The mortgage broker will excitedly tell you about the Gov taking Fannie and Freddie and how it’s helping, which I do not disagree with. Some realtors will tell you it’s a buyers market, which I do not agree with.

What my goal is here is to just give you some basics to watch out for before you go making the big buy.

For starters, get an agent! That stands whether you are buying or selling! I never knew the hassles of doing it on my own until I tried. Real estate professionals have the knowledge and more importantly the time (this is their job) to make sure everything is in order. The paperwork and appointments are too much for anyone holding a full time job to deal with.

Also consider your options. The number of homes for sale right now goes to show that it is no ones market. We are almost balanced. And with the strictness of lenders giving a mortgage takes more than just a little research.

Last, BE SURE! If you are doubting your agent ask them questions. If you’re a doubting your lender, look around before signing. If you are unsure of the house, keep looking. I am not saying to over analyze and make things difficult. Before you even look at homes, you should know what you can borrow as well as what you can pay every month. Then, call your realtor, pick out your house, sign your papers, and move in. It really can go that smoothly if you take the time in the beginning.

So Good luck!

Gearing is basically defined as the ratio between a company's borrowing (debt) and owner's equity (i.e. shareholder's fund). It is synonym to the word leverage.

A number of ratios fall under the bracket of Gearing Ratio. Thus Debt Equity Ratio and Interest Cover or Times Interest Earned are the more common examples of Gearing Ratio, which are mostly used.

Formula, examples and interpretation of the more common types of Gearing Ratio are explained below.

Gearing Ratio

Formula

Gearing Ratio = Total Borrowings / (Total Borrowings + Total Equity) * 100

Example

A Company has Equity contributed by Shareholder's amounting to $ 100,000. The funds borrowed from the Bank amount to $ 50,000 for the purpose of purchase of Plant & Machinery.

Gearing Ratio = 50,000 / (50,000 + 100,000) * 100

Gearing Ratio = 33%

Interpretation

In this case 33% of the total funds are contributed by way of borrowings. Thus the proportion of debt to total funds appears to be reasonable. However this ratio needs to be compared with other companies in the industry to judge the reasonableness.

In a capital intensive industry Gearing Ratio of 50% or less can be considered reasonable. Capital Gearing Ratio above 50% is considered to be risky, since borrowing funds has a cost attached to it by way of interest. Once funds are borrowed, the principal and interest are required to be paid irrespective of the performance of the business. Thus a high Capital Gearing Ratio leads to high risk.

Debt Equity Ratio

Formula

Debt Equity Ratio = (Total Debt / Total Equity) * 100

Example

A Company has Equity amounting to $ 50,000 and has borrowed funds by way of Long Term Loan amounting to $ 75,000 for funding the construction of building and purchase of Plant & Machinery. A Short Term Loan of $ 25,000 is taken for funding the Working Capital Requirement.

Debt Equity Ratio = (100,000 / 50,000) * 100

Debt Equity Ratio = 200%

Interpretation

A Debt Equity Ratio of 200% is considered to be very high. There is heavy dependence on borrowed funds which means more risk. In this case the company will need to perform and have sufficient Operating Profits from the first year itself in order to meet the interest cost and repay the first year loan installment. In case the company has struck a deal to start repayment of the loan after a couple of years it would have that time period available for setting up and growth of the business. Within this time period the company would be required to make sufficient Cash Profits in order to repay the loan.

In case the Debt Equity Ratio is 200% after the company has commenced business and operated for a period of few years, then it would be interpreted to be very unhealthy and high risk, unless a major expansion is planned.

As stated above, the Debt Equity Ratio would need to be compared with the industry norms to ascertain the reasonableness. A capital intensive industry would be having a high Debt Equity Ratio as compared to trading business.

Gearing Ratio Vs. Debt Equity Ratio

There are debates and arguments as to the correctness of calculation of Gearing Ratio. What is the correct formula for calculating Gearing Ratio? Is the Gearing Ratio the same as Debt Equity Ratio?

It can be observed from the above examples that Gearing Ratio and Debt Equity Ratio give similar results except the result %age will be much higher in the case of Debt Equity Ratio. It finally does not matter which method of calculation is being used. It is the interpretation of the ratio which is more important and comparison of the results with industry norms.

The key thing to remember is that before increasing your borrowing the risks and returns need to be balanced.

Interest Cover

Interest Cover or Times Interest Earned is another important ratio which falls in the bracket of Gearing Ratio's.

Formula

Interest Cover or Times Interest Earned = Operating Profit (EBIT) / Total Interest

Example

A company has made an operating profit of $ 8,000. The Interest Paid during the year is $ 4,000.

Interest Cover = 8,000 / 4,000

Interest Cover = 2

Interpretation

The Interest Cover ratio is more relevant where the Gearing Ratio is high. Thus in this case if the interest rates go up, the company is in a critical situation since it will eat away the profits.

The interpretation of the Interest Cover ratio given above is also dependent on the performance of the Company. Has the company made sufficient profits at the operational level? The Operating Profit to Sales would need to be calculated and compared with the Projections.

Lower the interest cover higher the risks. If interest cover is 1 or less than the company may suffer liquidity problems and may need to identify alternative sources of finance. Additional capital introduction by the owners may need to be considered.

The International Franchise Association reports that there are more than 75 various industries that use the franchising method of expansion, ranging from cleaning services to fast food restaurants and everything in between. But, believe it or not, not all businesses have the potential to be successfully franchised. A local success story does not guarantee a national phenomenon. Certain criteria must be met. Let's see if your business has what it takes.

Criteria for Franchising

A Proven Concept and Track Record for Success: Before handing over a large sum of money, investors look for a history of operating success. Franchisees are investors, so they will be scrutinizing every aspect of your business. You will need to demonstrate that your concept and methodologies are proven from both a financial and an operational perspective. If you are still fine tuning your systems or if your profit margin hasn't shown a steady increase, you are not in a position to consider franchising. You will not be taken seriously and will be viewed as a risk, not an opportunity.

Long-Term Market Potential

The product or service that you are offering must address a specific market need and have long-term market potential. Would-be franchisees will be looking for opportunities that take advantage of emerging trends. They will shy away from those that follow fads or those that are based on a whim. You must provide sufficient market research to back up your claims of market size and demand. Demonstrate to potential buyers that the market is increasing or that you are operating in an evergreen industry - one with a never ending supply of customers, because there will always be a need for your product or service.

A Positive Reputation and Brand Identity

Okay. If you were considering franchise opportunities, would you be more apt to buy a McDonald's franchise or a McHarry's franchise? The answer to that question is obvious. You recognize the brand name McDonald's therefore, you believe it would be a more profitable choice because its identity has been established. It's a no-brainer. Franchisees will be looking for franchise concepts that have the ability to generate sales because its reputation and brand are well-known. If your identity has not been established, all is not lost. Make sure you are taking the appropriate measures to protect your identity (i.e. trademarks and service marks) and that your concept has distinguishing features to give it distinctiveness in the marketplace.

A “Portable” Business Model

It is important that your franchise concept be portable and require no prior experience on the part of a franchisee. You must be able show new franchisees how to easily set up and operate the business using the systems that you have in place. If there are certain aspects of your business that are not portable, such as requiring a special degree, artistic ability or talent, your prospects will be limited.

Operating Experience and a Skilled Management Team

It is absolutely necessary that you have solid experience starting up and operating the business that your franchisees will be buying into. Operating experience demonstrates that your concept is viable. If you have a larger management team, they should also possess franchise related experience. Your franchisees will need initial and ongoing support. They will look to you and your management team to provide this support. Your team will also need to periodically inspect each franchised unit to ensure that all franchisees are following operating guidelines and procedures.

A Knack for Opening New Channels and Closing a Sale

You have to be able to sell - sell yourself and sell your concept to others. Consequently, you will a detailed plan that outlines how you plan to sell your franchise to would-be entrepreneurs. The plan should highlight the marketing and advertising techniques that you intend to use. Keep in mind your budget and target audience.

Franchising is about creating a systematic way of doing business that results in a unified network of individuals working to towards the same goal: maximum profitability. In summary, if you are considering franchising your concept, make sure that you have the following criteria in place:

• A successful business and operating history
• A proven system that generates a profit
• Market research findings that verify a large market to support ongoing efforts
• A favorable reputation in the marketplace
• An easy to operate, transferable business model
• Operating experience to prove your credibility
• An experienced management team that can meet the needs of franchisees
• Ability to sell to others effortlessly

Even if you have met all the criteria, be prepared to invest both time and money to develop your franchise system. Many people have met success taking the franchise route. If your business is truly “franchisable” and you're willing to work hard, you too might build great fortune with franchising. Have fun and good luck!