideas in to a reality…. Any sort of advice will be truly appreciated.

I should start by saying that this is definitely not my expertise.  On the other hand, like you, I see what’s happening in mobile apps, it’s clearly a huge opportunity. So I did some investigating. I do know people in the apps business, I’ve talked to several, done some research, so here is my quick-and-dirty summary.


Good news or bad: If you’re going to pay somebody else to do an app, it’s going to cost at least about $75,000. I say at least because it’s often much more. To keep costs down you must be good at managing developers, probably from remote locations; and you have to have good design.

Good news possibly: some of the best apps are do-it-yourself apps by smart people who learned programming and just did it. Do a good web search. There are lots of learn-programming facilities available on the web, for amazingly low prices. Do you have the persistence to stick with it, learn it, and get good at it? Few do. I’d venture to say the ratio of people who start this path to people who finish it is about the same as the ratio of people who start a novel to people who finish one. But it’s there. Start with udemy.com.

And here’s a tip: Go take a look at 99designs.com. Take a look at what they do to bring international developers into a project one by one. Look at some of their examples for design projects, then some for development/coding/web projects. (disclosure: I’m a happy customer, I have no business relationship except I’ve paid them money).



Q&A: Finding a Consultant to Find Investors

This is another frequently asked question that came from the ask-me-a-question web form on my main site at timberry.com.


Trying to find a consultant that links me to investors? Does this exist? I’m a 21 yr old entrepreneur. Learning on the fly!


  1. You don’t need a consultant to learn about angel investment. There are thousands of good links on the web. Not that mine are necessarily the best, but since you asked me:  Browse though the angel investment articles on this site (click here for a site search for angels). Read the angel investment category on this blog.
  2. Please make sure you have a deal that will interest investors first. It takes a credible experienced startup team, an attractive product-market fit, an interesting market, and defensibility. Way too many people waste their time and — if they hire consultants — trying to find investors with a deal that no investors would ever be interested in. Please read Is Angel Investment Realistic? and be honest with yourself.
  3. If you don’t have the right stuff, don’t spend energy searching for investors. Change your plan. Either gather some more team members to beef up the offering, or focus on what you can implement by yourself. Bootstrap your business. If you still want a consultant, forget paying somebody to link you to investors. Get somebody to tell you what you need to have.
  4. If you do have the right stuff, then you probably don’t need a consultant. Go register at gust.com where you can browse through about 600 angel investment groups and look for one in your local area, or one with interest in your kind of business. Don’t apply to all; don’t send your info bouncing around everywhere; concentrate on the groups that are more likely. Connect with your local small business development center (SBDC). Ask people you know who they know locally who might be interested. Find out about local investors using the SBDC, the chamber of commerce, local business schools, etc.
  5. And if you really want the consultant, and you have money to spend, buy expertise and experience from the consultant, not heavy lifting. Buy very targeted help. There are honest legitimate consultants in this business, but they are rare. Check references carefully. Talk to past clients. And if you have a consultant help with your own business plan and your own business pitch, what you want is coaching, constructive criticism, not writing and formatting.