Eleven Ways to Generate Leverage from Your Business

Too many businesses – even fairly large ones — are more like mom and pop entities that take too much time to run, barely make a profit after factoring in the owners’ time, and aren’t worth much on sale. Business owners need to develop sources of leverage so that their business runs without them. That way, work becomes more enjoyable and the business becomes more valuable.

Following are eleven ways that business owners can generate leverage in their business:

First and foremost, the business owner needs the right mindset. He or she must put ego aside and be willing to give control to people and processes to take over the business. Many business owners fear that no one can serve customers like they can. This may be true, but to have a truly successful business, the CEO needs to be willing to cede control. With the right mindset in place and the additional ways to generate leverage (to be discussed below), he or she has a blueprint to succeed.

Second, the business owner needs to spend most of his or her time setting direction for the company, improving performance, and developing processes and systems. Time spent “in” the business instead of “on” it, as Michael Gerber makes clear in E-myth, is time poorly spent. Business owners need a sense of where they spend their time, and how they can focus more on building their business to run without them.

Third, business leaders should be setting high standards for each and every core process, and then measuring results. That way, they can hold people accountable for doing what matters in the business. Metrics are an essential tool for generating leverage. The business owner can watch the metrics and provide tools for others to generate results. Meanwhile, employees do the work of meeting standards and continuing to improve.

Fourth, talent is essential. In the restaurant business, there is an adage that every restaurant chain is guaranteed to fail once it opens one restaurant more than its management team can handle. One of the most important limiting factors in any business is talent. Business owners need a stable pool of full-time talent to grow the business, and in many cases, a pool of part-time talent to flex up capacity when needed. Therefore, one of the most important jobs of every business owner is to find, develop, engage, and retain top talent.

Fifth, the more alliances and strong relationships that the business owner can create, the more powerful their network (or power base), and the more the business owner can get done. Alliances with employees, suppliers, distributors, marketing channels, government, and local leaders assure that in both good and challenging times the business owner has a network of relationships to make things happen. Ideally, these alliances are loyal to the business first, and the business owner second.

Sixth. every business should have operational systems so that the business thrives even when the owner or manager is not present. These systems include detailed product manuals, consistent processes, clear performance standards, and a set of processes to train and motivate people to provide consistent, excellent service to customers. That way, customers associate the business brand with a positive experience every time.

Seventh, you need marketing systems in place. We are blessed to live in a time where much of our marketing can happen while we are doing other things. Thanks to virtual teams, outsourced firms, and the Internet, we can get visible in effective ways 24 hours a day, 7 days a week. Also, executives should constantly test and refine their marketing tactics in order to have a honed lead generation and conversion machine.

Eighth, while the promise of technological solutions sometimes falls short of expectations, technology can still bring enormous leverage to every business. Software, mobile communications tools, and web-based technology can all contribute to a more efficient and profitable business.

Ninth: a unique edge separates your business from others and helps you dominate your market. The me-too business that is almost identical to its competitors will not generate as much value as a business that has a measurable, significant, meaningful (to its customers) advantage over the competition. Types of “edge” include: proprietary technology or intellectual capital, scale, operational excellence, customer intimacy, unique marketing strategies, proprietary alliances, relationships with suppliers/sources of product, and product leadership. Every business should strive to have a three to one advantage over its competitors in some meaningful area, or at least to be the dominant leader in a niche market.

Tenth, develop business credit and sources of financing in order to have a ready source of cash to expand when needed. Sometimes the only thing that separates one business from another is the cash to withstand down business cycles – or expand when others can’t.

Eleventh, by having a clear vision of how to exit the business, the business owner can focus on developing a business that will be attractive to a buyer. Buyers want a business that they can take over and run – without depending on the owner for a long transition period. An exit strategy requires a commitment to a set of processes, a respected brand, and a business that runs without heavy involvement by the owner.

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Financing Gas Stations

Financing gas stations are complicated due to the single use nature of the property, environmental issues and subsequently the limited pool of banks and lenders that want to fund on this property type. Some lenders will simply not look at gas stations while others will be so conservative that it would save everyone time and effort if they just didn’t bother quoting on gas stations to begin with.

The most viable options for gas station financing include SBA loans and niche portfolio lenders that specialize in this building type.

The primary benefits of the SBA programs include low, long term fixed rates and the highest level of leverage in the industry. Borrower can expect to only put down 15% compared to conventional requirements at 40% down. In addition, the SBA, and especially the SBA 7a program has very flexible underwriting standards. For example, debt coverage ratios can be as low as 1.1 compared to 1.4 that required by most conventional sources.

Most people do not realize that they can refinance with an SBA programs. With the 504 that is true you cannot refinance with it. With the 7a you can. And it can be one of the best programs in the industry. Borrowers can consolidate business debt, pull cash out for renovations or expansion, etc.
One of the main criticisms of the 7a program is that it comes with a floating rate. However there are a few lenders do structure this as a 5 year fixed program that is amortized over 25 years.

Niche portfolio lenders that specialize in gas stations often have as many benefits as the SBA programs but in different ways. For example we work with a gas station lender out of Maryland that will consider not only the value of the real estate as collateral but also business value and equipment. They’ll go to 80% of the combined value. This can be really relevant if, for example, the value of your real estate has dropped, or if you currently have an SBA loan that is at max leverage.

In general due to the complexity of gas station financing it’s important to work with people that have experience in this industry.

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Network Marketing – The Power of Leverage

A lever is an incredibly powerful tool. Archimedes used to say “Give me a place to stand and with a lever I will move the whole world”.

What Is Leverage

Leverage is an incredibly powerful wealth building tool. Relative to the financial world, leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Most people are familiar with the financial leverage used in real estate transactions. At one time, you were able to control a large financial asset (your home) with relatively little of your own money. And if you bought your home and the timing was right, then you could conceivably turn a small amount of money (your down payment) into thousands or tens of thousands of dollars when you sold the property.

Create Leverage

Real estate is only one way to use leverage to create wealth. If you look at any real business, you can see examples of leverage. Because of the large cost to start a business, the business owner will generally borrow money through selling stocks or bonds. Smaller business owners may finance their enterprise by using Visa or MasterCard, a home equity loan, or maybe even Aunt Sadie. Without leveraging other people’s resources (money), very few entrepreneurs could afford to get their new business started.

Another way that traditional businesses use leverage is through employing others. While the employees are trading one day’s work for one day’s pay, the business owner is leveraging his employees’ efforts and getting paid on the cumulative and synergistic work of all of the employees. It is impossible to leverage your business if you are the only one doing the work.

Build A Network

Can you think of some examples of industry leaders that have put leverage to work for them to create their fortunes? Donald Trump borrowed lots of money to build his real estate empire. Warren Buffett leverages his investor’s money to create wealth for himself (and hopefully his investors, too). Oprah Winfrey has leveraged her talents through vast media syndication. And all true leaders will leverage their followers’ efforts to obtain their collective goals.

And that’s exactly what we do in our network marketing business. We use the power of leverage to amass great wealth by working with a large group of people to do a little bit over a period of time. We have heard that to get something done we must do it ourselves. This is the exact opposite of what we must do with our network marketing business. Andrew Carnegie said “I would rather have one percent of 100 people’s efforts than 100 percent of my own”. Mr. Carnegie certainly appreciated the power of leverage.

A team of people will always have the capacity to accomplish more than an individual can. The power of leverage is there for everybody to use.

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Mezzanine Financing Overview: What It Is, Pros and Cons, and Common Situations

If you’re raising growth capital to expand your business, you may want to consider using mezzanine financing as part of your funding solution.

Mezzanine financing is a form of debt that can be a great tool to fund specific initiatives like plant expansions or launching new product lines, as well as other major strategic initiatives like buying out a business partner, making an acquisition, financing a shareholder dividend payment or completing a financial restructuring to reduce debt payments.

It is commonly used in combination with bank provided term loans, revolving lines of credit and equity financing, or it can be used as a substitute for bank debt and equity financing.

This type of capital is considered “junior” capital in terms of its payment priority to senior secured debt, but it is senior to the equity or common stock of the company. In a capital structure, it sits below the senior bank debt, but above the equity.

Pros:

  1. Mezzanine Financing Lenders are Cash Flow, Not Collateral Focused: These lenders usually lend based on a company’s cash flow, not collateral (assets), so they will often lend money when banks won’t if a company lacks tangible collateral, so long as the business has enough cash flow available to service the interest and principal payments.
  2. It’s a Cheaper Financing Option than Raising Equity: Pricing is less expensive than raising equity from equity investors like family offices, venture capital firms or private equity firms – meaning owners give up less, if any, additional equity to fund their growth.
  3. Flexible, Non-Amortizing Capital: There are no immediate principal payments – it is usually interest only capital with a balloon payment due upon maturity, which allows the borrower to take the cash that would have gone to making principal payments and reinvest it back into the business.
  4. Long-Term Capital: It typically has a maturity of five years or more, so it’s a long term financing option that won’t need to be paid back in the short term – it’s not usually used as a bridge loan.
  5. Current Owners Maintain Control: It does not require a change in ownership or control – existing owners and shareholders remain in control, a key difference between raising mezzanine financing and raising equity from a private equity firm.

Con’s

  1. More Expensive than Bank Debt: Since junior capital is often unsecured and subordinate to senior loans provided by banks, and is inherently a riskier loan, it is more expensive than bank debt
  2. Warrants May be Included: For taking greater risk than most secured lenders, mezzanine lenders will often seek to participate in the success of those they lend money to and may include warrants that allow them to increase their return if a borrower performs very well

When to Use It

Common situations include:

  • Funding rapid organic growth or new growth initiatives
  • Financing new acquisitions
  • Buying out a business partner or shareholder
  • Generational transfers: source of capital allowing a family member to provide liquidity to the current business owner
  • Shareholder liquidity: financing a dividend payment to the shareholders
  • Funding new leveraged buyouts and management buyouts.

Great Capital Option for Asset-Light or Service Businesses

Since mezzanine lenders tendency is to lend against the cash flow of a business, not the collateral, mezzanine financing is a great solution for funding service business, like logistics companies, staffing firms and software companies, although it can also be a great solution for manufacturers or distributors, which tend to have a lot of assets.

What These Lenders Look For

While no single business funding option is suited for every situation, here are a few attributes cash flow lenders look for when evaluating new businesses:

  • Limited customer concentration
  • Consistent or growing cash flow profile
  • High free cash flow margins: strong gross margins, low capital expenditure requirements
  • Strong management team
  • Low business cyclicality that might result in volatile cash flows from year to year
  • Plenty of cash flow to support interest and principal payments
  • An enterprise value of the company well in excess of the debt level

Non-Bank Growth Capital Option

As bank lenders face increasing regulation on tangible collateral coverage requirements and leveraged lending limits, the use of alternative financing will likely increase, particularly in the middle market, filling the capital void for business owners seeking funds to grow.

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