Six Reasons Why Business Plans Are Important in Real Estate Investing

6 Reasons Why Business Plans Are Important in Real Estate Investing

Let’s repeat some well-known business facts: a) 98% of all businesses in the USA are small businesses. b) 98% of all businesses fail in the first year, c) 100% of all failed businesses have well-understood reasons why they failed. With these three facts, we should be able to craft a business that has a more than average chance of success.

Why businesses fail.

All failed businesses share the same characteristic: they fail for one or more of the following reasons:

1) Undercapitalized. They don’t have the financial strength to survive the startup period.

2) Weak Management. The current owner/manager simply doesn’t have the skills to make the business flourish.

3) Wrong product. You can’t sell what the public doesn’t want to buy.

4) Wrong market. What you have may be attractive but the local market can’t afford to buy it.

5) No ‘exit’ strategy. With no thought of the future, the business will founder.

6) No “vision” as to what the business intends to accomplish.

Notice that nowhere once did I say the words “Real Estate”, even though that is the emphasis of this article. A “Real Estate” investment business is just the same as any other business, and can fail for all the same reasons that other businesses fail. The main difference is that when you invest in Real Estate, you tend to risk larger amounts of capital. Also, the Real Estate market contains many factors that you can never control, unlike most ‘normal’ businesses.

What’s the answer?

The most important answer is: a well-crafted business plan. Developing a meaningful business plan is more than just sitting down and describing your product in glowing marketing terms. The act of creating a business plan forces you to think about the various aspects of the business. It also places you in the position of your customer, your banker, your lawyer, your assistants, and yourself as owner/operator.

A well-thought through business plan becomes the roadmap to your business success. It lays out what you plan to accomplish, when you plan to accomplish, what resources you will need to achieve your goal, and a timetable of when you will achieve that goal.

Before you rush over to the computer and begin to hammer out a business plan, you need to do some heavy duty and serious research. Visit your Library and check out some books on preparing a business plan. See what the elements make up a business plan. Then after you’ve digested the information, speak to your Banker. Ask what they want to see in the way of a business plan that will help them fund your new business.

You might want to invest in a copy of a “Business Plan Development” software program that will guide your efforts in creating that plan. Let’s examine these six points.

1. Undercapitalized. As a minimum, you should plan on being able to sustain the business for 12 months, and be able to cover all expenses for that time. You’ll need either up-front capital, or a guaranteed line of credit that you can draw upon during that first 12 month period. Your business plan needs to spell out all of the expenses you’ll incur during that first 12 month initial start-up period. Don’t forget advertizing, property acquisition, living expenses, property maintenance and repairs, property holding costs (if you finance your investment purchase, you have monthly mortgage expenses, utilities, gardening and upkeep, etc. while you fish for tenants).

2. Weak Management. If you’ve never managed a business, you’re in for a rude awakening. Typically, the owner of the business is his/her own worst enemy – you’ll find yourself talking to yourself in the mirror:?Why are you wasting time (shaving/putting on makeup/etc) when you should be out “doing business”?? How do I get clients? How do I get renters? How do I find investors? A strong business plan will help you identify these ‘time traps’, and hopefully, guide you away from them.

3. Wrong Product. Are you trying to flip properties in a falling market? Do you find that you can’t rent a property so that it has a chance of getting a positive cash flow? Are there any takers out there? A well-thought through business plan will minimize the chances of that happening.

4. Wrong Market. An extension of #3 above. After fixing that old place up, you find that it’s now too costly for any one in that area to buy. Your business plan may have been able to flag that one before you started.

5. No Exit Strategy. If you don’t have a roadmap of where you’re going, then you’ll never get to where you want to be. Of course, if you didn’t sit down and decide where you wanted to be in the first place, you’ll surly succeed in getting there! A well-developed business plan will help you lay out Who, What, When, Where, and Why, in addition to How.

6. No “Vision”. A business plan not only establishes your goals, but it does one thing more: remove the ‘emotion’ from the decision. Getting emotionally involved is not the same as being enthusiastic about what you’re doing. If your vision is to have a string of positive cash-flowing properties that are easily rented, easy to maintain, and low overhead, then your business plan should prevent you from “Gold-Plating” those properties so that you never achieve that goal.

Summary

Never underestimate the power of a good business plan. Before you rush off to execute that plan, make sure that you have given it a critical look. Have your Banker, your Lawyer, your Spouse, your Accountant, your Broker critique it for you.

Google Places The Benefits for Your Business

Did you know that one out of every five searches on Google pertains to a specific location? It’s true. And from this bit of information, Google Places was born.

Introduced to the online scene late last year, Google Places is a Google feature that produces search results for local businesses. Some consider it a highly beneficial marketing tool for their business; others are unsure of any benefits their business could receive from this localized search tool.

Recently, Google Places has added some new and exciting elements to their features list that could bode well for some businesses, but maybe not all. You make the call on these features:

*Streamline analytics feature: Discover who is searching for you on Google, how they’re finding you, and where they’re coming from right before they enter your store.

Benefit: You can customize your marketing strategies based on what search terms customers are using to locate you. For example, if you own a high-end spa in upper Manhattan and you list services on your Google Places page that customers are using to search for a nearby salon, you might consider keeping those service descriptions on your Google Places page. You might also consider using those keywords in other online marketing platforms such as copy on your website, blog, and social media profiles.

In addition to tailoring your marketing copy, you can also hone in on where your customers are coming from, based on their Google map search for directions to your location. This allows you to consider options such as opening another store across town-somewhere closer to your clients who live farther away.

*Business Information Feature: In addition to posting your business location, you can also post a plethora of business information, including your hours of operation, contact information, photos, payment options, products / services features and benefits, printable coupons, and more.

Benefit: Customers can receive rewards for visiting your business by printing out your customized company coupons on Google Places. This encourages support for your company and helps to build long-lasting relationships with clients.

In addition to building relationships with customers, posting detailed business information also provides your customers with necessary information in one easy-to-read location. This streamline navigation feature reduces frustration on your clients and allows you to reduce the number of unproductive phone calls and inquiries that revolve around your hours of operation, directions to your business, and more.

*Photo Feature: Businesses can offer Internet users a behind-the-scenes (transparent) look into business practices and the faces behind the business. Companies can post photos of the office, the team members, where products are made, where services are offered, and more.

Benefit: Showcasing photos of your business is a highly effective way to open your business to your clients and allow them to build trust in your company. When you illustrate your transparent business practices, you are making it much easier for customers to view your company as trustworthy.

*Customized Code Feature: As more and more businesses begin to promote their Facebook pages and Twitter usernames on their business cards, websites, and in stores, online shoppers are no longer limited to searching main company websites as their source for business information.

Playing off this trend, Google has created a new feature for Google Places that generates a customized code for each business. This code can be placed on business cards, in-store receipts, and business websites. Customers can scan this code into their smartphones and be automatically directed to the company’s Google Places page.

Benefit: According to a study performed by compete.com, smartphone users are interested in receiving some form of rewards on their mobile phone. 36% of participants said they would like to receive grocery coupons, and 29% said they were interested in scannable barcodes.

Taking into account these statistics, Google Places’ customized codes enable your company to cater to the smartphone segment of your market. This illustrates that your business respects your target audience’s time and takes every measure possible to ensure their preferences are met and their lifestyle is catered to.

Does Google Places benefit online businesses?

Although all of these benefits sound fantastic, there is one question that comes to mind. What if you’re an online business with a virtual storefront? Can you still utilize Google Places’ wonderful features?

Based on Google Places’ guidelines, there doesn’t appear to be any benefits for online businesses. Here’s a glimpse into some of their guidelines to help you better understand this conclusion:

Every listing must have a mailing address.
No one business can have more than one listing per physical location.
Businesses that cover a wide range of cities and states must choose one business location (it’s recommended by Google that you choose the address of the company headquarters if you have more than one address). You can specify the area you cover, but you must have one address associated with your business.
You cannot use a location where the business does not actually exist.
P.O. boxes don’t count as viable locations.
You cannot have more than one listing for your business, even if there are multiple locations.
If you are renting your property, it is not considered a place of business. Therefore, you must create one listing for the location that processes these rental properties.

The Importance of Reliable Financial Statements When Selling Your Business

Many small business owners underestimate the importance of having reliable financial statements on hand when the time comes to sell a business. This article will explore some of the main reasons why you should have several years of accountant-prepared financial statements when you go to sell a business.

Valuing a Business
One of the first steps in selling a business is coming up with a selling price or a business valuation. In order to do so, a business broker or business valuator needs to have a complete financial picture of the business from which to conduct an analysis and form an opinion. Too often, business buyers insist that there is unclaimed “cash” in the business. An ethical business broker or valuator will not take this into account in their valuation as they themselves cannot validate this money to a prospective investor.

Presenting the business to buyers and due diligence
A qualified business buyer will most certainly ask to review the financial statements of the company before consummating a transaction. In fact, in the province of Ontario it is law that a buyer must be given financial statements and a detailed asset list prior to the sale of a business. Once presented with the numbers, a buyer will usually take this information to their accountant for independent validation. An accountant will certainly not advise their client to proceed with a deal unless the books check out. In other words, business buyers need a good set of financials in order to give a green-light to a deal.

Getting a bank to approve a loan for a business acquisition
The sale of a business really involves three different parties to the transaction – the buyer, the seller and the financial institution that will be financing the purchase. Banks in Canada are especially conservative and will insist on valid financial information as well as relevant tax returns in order to pass their credit process. Most banks in Canada will require recent accountant-prepared financials (less than 6 months old ideally) and will absolutely not consider “under the table” cash sales claimed by the owner. The harsh reality is that even if a buyer and a seller want to proceed with a deal, it could all be a moot point if the bank is not in on the deal too.

Revenue that is claimed increases the valuation of the business
Many business owners falsely believe that by pocketing cash sales that they will be saving money in the long run. The truth is, not claiming cash revenue may save in the income taxes payable on that revenue but it is highly illegal and probably not worth it from a financial perspective too. Consider an example where a business owner does not put through $1,000 in revenue. The business owner may have saved about $200 in taxes payable by doing this. However, from a valuation perspective if the business has a 3x earnings multiple then the owner just shaved off about $3,000 in overall business value from their company by not recording the sales.

The overall point is that if you are a business owner make a point to have a professional accountant prepare your business financial statements every year. Keep all of your personal expenses distinct from your business too as it makes the process of selling your business so much easier. The market to sell a small business is already difficult enough without the added burden of not having clean books to rely on.