What To Do Now?

If you’ve been lucky, since 2008 your business has been relatively unscathed by the financial turmoil and resulting uncertainty.  It’s likely that most small businesses will be affectied negatively as we move ahead into 2012 and a recessionary economy with continued uncertainty.  Depending on who and what you read, this recession could last 12 – 24 months or more.  So what are you, an average business owner, to do in an environment like this?

We think a couple of things.  First, don’t increase expenses and if possible cut them.  Look everywhere for cost savings – now is the time to review some of the things you always thought you’d get around to in terms of ways to reduce costs.

Second, if you don’t grow, don’t sweat it.  In an economy like this, steady state is golden.  Do what you can, with what you currently have, to maintain revenue, market share, and customer base.  We also highly recommend that you do not borrow to grow.  There’s enough risk right now with the uncertainty in the overall economy.  Don’t burden yourself with additional debt.

Last, always remember that you’re nimble and competitive especially if your competition is larger than you.  Your customers buy from you for some very good reasons (besides just cost) and remind them of those reasons early and often.

Selling On the Web

If your web presence includes the ability for your customers to order products and services, you should be aware of how their minds work when they are using your site.  Start by thinking about the way you shop on-line.  Have you ever heard yourself ask these questions while deciding to purchase something on-line:

1. I don’t know who you are so how can I trust you?
2. What are you going to do with my precious credit card and personal information?
3. How can I contact you (and be assured I’ll reach someone) if I have a problem with my order?
4. How do I know that my information will be secure?
5. What if the product I buy doesn’t work right or there is something else wrong?
6. Why should I buy from you rather than another site?
7. I’m having trouble finding information on your Web site, how do I know I’m getting what I need?
8. I can’t buy the way I want to. I’d like to talk to a person before placing my order
9. Are you a serious business or is this just a hobby site?
10. I need shipping options. Why don’t you have more options?

Taking a test drive of your site is the best way for you, the owner of the business, to know what’s going on and what your custmers might be thinking as they use the site.  Log onto your site periodically and place an order.  Take notes and screen shots (ask someone how if you don’t know) of what you saw and how it made you feel.  Then sit down with your technology group and/or web developers and brief them on your experience.

Be watchful  during the technology debrief.  Don’t let the “experts” dazzle you with jargon.  For example, if they tell you the technology won’t let them do something, ask them why that technology is being used.  If cost becomes an issue, quantify things – how much revenue are you missing because of a poor web experience.

Technology Won’t Change My Business

So thought the New York Times until 2009 rolled around.  Then, someone did some interesting math.  According to the Silicon Valley Insider, the NY Times could buy EVERY ONE of their subscribers an Amazon Kindle for 1/2 the cost of publishing the traditional newspaper for 1 year.

And just think, once the Kindles are purchased, their purblishing costs go down by another 90% since they only have to buy Kindles for new subscribers.  That’s an amazing change in a business paradigm.  If it ever comes to fruition.

The Amazon Kindle is a very portable device that lets the user download books, magazines and newspapers onto basically an 8 1/2 x 11 piece of paper.  Is everyone ever going to use an Amazon Kindle?  Of course not.  But they could and the NY Times could be sent into a tail spin (like it’s not in one already) if it doesn’t plan to make the transition from the way it does business now to new business platforms and paradigms.

Keep that in mind the next time you read about your competitor implementing a new ERP applicaiton or presenting a new way of interacting with customers to the market.  Technology is a game changer.  You’d better be ready for the changes and in some cases lead them or run the risk of winding up like the NY Times.

Selling Your Business in a Recession

The recession has us all wondering “what do I do now?”  I’d planned on exiting my business and thought the exit was just around the corner.  Now, valuations are depressed, the banking situation isn’t allowing deals to get done, private equity firms are focusing on maintaining current portfolio holdings, and on and on.

The good news is that the lapse in activity in the M&A space allows you some time to position you company for even more value than it would have gotten previously in the open market.  You should immediately start focusing on the parts of your business that can have a significant impact on valuation, for example:

 1. Develop a strategy for growth that is reasonable and understandable
2. Begin to move yourself out of the company.  Allow your key employees to start making real decisions and tell them why you’re suddenly doing that.
3. Look at your cusotmers.  Begin to understand which customers drive the most PROFIT, not revenue.  Don’t ask your sales people who your best customers are.  Get the data and figure it out for yourself.
4. Watch your cash flow.  Real estate is valued by three things, “location, location and location”.  Businesses are valued on cash flow.
5. Look at your business processes and systems.  Will they sustain the growth that you envision?  Will they provide adequate information about growth that will allow you to make corrections as necessary?
6. Review your expenses.  Okay, you’ve probably already done this but do it again.  Cut the unecessary costs and refer back to point 4, watch your cash flow.
7. Sperate your personal life from your business.  Now is the time to start looking at things  like the company car, and other things that you need as the owner to run the business effectively.  The question to ask here is “will others need to incurr this expense when I’m not around?”

 For the time being, holding pat may be a good strategy.  But don’t stand still.  Be prepared to be the first back in the market once things turn around.

Let Your Business Fail in 10 Easy Steps

Okay, there’s a bit of sarcasim in that title but we needed to get your attention.  No matter how big or small your company is, always keep your eye on these 10 things:

  1. Working capital – having enough working capital on hand or having easy access to working capital is critical.  The need is even greater during slow economic times.  For example, what will you do if your revenue drops by 50%?  Or what if your major competitor’s revenues drop by 90% and they approach you about buying them out?  Working capital solves these problems and turns them into opportunities.
  2. Inadequate accounting records – you need an accurate and timely picture on how the business is doing.  Only complete and accurate financial statements can do that.
  3. Not controlling costs – always know what your costs are and don’t guess or assume they’re not changing.  In other words, verify costs for each project you bid, proposal you submit, sales order you write.
  4. Not understanding your financial statements – your accountant (whether internal or extermal) is just like any other geek.  They love to hear themselves talk and throw acronym after acronym out.  If you’re really not sure what they’re talking about or aren’t clear how what they’re telling you helps you with points 2 and 3 above, call them on it.
  5. Not training your employees – you can’t do it all and if you don’t teach them, your employees can’t know how to do it (whatever “it” is).  Also remember, buyers like businesses that can survive past the entreprenuer.  Ask yourself how someone from the outside would view the business’ sustainability if you’re no longer involved.
  6. Failure to plan ahead – and for most small business this also means failure to plan.  You need an understanding of where your headed to know how to motivate employees, gauge how well you’re doing and lining up adequate working captial.
  7. Weak internal controls – these are the policies and procedures you put in place to make sure employees don’t steal you blind.  We’ve all read the stories about this happening “to someone else”.  But are you really sure your controls would work if 2 employees got together and decided it was their time to earn the big dough?
  8. Not selling agressively – one of my favorite quotes is from the movie “Glenn Gary Glenn Ross”.  When one of the sales people gets up for more coffee the sales manager sits him right back down with the stern line, “Coffee is for closers!”.  Look at your sales by sales person.  Most likely you’ll see that close to 80% of your revenue comes from 20% of your sales people.  Clearly, some house cleaning is in order.  But the next question should be “how can I get more people to perform like my top 3 producers?”
  9. Not carrying enough insurance – it’s a pity to see businesses go under because of insurable losses that weren’t.  Don’t be one of “those” statistics.  Insurance isn’t cheap but the alternative is . . .
  10. Not having professionals on your team – surround yourself with highly qualified and trust-worthy professionals.  A good attorney, CPA, M&A Specialist, Insurance Agent, Banker, etc., are invaluable assets from many different perspectives.

Being the owner of a business is hard enough.  Knowing what makes them fail most often will help you avoid it.  But remember, it’s up to you to take action about the items on this list.

Too Big To Fail

For some time, I’ve been looking for a reasonable explanation as to how the “finanical crisis” came about and how some firms were labeled as “to big to fail”.  Because of our orientation towards small business, we’ve simply not dealt alot in with the types of institutions these terms apply to.  That said, we’re all dealing with the fallout from this process.

This article from DealBook does a great job of explaining what went wrong and how the regulatory system dealt with the implicaitons within the tools (laws and regulations) they had.  Make sure you read the whole thing as it contains many “I never knew that!” moments.

What Do You Know About Your Competition

Knowing your customers and what makes them buy from you is important.  It’s also important for you to know and understand your competition.  Remember, your customers are sometimes only one click away from being someone else’s customers so know what might make them change their buying habits.  It’s always good to know and revisit the following things about your competition:

  1. Products & Market Emphasis – you certainly know the products they sell that compete with yours.  But do you understand their new product development / introduction life cycle?  You should.
  2. Positioning – how do they position themselves within the market.  Does their competitive position change over time?  For example, is someone who was once tangental competition now direct competition?
  3. Technological Capabilities – what types of technologies do they use to put into their products, to sell their products or support their products?  An important part of the technology review is how they utilize tools like the web compared to you.
  4. Management – who are the members of their management team?  Are they changing their team and does the change bring them additional credibility in the market place?
  5. Company size – this is a hard one to gauge.  Think about how closely you hold this information to your vest.  Do what you can to find out about their size, number of customers, market penetration, etc.  Key pieces of information to gather include revenue, operating profits, number of employees, etc.
  6. Resources – this is an often overlooked metric.  The resources of a company refer primarily to it’s owners and/or investors.  This information allows you to gauge their staying power in the event of economic downturns, price competition, the size of customers or contracts they’re able to service.

Once you know this information, perform a SWOT (strengths, weaknesses, opportunities, threats) analysis on each competitor and yourself.  Discuss what you find with your sales people, your service & support people, and potentially your customers.  Understanding how you compare is the first step to increasing your business and making it more profitable.

Dangerous Management Mistakes

The recession is lasting longer and is deeper than anyone expected.  When a business fails, the cause can be traced back to several fundamental reasons.  Knowing those, may arm you with the ability to track your business now to avoid a catastrophic failure in the future.  What should you be looking at early and often?

  1. Sales forecastsMistake – small businesses are known for not doing an adequate job in forecasting sales.  Remember, a sales forecast is NOT: “we’ll increase revenue 18% over last year, just like we’ve done the past 5 years”.  A sales forecast shows both what you expect revenue to be and HOW you expect to generate it.  That means you identify what customers will be expected to generate specific revenue volumes.

    Correction – review forecasts against actual results; at least weekly, monthly is better and if you’re not hitting your sales forecast, review it weekly.  When you notice a customer is not hitting their anticipated sales, ask the hard questions of your sales people.

  2. Financial reportingMistake – small business owners don’t have access to financial analysts who pour through the financial reports (balance sheet and profit & loss statement) comparing results to last quarter, last year, etc.  That work still needs to get done.

    Correction – ask your accountant (or whomever generates your monthly financial statements) to generate “comparative” financials.  These reports are automatically generated by all accounting systems.  Look for lines on the statements that show a big change – what caused that expense to go up? or what made that revenue go down? or I had no idea our sales discounts were so high! are all relevant questions to ask.

  3. PurchasingMistake – not knowing who in your organization is responsible for purchasing what and not monitoring what they’re buying.

    Correction – make sure you know about everyone in your organization that is responsible for spending working capital.  Yes, that includes who’s buying the coffee.  Make sure the things they’re buying are necessary and relevant for the level of business you’re currently experiencing.  Monitoring what’s being purchased over time means that you may be able to avoid the “big cuts” if caught off-guard by a sudden decrease in revenue or a big delay in cash collections.

  4. Product profitabilityMistake – not knowing which products are contributing to the company’s overall profitability.  Also, not understanding the current velocity of various products.  In this case, the velocity can refer to any sort of growth as it relates to the product.  For example, the gross sales for your best selling product may be increasing just like they have for the past 5 years – the velocity is increasing.  However, in order to maintain that velocity, your sales people have been giving “one-time discounts” because competition is moving into the product line.

    Correction – have your accountant generate profit and loss statements by product line and if possible by product.  And don’t accept the answer that “our system doesn’t do that”.  Most likely it does but hasn’t been configured properly.  Or, shortcuts are taken in terms of entering data that makes the reporting less than accurate.  This information is CRITICAL to the success of your business.

  5. Keep your key people

    Mistake – when times are tight, bonuses and incentive compensation may have to be cut back.  Like you, people don’t like it when you mess with their income.Correction – keep your best and brightest employees in the loop about what’s happening with the business.  They have a vested interest in making sure problems are solved and revenue is generated.  If the business won’t support the level of cash compensation they’re used to, look for other ways to reward them.  For example, more responsibility, start a phantom stock program (DO NOT give them actual stock) or ask them how they can stay motivated given the current economic situation.


Finding Value In Your Company

Are historical financial metrics the exclusive drivers of your company’s value?

Yes, if they’re all you can prove to potential investors or buyers.  But what else can you show them that would potentially drive up your company’s valuation?
Small to medium sized businesses, while being the primary driving force behind the US economy, are difficult to value.  Investors traditionally have relied on historical financial measures such as multiples of trailing twelve months (TTM) earnings before income taxes, depreciation and amortization (EBITDA) or discounted cash flows (DCF) of future earnings to benchmark the value of a closely held business.  As you may have guessed, those valuations can leave a lot of money on the table.

As you’ve grown your business, you’ve come to rely on three things that have made you successful: your people, your customers and your ability to turn an idea into a product or service.  Capitalizing on these assets is one way to break out of a straight financial valuation.

Let’s start with people.  You’ve known for a long time that you have the best group of people ever.  They’re hard working, intelligent and they want to help your customers.  To show an investor the value of this “people asset”, you’ll need to be able to show them things like:

  • How you attract and retain new employees that contribute to the company in as short as time possible
  • How you continually improve their performance in their current job and prepare them for new jobs (with increasing responsibility) as the company grows
  • How you compensate your employees for performance, community involvement, etc.
  • How you create an atmosphere of competitive comradery  where each employee challenges their peers and executive management to do the best job possible every day.

Let’s face it.  You also have the best customers in the world.  They’ve stuck with you through thick and thin.  They’ve always worked with you to provide good profitability and you in turn listened to what they wanted and responded with high quality goods and services.  But once again, how do you show this to a potential investor?

One way it to document the business processes that you built over the years to find, close and service your customers.  Being able to show that your increasing revenue is the result of a clearly defined sales process and not just you or your star sales person closing the deal may increase your value dramatically.  On the back end of the sale, show the investor how you continually listen to your customers and respond to their needs throughout their relationship with your company is another important value driver.

Lastly we need to address your innovation.  How have you made the process of concept to product repeatable and scalable?  Is it still reliant on you or a “key” employee?  Is the process transferable to another company within the investors’ portfolio?

Starting Early

As you can see, being prepared to show value to investors can be as important as the financial performance you’ve been able to maintain.  The good news is that getting a handle on these important value drives makes you a better company with or without a transaction.  Your bank will be happier with more information, your customers will be happier with more consistent treatment and your employees will be happier when they understand how their job contributes to the company’s overall success.

Valuing A Small Business

As the old saying goes, three things drive value in real estate: location, location, location.  While that saying can provide an inkling of the value of the real estate your business owns, what drives the value of the business itself?

Small Business Valuation Drivers

Regardless of who you look to for statistics, the fact of the matter is small business is the heart of the American economy.  Consider numbers like small business:

  • Represents more than 99.7% of all employers
  • Create about ¾ of the net new jobs in the US
  • Employ almost 62% of the workforce
  • And account for more the 60% of the gross domestic product of the US.

Despite these impressive statistics, the valuation of small businesses isn’t a science.  Buyers and investors will look at an opportunity through the glasses that represent their experience with similar businesses.  If they’ve been successful with or know someone who was successful with a similar business in the past, valuations will be more favorable.  If they’re unfamiliar with the business, valuations will reflect their perceived increased ‘risk”.  But how will the value of your business determined?

    • Consistent Performance – as you’ve found in running your business, consistency is nice.  You know what kind of income to expect, your employees have the comfort of job stability, your bank is asking if you’d like to borrow more money, etc.  Of course, a certain amount of inconsistent performance can be explained.  Perhaps your business is cyclical – as long as the cycles are consistent over a period of time, fine.  Perhaps your business is tied to larger market trends – okay, but you’re better off if you can describe how you can insulate your business from the lowest lows while taking advantage of the highest highs.
    • Business Strategy, Financial Controls and Systems – your business plan will show investors what your overall strategy is compared to your market and competitors.  Financial budgeting and monitoring actual results compared to budget in a timely manner provide buyers and investors with comfort that the business is under control – especially in times of changing markets or economics.  Financial projections are a critical adjunct to your business plan.  They show you’ve thought about all aspects of the company’s growth and can spot trends that are keeping you from growing.  And, as the trite saying goes, having systems in place that provide this type of information in any level of detail at any time – priceless.
    • Management Team – is critical to the long term success of any business.  Having a management team with a seasoned professionalism makes investors feel comfortable the business is truly sustainable beyond the owner / entrepreneur’s involvement.
    • Defensible or Sustainable Markets – if you have a unique product or service great.  If you have a patent or other defensible legal position, even better.  If you have operational, financial and sales processes that effectively keep competition at bay . . . congratulations.  You have a valuable business.  The trick of course, is convincing a willing buyer this is the case.

What You’re Looking For

Valuations can also depend on what you’re looking for.  For example the outright sale of your company may drive a different valuation than an equity infusion to continue a growth trend or to enter new markets.  Typically, investors like to see the original owners continue with a stake in the business.  Someone who wants to cash out completely may get a different valuation than someone looking for a ‘second bite at the apple’.

What can you do to control the Valuation?

Clearly, given the valuation drivers, there is significant work that can be done to prepare your company for this ultimate event.  Update your business plan and overall business strategy.  Make sure your management team is well rounded in all disciplines and make sure they’re given the authority and responsibilities to make decisions after being given direction from the Leader (you!).  Lastly, think about what makes your company unique to the needs of your customers – what satisfies their need to feel their investment in you and your employees is a valuable one.