The role of small business in the presidential elections was brought into the national spotlight with the mention of “Joe the Plumber” during the last presidential debate. Mr. Wurzelbacher was referred to 26 times during the discussion that evening. You would think that small business would become a major component of the economic policies of each candidate based on that debate and the follow up references thereafter.
Below are links to the websites for John McCain and Barack Obama that refer to their positions on small businesses.
http://www.johnmccain.com/Issues/JobsforAmerica/smallbusiness.htm
http://www.barackobama.com/issues/economy/#small-business
I am going to let their own words speak for their positions. I will add my editorial opinion that both websites seem to be lacking in substance. There are some in depth issues that concern many small business owners that are not being addressed sufficiently.
I will also add my opinion that both campaigns spend more time talking about the other candidate’s economic policies rather than their own. I am sorry, but I don’t want to hear from John McCain what is wrong with Barack Obama and I don’t want to hear from Barack Obama what is wrong with John McCain. I want to hear what substantial policies each candidate will implement to help small businesses bring innovation to the marketplace.
Yet I am getting off topic and I want to focus more on what our leadership should be doing for small businesses. If I were given the opportunity to help either campaign, my positions on small business would focus on these issues:
• Capital Access – Making sure small businesses can get funding to implement a solid business plan. Almost all innovation in the marketplace comes from small business and innovation has risk. Banks can’t shoulder the burden of too much risk and maintain profitability. I will compliment the government, especially the SBA, for developing some good programs to make financing more available to some businesses. Still, there are flaws in the system and it is time for the US government to develop a 21rst century plan that provides not only more access to capital, but a better due diligence system that limits the risk..
• Technical Assistance – I am not saying this because I am one of the government’s technical assistance providers. I am saying this because we still have not done a good enough job of helping early stage entrepreneurs understand that developing a successful business goes beyond having a good idea and vision. It requires operational expertise, marketing expertise and financial management skills. We still have businesses getting government backed financing that do not have effective business plans with functional budgets and forecasts. These business owners need to be partnered with better mentors who can help them develop the best practices that have been utilized by those who have achieved success. Our resources have been too focused on theory and we need to get more practical technical assistance programs out there for small businesses. This would include developing a more involved direct mentoring of small business owners receiving government backed financing.
• Procurement – The government, at Federal, State and Local levels, spends trillions of dollars each year to operate. While small business owners do have the opportunity to bid on some contracts, the processes in place are archaic and do not provide a level playing field for the average small business owner. If I had the opportunity, I would develop a more streamlined process for bidding and managing procurements to provide greater access to small businesses.
• Regulatory Streamlining – Regulations are a necessity and I am not talking about deregulation here. The problem is that we have not been strong enough in providing the technical assistance for small businesses to get the answers on how to follow regulations properly or cost effectively. If the government is going to develop regulations, they should also develop the technical assistance to make it easier for businesses to comply with those regulations. Talk to just about any small business owner and you will find a disdain for some government agency because of their confusing regulations or permitting requirements. Most of these agencies have been guilty of creating a culture of non-compliance by being ambiguous in what they want and ruthless in their pursuit of perceived offenders. By creating regulations with clearer instructions and better technical assistance, we can foster better compliance. We need to change the government paradigm from being a regulatory police force to a compliance enabling force.
• Healthcare – Most small business owners want to get healthcare for themselves and for their employees. The problem is that the costs of healthcare are not only prohibitive, they are unpredictable. It is impossible to budget for the steep increases in healthcare costs each year. I know this is an area where both presidential candidates have offered very different solutions. Unfortunately, neither solution addresses the true problem (in my opinion). I wish I could offer an alternative solution, but I just don’t have one. I will say that the common denominator in both plans presented, and the major flaw in my opinion, is they see the problem as making healthcare plans more accessible. That solution will fail, as it will only drive up the cost of healthcare, because demand will become higher. Economics states that as demand increases, so do prices (if supply stays constant). And it is the same simple economics that is the problem we have to address. Healthcare has an inelastic demand. That is, people want to live, so they pursue healthcare. Here in is the problem. The demand is so powerful, people will pursue it whether they can afford it or not. So the suppliers (healthcare companies and healthcare providers) don't get paid in those situations. If this goes unchecked, it will effect their ability to stay profitable and continue supplying healthcare. Our society needs healthcare. Demand is growing, because our population is growing (not to mention, living longer) and that demand is inelastic. Like it or not, capitalism and inelastic demand don’t work very well together and that is something that a lot of people have trouble reconciling.
So I’ve identified my concerns for small business. I would invite other small business owners to comment and address issues that concern them. I would really like to stay away from getting into a debate between candidates. Let’s make a decision for who we want and accept the fact that other people are entitled to have differing opinions.
In regards to my opinion, I obviously have some social leanings that can't be hidden in the editorial contents of my posts. I also used to own a bagel store just outside of Wasilla, AK where Sarah Palin would stop by on occasion. She really is a quality person who is intelligent, charitable and dedicated to public service.
Unlike most people who offer their opinions, I find both candidates and both of their running mates to be quality individuals who have shown dedication to serving this great nation. I don't agree with all of their opinions, but I appreciate their commitment to make this country a better place. I will conclude with the true gem that came from Joe the Plumber when asked about his presidential choice. He said, “It's between me and the button I push.”
Tuesday, October 28, 2008
Tuesday, October 14, 2008
Increasing Your Bottom Line
I am teaching a class this Thursday entitled, “Increasing Your Bottom Line” in partnership with the Plattsburgh-North Country Chamber of Commerce and our local SCORE chapter. For those who are unable to attend, I will give a little preview of this presentation.
As I have said in some previous posts, there are only three things you can do to increase the profitability of your business:
* Increase Prices
* Increase Volume
* Decrease Expenses
The simplicity of focusing on these three strategies would seem to make business management a relatively easy task. Unfortunately, the implementation of these strategies is complicated by the huge range of variables that may result from any decision.
For example, if you increase your prices and maintain your current volume of customer transactions, you will certainly increase your profitability. Yet we know that if you raise your prices, you become more susceptible to losing volume. What if the competition doesn't raise their prices? You run the risk of losing customers to them. That is not the only variable that comes into play. What if your customers can no longer afford your prices?
To increase volume, I like to refer to your strategy options as a two step dance. The first step is to get your existing customers to purchase more each time they make a transaction. It is no joke why fast food establishments train their workers to ask, “You want fries with that?” Every time you can add an item to a transaction, you will increase your volume and your ability to increase profit. So train your employees to offer more products or services to your customer. Don't have any more products or services to offer? Maybe that's the problem and may be missing out on an opportunity to grow your business.
The second step to this dance is to get more customers. That is also easier said than done, but we'll do some postings in the future to help seed some ideas in this area. Basically, it boils down to marketing your business. Jay Conrad Levinson, the celebrated author of Guerilla Marketing, says, “marketing is everything you do to promote your business, from the moment you conceive of it to the point at which customers buy your product.” So keep doing everything, but try to do more of it!!!
Like with raising prices, there are risks to your attempts to increase volume. By adding product lines, you may incur the costs associated with the increase of inventories. You also run the risk of “cannibalism.” Cannibalism refers to the sales of one product line eating away the sales from other areas of your own business. Adding services may increase your labor costs, decrease your productivity or carry other unforeseen costs. Another concern is the costs associated with marketing your business. While there are some great books on saving money on marketing, any plan will at the least require your time; and there is a value to your time.
The final option is to decrease your expenses. I will again reference one of my favorite humorists, P.J. O'Rourke. In his book, Parliament of Whores, he introduces the P.J. O'Rourke Circumcision Principle which simply states, “you can take 10% off the top of everything.” Can you cut some fat off of your operating budget?
You need only to go back to my first post on this blog, “You Can't Cut Your Way to the Bottom Line” to get my opinion on your prospects in this area. Still, if you can cut some expenses off your budget without that sting that I felt by just typing the word “circumcision,” you will increase your profitability.
The purpose of this posting is not to get you to make rash decisions, but rather, to encourage you to explore the possibilities. Your main responsibility as a business owner is to maximize profitability. When was the last time you reviewed your options? Can you come up with a plan of action with a forecast of the expected results? Have you done a risk/reward analysis?
If you want to join our discussion this Thursday, here is the link to more information on this event:
http://www.northcountrychamber.com/MBTP/eventspage.cfm?ID=150
As I have said in some previous posts, there are only three things you can do to increase the profitability of your business:
* Increase Prices
* Increase Volume
* Decrease Expenses
The simplicity of focusing on these three strategies would seem to make business management a relatively easy task. Unfortunately, the implementation of these strategies is complicated by the huge range of variables that may result from any decision.
For example, if you increase your prices and maintain your current volume of customer transactions, you will certainly increase your profitability. Yet we know that if you raise your prices, you become more susceptible to losing volume. What if the competition doesn't raise their prices? You run the risk of losing customers to them. That is not the only variable that comes into play. What if your customers can no longer afford your prices?
To increase volume, I like to refer to your strategy options as a two step dance. The first step is to get your existing customers to purchase more each time they make a transaction. It is no joke why fast food establishments train their workers to ask, “You want fries with that?” Every time you can add an item to a transaction, you will increase your volume and your ability to increase profit. So train your employees to offer more products or services to your customer. Don't have any more products or services to offer? Maybe that's the problem and may be missing out on an opportunity to grow your business.
The second step to this dance is to get more customers. That is also easier said than done, but we'll do some postings in the future to help seed some ideas in this area. Basically, it boils down to marketing your business. Jay Conrad Levinson, the celebrated author of Guerilla Marketing, says, “marketing is everything you do to promote your business, from the moment you conceive of it to the point at which customers buy your product.” So keep doing everything, but try to do more of it!!!
Like with raising prices, there are risks to your attempts to increase volume. By adding product lines, you may incur the costs associated with the increase of inventories. You also run the risk of “cannibalism.” Cannibalism refers to the sales of one product line eating away the sales from other areas of your own business. Adding services may increase your labor costs, decrease your productivity or carry other unforeseen costs. Another concern is the costs associated with marketing your business. While there are some great books on saving money on marketing, any plan will at the least require your time; and there is a value to your time.
The final option is to decrease your expenses. I will again reference one of my favorite humorists, P.J. O'Rourke. In his book, Parliament of Whores, he introduces the P.J. O'Rourke Circumcision Principle which simply states, “you can take 10% off the top of everything.” Can you cut some fat off of your operating budget?
You need only to go back to my first post on this blog, “You Can't Cut Your Way to the Bottom Line” to get my opinion on your prospects in this area. Still, if you can cut some expenses off your budget without that sting that I felt by just typing the word “circumcision,” you will increase your profitability.
The purpose of this posting is not to get you to make rash decisions, but rather, to encourage you to explore the possibilities. Your main responsibility as a business owner is to maximize profitability. When was the last time you reviewed your options? Can you come up with a plan of action with a forecast of the expected results? Have you done a risk/reward analysis?
If you want to join our discussion this Thursday, here is the link to more information on this event:
http://www.northcountrychamber.com/MBTP/eventspage.cfm?ID=150
Wednesday, October 1, 2008
Another "Main Street" Opinion
I feel compelled to weigh in with my “Main Street” opinion on our current fiscal crisis. I welcome comments with contrary opinions; I just ask that you please keep them courteous. I also give two disclaimers. One is that this is my personal opinion and it doesn't reflect the opinions of my place of work or any affiliated organization. The second disclaimer is that I am not an economic expert, nor am I in any position to make a decision on what happens with the bail out process (except with my personal vote this November and I address that later in this posting).
Recently, I have been telling anyone who will listen to remember the words of Albert Einstein, "We cannot solve the problems we face at the same level of thinking as when we created them."
The issues I have with the "bail out" plan, as proposed, is not that I am against investment in our economy. There is no doubt that our tax dollars are a contributing factor in our economy and there is no way around that. My problem with the plan is that it does not appear as if our tax dollars are being invested. As proposed, our dollars are being used to purchase worthless assets from private companies who made poor decisions so they have capital to continue investment in wiser opportunities. The principal behind that is that the taxpayers need to do this to insure there is capital available for future investment. That is fine by me, but if the taxpayers are going to put up money to ensure the continuing flow of credit, shouldn't the taxpayers reap the rewards of that investment?
The "bail out" plan relies too much on a good faith assumption that a successful economy created by private firms making money will reward the taxpayers. Well, in my opinion, past performance is the best predictor of future behavior. Over $126 billion was pledged to bail out the Savings and Loans in the late 80s and early 90s and we watched that industry recreate itself, develop amazing wealth and then squander it through poor judgment to lead us back to where we stand today.
I remind you that just two years ago, some of the same companies that are seeking a taxpayer bailout were handing out huge bonuses. See this link to some of the corporate bonuses that were doled out in 2006 by some major players in this industry:
http://www.bankersball.com/2006/11/06/2006-bonuses/
How much of that wealth trickled down to the average taxpayer? Why wasn't that money socked away for a rainy day such as today?
So I've stated the problem, but what is the solution? Unfortunately, I don't have the answer. I am spinning my wheels trying to help come up with a good suggestion. But I am not an economics expert and I tend not to make decisions of this magnitude without some thought and research. Yet here in lies another problem; everyone seems to think we need to fix this by next week. To be frank, for the President, the taxpayers or the press to expect Congress to just turn over $700 Billion of taxpayer monies in one week to an industry that created a financial mess that was years in the making is just an unreasonable expectation. Even more ludicrous is the belief that Congress can make an educated decision in this time frame that carefully projects likely outcomes of of this appropriation. I’m not very comfortable with the odds for success.
Still, I am going to try to throw something out there and the best suggestion I can make is that we could follow Robert Kiyosaki's advice for a best practice of investment strategy, as outlined in his book, “Rich Dad, Poor Dad.” As noted in a previous post, he suggests that investment should be in assets that are likely to generate income. So let’s invest taxpayers dollars in those types of assets instead of the worthless junk that we are proposed to be buying. At least with this model, the taxpayer’s investment will stand a chance to yield the taxpayer some rewards.
Unfortunately, there is no mechanism in place to make decisions on investing so much public dollars into private industry wisely and prudently. So many people will throw out my suggestion because the world is on the verge of collapse and it is just not timely enough of a solution.
Keeping that in mind, I feel that we are faced with these alternatives:
1. Congress can act now and throw taxpayer dollars at a poorly conceived, reactionary bail out plan
2. Congress can actually work on a bipartisan, proactive plan that ensures the flow of credit is available after developing a mechanism to wisely invest public capital into private industry
3. We do nothing and let the private sector continue with its fascinating, Darwinian “survival of the fittest” economy
Here is what I foresee to be the results of each alternative:
1. Come November, the largest number of incumbents who lose Congressional elections is realized due to people like me who can't see the benefit of Congress bailing out Wall St. (especially when no government solutions were offered to me when I made poor investment decisions)
2. The Devils win the Stanley Cup since home ice advantage is obviously in hell because it just froze over.
3. Some people will lose a lot of money; some people will make a lot of money. Credit will tighten in some markets; credit will loosen in other markets. Some people will lose opportunities, some will gain opportunities. In other words, on a macro level, nothing will change.
For those who need me to be more literal about my editorial opinion, I am obviously in favor of letting the market sort things out. I am a bit cynical with my belief that our government is not capable of pulling politics and favoritism out of their decision making process. I am even more fearful that too many Congressional leaders do not have a strong enough understanding of finance to be making such a large “investment” decision, especially with other people's money.
I do not buy in to the global economic meltdown theory. In my opinion, it is like a law of thermodynamics: "The economy cannot be created or destroyed." The economy is still there, it just gets moved around in different ways.
I am well aware of the fact that there will be tragic stories of loss should government not act and I can empathize with those who stand to lose so much. But some of us have already had tragic stories of loss and the government left us to pull ourselves up by our own bootstraps. And can anyone think of a solution in our economy where everyone wins? Our competitive marketplace does not allow for that, which is the main reason why I stand firm in my belief that government should keep as much distance from this mess as possible. For the government to choose who wins in this game is too dangerous.
As P.J. O’Rourke once wrote, “The mystery of government is not how Washington works but how to make it stop.”
Recently, I have been telling anyone who will listen to remember the words of Albert Einstein, "We cannot solve the problems we face at the same level of thinking as when we created them."
The issues I have with the "bail out" plan, as proposed, is not that I am against investment in our economy. There is no doubt that our tax dollars are a contributing factor in our economy and there is no way around that. My problem with the plan is that it does not appear as if our tax dollars are being invested. As proposed, our dollars are being used to purchase worthless assets from private companies who made poor decisions so they have capital to continue investment in wiser opportunities. The principal behind that is that the taxpayers need to do this to insure there is capital available for future investment. That is fine by me, but if the taxpayers are going to put up money to ensure the continuing flow of credit, shouldn't the taxpayers reap the rewards of that investment?
The "bail out" plan relies too much on a good faith assumption that a successful economy created by private firms making money will reward the taxpayers. Well, in my opinion, past performance is the best predictor of future behavior. Over $126 billion was pledged to bail out the Savings and Loans in the late 80s and early 90s and we watched that industry recreate itself, develop amazing wealth and then squander it through poor judgment to lead us back to where we stand today.
I remind you that just two years ago, some of the same companies that are seeking a taxpayer bailout were handing out huge bonuses. See this link to some of the corporate bonuses that were doled out in 2006 by some major players in this industry:
http://www.bankersball.com/2006/11/06/2006-bonuses/
How much of that wealth trickled down to the average taxpayer? Why wasn't that money socked away for a rainy day such as today?
So I've stated the problem, but what is the solution? Unfortunately, I don't have the answer. I am spinning my wheels trying to help come up with a good suggestion. But I am not an economics expert and I tend not to make decisions of this magnitude without some thought and research. Yet here in lies another problem; everyone seems to think we need to fix this by next week. To be frank, for the President, the taxpayers or the press to expect Congress to just turn over $700 Billion of taxpayer monies in one week to an industry that created a financial mess that was years in the making is just an unreasonable expectation. Even more ludicrous is the belief that Congress can make an educated decision in this time frame that carefully projects likely outcomes of of this appropriation. I’m not very comfortable with the odds for success.
Still, I am going to try to throw something out there and the best suggestion I can make is that we could follow Robert Kiyosaki's advice for a best practice of investment strategy, as outlined in his book, “Rich Dad, Poor Dad.” As noted in a previous post, he suggests that investment should be in assets that are likely to generate income. So let’s invest taxpayers dollars in those types of assets instead of the worthless junk that we are proposed to be buying. At least with this model, the taxpayer’s investment will stand a chance to yield the taxpayer some rewards.
Unfortunately, there is no mechanism in place to make decisions on investing so much public dollars into private industry wisely and prudently. So many people will throw out my suggestion because the world is on the verge of collapse and it is just not timely enough of a solution.
Keeping that in mind, I feel that we are faced with these alternatives:
1. Congress can act now and throw taxpayer dollars at a poorly conceived, reactionary bail out plan
2. Congress can actually work on a bipartisan, proactive plan that ensures the flow of credit is available after developing a mechanism to wisely invest public capital into private industry
3. We do nothing and let the private sector continue with its fascinating, Darwinian “survival of the fittest” economy
Here is what I foresee to be the results of each alternative:
1. Come November, the largest number of incumbents who lose Congressional elections is realized due to people like me who can't see the benefit of Congress bailing out Wall St. (especially when no government solutions were offered to me when I made poor investment decisions)
2. The Devils win the Stanley Cup since home ice advantage is obviously in hell because it just froze over.
3. Some people will lose a lot of money; some people will make a lot of money. Credit will tighten in some markets; credit will loosen in other markets. Some people will lose opportunities, some will gain opportunities. In other words, on a macro level, nothing will change.
For those who need me to be more literal about my editorial opinion, I am obviously in favor of letting the market sort things out. I am a bit cynical with my belief that our government is not capable of pulling politics and favoritism out of their decision making process. I am even more fearful that too many Congressional leaders do not have a strong enough understanding of finance to be making such a large “investment” decision, especially with other people's money.
I do not buy in to the global economic meltdown theory. In my opinion, it is like a law of thermodynamics: "The economy cannot be created or destroyed." The economy is still there, it just gets moved around in different ways.
I am well aware of the fact that there will be tragic stories of loss should government not act and I can empathize with those who stand to lose so much. But some of us have already had tragic stories of loss and the government left us to pull ourselves up by our own bootstraps. And can anyone think of a solution in our economy where everyone wins? Our competitive marketplace does not allow for that, which is the main reason why I stand firm in my belief that government should keep as much distance from this mess as possible. For the government to choose who wins in this game is too dangerous.
As P.J. O’Rourke once wrote, “The mystery of government is not how Washington works but how to make it stop.”
Friday, September 26, 2008
Where's the Value?
This week, I have received over five inquiries from people interested in buying existing businesses. Each inquiry was related to getting bank financing and, in my opinion, none of the inquirers did enough research to justify whether the businesses were even worth the amount of money they wanted to borrow.
Human behavior has always baffled me. Why would someone buy a business without an in depth review in regards to the legitimacy of the asking price or a feasibility analysis of whether this will provide a reasonable rate of return on the investment? Sometimes I think people will put more thought into finding a gas station that can provide a $0.05/gallon savings on gasoline than they do in making a business purchase. I say this because I’ve had too many unfortunate counseling sessions with people who have made bad business purchases. The common denominator in most of those instances is that no proper research or planning was done during the purchase process.
In my opinion, the first step in purchasing a business should be assessing feasibility. A feasibility analysis will answer the following questions:
• Do you have the capital to invest into the purchase of this business?
• Do you have the skills to manage and operate a particular business (this is especially important for those who are considering purchasing a business in an industry in which they have no prior experience)?
• Do you have the time to commit to this business?
• Does this business have the potential to provide a return on investment that meets your financial goals?
Some people will argue with me that these questions can’t be answered without assessing value. The point I want to make is that before assessing value of a business you intend to purchase, you should assess the amount of money you can afford to invest. Why bother wasting your time or the seller’s time if there is such a huge gap between what you can afford and the asking price for a business? Also, anyone who purchases a business should have a reasonable expectation of earnings based on how the business will operate after the purchase. You can’t just look at the past performance, there needs to be a forecast of what will change once ownership changes hands.
After you assess feasibility, then you should begin a valuation analysis of the business you want to purchase. The most important thing to understand in doing a valuation analysis is that there is no subjective method for assessing value. There are formulas you can use to make estimates, but the value is ultimately determined by what the seller is willing to accept and what the buyer is willing to pay.
Below is a link to an article with detailed explanations of some of the different business valuation methods you can use as a guide, but I caution you not to consider any formula as an absolute indicator of a value of a particular business.
http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2240
If you have already done your feasibility analysis and you have arrived at an agreed upon value, the next step in the process is a due diligence review. Due diligence is the verification of information presented to you during negotiations. It is also researching more detailed information about the history of the business. The link below contains a fairly extensive checklist of things you may wish to investigate.
http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html
I also strongly suggest that before a purchase is made, you ask the seller for references from some vendors and customers. While the due diligence checklist addresses getting information on customers and vendors, I suggest you take it a step further and actually script some questions on issues such as consistency in service, challenges they may have had with the company and their opinions on operations.
You should also remember that the best due diligence is your own direct observation of how the business operates. While you have to be cognizant of confidentiality issues, if at all possible, try to witness as many details as possible to ensure that you truly understand how this business functions.
As someone who is both purchased and sold businesses, I will add that it is very common to have buyer’s remorse and seller’s remorse. You always wish you negotiated a lower price when buying a business and a higher price when selling a business. As Mary Pickford once said, “The past cannot be changed. The future is yet in your power.”
Human behavior has always baffled me. Why would someone buy a business without an in depth review in regards to the legitimacy of the asking price or a feasibility analysis of whether this will provide a reasonable rate of return on the investment? Sometimes I think people will put more thought into finding a gas station that can provide a $0.05/gallon savings on gasoline than they do in making a business purchase. I say this because I’ve had too many unfortunate counseling sessions with people who have made bad business purchases. The common denominator in most of those instances is that no proper research or planning was done during the purchase process.
In my opinion, the first step in purchasing a business should be assessing feasibility. A feasibility analysis will answer the following questions:
• Do you have the capital to invest into the purchase of this business?
• Do you have the skills to manage and operate a particular business (this is especially important for those who are considering purchasing a business in an industry in which they have no prior experience)?
• Do you have the time to commit to this business?
• Does this business have the potential to provide a return on investment that meets your financial goals?
Some people will argue with me that these questions can’t be answered without assessing value. The point I want to make is that before assessing value of a business you intend to purchase, you should assess the amount of money you can afford to invest. Why bother wasting your time or the seller’s time if there is such a huge gap between what you can afford and the asking price for a business? Also, anyone who purchases a business should have a reasonable expectation of earnings based on how the business will operate after the purchase. You can’t just look at the past performance, there needs to be a forecast of what will change once ownership changes hands.
After you assess feasibility, then you should begin a valuation analysis of the business you want to purchase. The most important thing to understand in doing a valuation analysis is that there is no subjective method for assessing value. There are formulas you can use to make estimates, but the value is ultimately determined by what the seller is willing to accept and what the buyer is willing to pay.
Below is a link to an article with detailed explanations of some of the different business valuation methods you can use as a guide, but I caution you not to consider any formula as an absolute indicator of a value of a particular business.
http://www.toolkit.com/small_business_guide/sbg.aspx?nid=P11_2240
If you have already done your feasibility analysis and you have arrived at an agreed upon value, the next step in the process is a due diligence review. Due diligence is the verification of information presented to you during negotiations. It is also researching more detailed information about the history of the business. The link below contains a fairly extensive checklist of things you may wish to investigate.
http://smallbusiness.findlaw.com/business-forms-contracts/be3_8_1.html
I also strongly suggest that before a purchase is made, you ask the seller for references from some vendors and customers. While the due diligence checklist addresses getting information on customers and vendors, I suggest you take it a step further and actually script some questions on issues such as consistency in service, challenges they may have had with the company and their opinions on operations.
You should also remember that the best due diligence is your own direct observation of how the business operates. While you have to be cognizant of confidentiality issues, if at all possible, try to witness as many details as possible to ensure that you truly understand how this business functions.
As someone who is both purchased and sold businesses, I will add that it is very common to have buyer’s remorse and seller’s remorse. You always wish you negotiated a lower price when buying a business and a higher price when selling a business. As Mary Pickford once said, “The past cannot be changed. The future is yet in your power.”
Friday, September 19, 2008
Be Like Mike
A good friend wrote a comment to my last posting and I wanted to feature it in this posting.
Mike Loiacono and I have known each other since 1973. Together, we started our very first business in 1984 (Spectrum Mobile Disc Jockey Service). He taught me many great lessons about business, while I showed him that people really will dance to “Crocodile Rock” (he almost killed me when I cued that song up at a wedding reception...surprisingly, it didn't clear the dance floor!). Mike has gone on to become a big shot CFO (chief financial officer) for a publicly traded company and I can attribute much of my accounting knowledge to discussions I have had with him. Thanks Mike!
Here's some of what he wrote in his comment:
“I would like to add to your blog if I may. Not only is it important for the business owner to 'learn not to be there' it is equally as important for the business owner to plan for one or more of their employees to 'not be there'. And what I am referring to is the importance of cross-training. A well-oiled machine works as well as the sum of all of its parts. What an organization does not want is for its operations to stumble when one part is missing.
As CFO, I have created and implemented a TCE (Train, Cross-train and Empower) program. Each of my employees are not only trained to perform their functions, but are also able to fill in when someone else in the department is out. This type of program satisfies two of my concerns as a manager:
1.) Enabling the department to run effectively even when there is absenteeism (or 'what happens if you get hit by a bus')
2.) I am NEVER backed into a corner by a potentially disgruntled employee who has a gun to my head because he/she is the only one who knows the job.
While smaller (and some larger) businesses may not have the wherewithal to produce training videos similar to those of the major fast food establishment you referred to in your post, it is indeed vital for all organizations to invest the time to develop detailed training manuals for all of the functions of the organization.
An organization cannot allow employee turnover (or absenteeism) to impact customer satisfaction. The best investments a business owner (or manager) can make are the investment of time in the hiring process and the investment of time in training and cross-training.”
Mike's advice is exceptional and I appreciate his sharing of these philosophies. The development of detailed training manuals and “cross training” are best practices that more companies should embrace.
His comment about “the only one who knows the job” is one that particularly strikes a nerve with me, as I have actually seen previously successful businesses fail when a key member of the organization leaves. Management should accept the responsibility to develop contingencies for the absences or departure of each member of their staff. If not, the odds for long term business survival are greatly diminished.
Life happens. Employees are going to miss shifts, sometimes for legitimate reasons and sometimes do to poor judgment. Employees are going to eventually leave your organization. Sometimes it will be by their choice, sometimes it will be your choice and, unfortunately, sometimes it may be due to circumstances beyond the control of either party. While you can continue to value your employees for what they offer your organization, reality dictates that they will not be there forever and your business should be prepared for the temporary or permanent absence of every member of the staff. As Charles De Gaulle once said, “The graveyard is filled with indispensable men.”
Mike Loiacono and I have known each other since 1973. Together, we started our very first business in 1984 (Spectrum Mobile Disc Jockey Service). He taught me many great lessons about business, while I showed him that people really will dance to “Crocodile Rock” (he almost killed me when I cued that song up at a wedding reception...surprisingly, it didn't clear the dance floor!). Mike has gone on to become a big shot CFO (chief financial officer) for a publicly traded company and I can attribute much of my accounting knowledge to discussions I have had with him. Thanks Mike!
Here's some of what he wrote in his comment:
“I would like to add to your blog if I may. Not only is it important for the business owner to 'learn not to be there' it is equally as important for the business owner to plan for one or more of their employees to 'not be there'. And what I am referring to is the importance of cross-training. A well-oiled machine works as well as the sum of all of its parts. What an organization does not want is for its operations to stumble when one part is missing.
As CFO, I have created and implemented a TCE (Train, Cross-train and Empower) program. Each of my employees are not only trained to perform their functions, but are also able to fill in when someone else in the department is out. This type of program satisfies two of my concerns as a manager:
1.) Enabling the department to run effectively even when there is absenteeism (or 'what happens if you get hit by a bus')
2.) I am NEVER backed into a corner by a potentially disgruntled employee who has a gun to my head because he/she is the only one who knows the job.
While smaller (and some larger) businesses may not have the wherewithal to produce training videos similar to those of the major fast food establishment you referred to in your post, it is indeed vital for all organizations to invest the time to develop detailed training manuals for all of the functions of the organization.
An organization cannot allow employee turnover (or absenteeism) to impact customer satisfaction. The best investments a business owner (or manager) can make are the investment of time in the hiring process and the investment of time in training and cross-training.”
Mike's advice is exceptional and I appreciate his sharing of these philosophies. The development of detailed training manuals and “cross training” are best practices that more companies should embrace.
His comment about “the only one who knows the job” is one that particularly strikes a nerve with me, as I have actually seen previously successful businesses fail when a key member of the organization leaves. Management should accept the responsibility to develop contingencies for the absences or departure of each member of their staff. If not, the odds for long term business survival are greatly diminished.
Life happens. Employees are going to miss shifts, sometimes for legitimate reasons and sometimes do to poor judgment. Employees are going to eventually leave your organization. Sometimes it will be by their choice, sometimes it will be your choice and, unfortunately, sometimes it may be due to circumstances beyond the control of either party. While you can continue to value your employees for what they offer your organization, reality dictates that they will not be there forever and your business should be prepared for the temporary or permanent absence of every member of the staff. As Charles De Gaulle once said, “The graveyard is filled with indispensable men.”
Sunday, September 14, 2008
Learn to Not Be There
I was at a local business the other day and had a bad experience. I've always had good service at this business on previous occasions, but this time, I was very disappointed with my service. One of the reasons why this experience was bad is because the owner was not there on this particular day.
This is an endemic problem with many small businesses. The business has a good model for success, as long as the ownership team is present, but once unsupervised, things fall apart. It gets to the point that where the ownership team feels they need to be there during every hour of operation.
The stories of small business owners working 80 – 100 hours per week are true, no doubt, because sometimes that’s what it takes to get the job done. I have to admit that not only did I do that, but I was guilty of wearing that as a badge of pride in my early days as a small business owner.
Yet working that many hours is often a sign of poor operations management and could be a tell tale sign that a business is not investing enough time in training their employees. Small business owners who have employees and still work that many hours should question whether they could delegate more of their duties.
It wasn’t long after working the countless hours in my stores that I learned that nothing I did was really that specialized of a skill. I was always the guy who made the bagel dough and baked the bagels in the first few years of operation. On the days I did turn it over to my partner or an employee, I would have this foolish pride in the fact that a few regular customers would notice that someone besides me made the product, because it wasn’t as good as when I made it.
It didn’t take long for me to have the epiphany that if I wanted my business to improve, as well as my quality of life, I could not make myself so mission critical to success. Rather, I should invest the time in training my employees to be as good, if not better, than me in helping out with operations.
I referenced the fact that I worked for a major fast food establishment in a previous post. One of the things that I remember from my experience there is that I had to watch 30 minute training videos before working in any of the stations. Whether it was working the grill, the fryer, the cash register or on janitorial duty, there was a video of how to properly work that station. I still remember how all the employees hated janitorial duty (it was called “lot and lobby”) where we had to change ashtrays, take out the garbage, sweep/mop and clean the bathrooms. Still, we watched a video on how to properly perform all those tasks to this company’s standards.
The realization that these videos were pure genius struck me years later when I told one of my employees at my bagel store to mop the front area floor. I went to do something in the back and returned to the horror of a floor that looked much worse after the mopping than before. You see, I forgot to tell this employee that before you mop a floor, you have to sweep up all the loose dirt. While that may seem like common sense to some, those of us who have had employees learn quickly that for there to be common sense, there needs to be common experiences and training. This particular employee never had to mop a floor before and this was his first experience. I may have made the same mistake the first time I mopped a floor had I not watched that training video at my first job.
Of course, you may have in mind delegating significantly more responsibility to your employees than just a mopping a floor. That is fine as long as you are committed to training your employees to accept those responsibilities.
When approaching training, keep in mind the old maxim to “hire for attitude, train for skill.” Especially when delegating management responsibilities. You can train your employees to develop certain skills, but you can’t change their temperament.
Developing a training program is not easy and it will take an investment of time. Just remember that every minute invested in an effective training program will return countless minutes of your own future productivity.
This is an endemic problem with many small businesses. The business has a good model for success, as long as the ownership team is present, but once unsupervised, things fall apart. It gets to the point that where the ownership team feels they need to be there during every hour of operation.
The stories of small business owners working 80 – 100 hours per week are true, no doubt, because sometimes that’s what it takes to get the job done. I have to admit that not only did I do that, but I was guilty of wearing that as a badge of pride in my early days as a small business owner.
Yet working that many hours is often a sign of poor operations management and could be a tell tale sign that a business is not investing enough time in training their employees. Small business owners who have employees and still work that many hours should question whether they could delegate more of their duties.
It wasn’t long after working the countless hours in my stores that I learned that nothing I did was really that specialized of a skill. I was always the guy who made the bagel dough and baked the bagels in the first few years of operation. On the days I did turn it over to my partner or an employee, I would have this foolish pride in the fact that a few regular customers would notice that someone besides me made the product, because it wasn’t as good as when I made it.
It didn’t take long for me to have the epiphany that if I wanted my business to improve, as well as my quality of life, I could not make myself so mission critical to success. Rather, I should invest the time in training my employees to be as good, if not better, than me in helping out with operations.
I referenced the fact that I worked for a major fast food establishment in a previous post. One of the things that I remember from my experience there is that I had to watch 30 minute training videos before working in any of the stations. Whether it was working the grill, the fryer, the cash register or on janitorial duty, there was a video of how to properly work that station. I still remember how all the employees hated janitorial duty (it was called “lot and lobby”) where we had to change ashtrays, take out the garbage, sweep/mop and clean the bathrooms. Still, we watched a video on how to properly perform all those tasks to this company’s standards.
The realization that these videos were pure genius struck me years later when I told one of my employees at my bagel store to mop the front area floor. I went to do something in the back and returned to the horror of a floor that looked much worse after the mopping than before. You see, I forgot to tell this employee that before you mop a floor, you have to sweep up all the loose dirt. While that may seem like common sense to some, those of us who have had employees learn quickly that for there to be common sense, there needs to be common experiences and training. This particular employee never had to mop a floor before and this was his first experience. I may have made the same mistake the first time I mopped a floor had I not watched that training video at my first job.
Of course, you may have in mind delegating significantly more responsibility to your employees than just a mopping a floor. That is fine as long as you are committed to training your employees to accept those responsibilities.
When approaching training, keep in mind the old maxim to “hire for attitude, train for skill.” Especially when delegating management responsibilities. You can train your employees to develop certain skills, but you can’t change their temperament.
Developing a training program is not easy and it will take an investment of time. Just remember that every minute invested in an effective training program will return countless minutes of your own future productivity.
Wednesday, September 10, 2008
Remembering Vic Saracini
In my 17 years as the owner of bagel stores, I have had the opportunity to meet so many wonderful people. Being in retail, I've been blessed to have thousands of customers who would share more than just a business transaction with me. In this post, I am not going to talk about business, but rather, I would like to share a personal story about a customer.
Today I am thinking about a customer who came into my Pennsylvania store back in early May of 1996 and started a conversation with me. The conversation starter was a little sign that I put up announcing the arrival of my daughter, Sarah. Sarah was my second child and first girl. The customer, an airline pilot, noticed the sign and congratulated me. I made a comment how I wasn't prepared to be the father of a girl. He smiled and told me about his two young girls and how they make it so easy. “They are little princesses,” he said, “they are so loving, they are so devoted to their Daddy. It's such a great feeling coming home to them.” It was quite some time ago and I am going from memory, but I am pretty sure he used “princess” and “devoted” when describing his daughters. I think he may have said “beautiful,” as well, but I'm not sure. I really wish I could remember the conversation better.
Why do I want to remember his exact words? Because I want to share the love I heard in this man's voice for his family. I want people to know about this special person, who just came to my store for a quick snack and took the time to share a kind thought and a smile.
September 11, 2001 was a tragic day; not because an infamous event occurred, but because this kind gentleman, Vic Saracini, passed away on that day. While many people refer to that day as “Nine Eleven,” it was more than just a catch phrase, event in our history. It was a day when over 3,000 loving and caring people were senselessly murdered by cowards. I am sure there is probably a more effective way to express my emotions about that horrific day, but the words escape me.
I did not know Vic Saracini well enough for me to be able to write much more. There is a “Garden of Reflection” in Lower Makefield, PA that provides tribute to the lives forever changed on that tragic day.
Garden of Reflection
There will be various remembrances on September 11th this year and for years to come. I hope we not only unite as Americans in remembering the day, but also take the time to think of the people who perished. Their lives may have been taken, but they will never be lost if they remain in our memories.
Today I am thinking about a customer who came into my Pennsylvania store back in early May of 1996 and started a conversation with me. The conversation starter was a little sign that I put up announcing the arrival of my daughter, Sarah. Sarah was my second child and first girl. The customer, an airline pilot, noticed the sign and congratulated me. I made a comment how I wasn't prepared to be the father of a girl. He smiled and told me about his two young girls and how they make it so easy. “They are little princesses,” he said, “they are so loving, they are so devoted to their Daddy. It's such a great feeling coming home to them.” It was quite some time ago and I am going from memory, but I am pretty sure he used “princess” and “devoted” when describing his daughters. I think he may have said “beautiful,” as well, but I'm not sure. I really wish I could remember the conversation better.
Why do I want to remember his exact words? Because I want to share the love I heard in this man's voice for his family. I want people to know about this special person, who just came to my store for a quick snack and took the time to share a kind thought and a smile.
September 11, 2001 was a tragic day; not because an infamous event occurred, but because this kind gentleman, Vic Saracini, passed away on that day. While many people refer to that day as “Nine Eleven,” it was more than just a catch phrase, event in our history. It was a day when over 3,000 loving and caring people were senselessly murdered by cowards. I am sure there is probably a more effective way to express my emotions about that horrific day, but the words escape me.
I did not know Vic Saracini well enough for me to be able to write much more. There is a “Garden of Reflection” in Lower Makefield, PA that provides tribute to the lives forever changed on that tragic day.
Garden of Reflection
There will be various remembrances on September 11th this year and for years to come. I hope we not only unite as Americans in remembering the day, but also take the time to think of the people who perished. Their lives may have been taken, but they will never be lost if they remain in our memories.
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