Category Archives: small business

Discussions pertaining to small business

Exit Planning

As we Exit 2016, Time to think of Exit Planning

Contrary to common belief, you have to start thinking of planning exiting your business several years in advance. And even if you do not want to exit the business for many years to come, we strongly advise business owners to think about exit planning.

Why?

One of the reasons you do this is to improve the way you run the business so that you can improve the value of your business. Even if you have no intention of selling, the steps that you take in running your business better have other benefits – It helps improve your cash flow, allows you to have more money in your pocket, and most importantly, it will give you more time for you and your family and decrease the stress of running the business.

How?

Value Builder Platform identified eight factors that influence the value of the business. One of the important factors is that you do not run your business using “Hub and Spoke” model. This model is very common in the airline industry where all the flights of an airline converge at one hub before going to their destinations. Whereas there is value for this in the airline industry, many entrepreneurs, and small business owners run their businesses so that they become the “hub”. Everyone comes to them for advice and sign-offs and all decisions, big and small, are made by them. By promoting other people in your organization to take up most of these responsibilities and building a management team. you become less important and you have less stress and more time.

For more on how Value Builder Platform can help you run your business better, please visit this page and take a 13-minute survey to get your Free Value Builder score.

Here is to a less stressful and more productive 2017!

Talk to you soon.

Yatin B. Thakore

 

Your Company’s Worth

Do You know How Much Your Company is Worth?

 

We usually keep tab of money in the bank, how much our stocks, bonds, and other investments are worth and how much our home and real estate investments are worth. And we know how much debt we are in – either from a mortgage, student loans, car loans or other loans. We use these numbers to calculate our net worth, and it helps us build a nest egg for retirement. However, strangely, many entrepreneurs have no idea of how much their business might be worth. Your business could be one of the biggest assets that you may have. It is an investment of time, labor, and your financial investments. Shouldn’t you know the value of your business and try to protect and grow its value just like your other assets?

You can hire a valuation expert or an M&A advisor/business broker to get some idea about the value of your business, or you can run some back of the envelope type of calculations to get a rough idea based on your financial performance. Very often, for small businesses with gross revenues under $5 million, you will see that the value is often 2-3 times discretionary earnings (DE, also known as seller’s discretionary cash flow) or 2.5-4 times adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). In many industries rules of thumb also calculate valuation based on a multiple of gross revenue (e.g. dentist practice is often said to be worth between 0.5-0.7 times revenue). However, for me,  cash flow, either as DE or EBITDA is a better measure because a substantial revenue without profits does not do much.

Couple for valuation

Couple for valuation

If you are like entrepreneurs shown in this cartoon, who can go on a world cruise for a year, then I would say that you have probably done well – both from profiting from your business and running the business. You have put your business on auto-pilot so that you have a management team who can run the business with minimum involvement from you. As a business owner, you want to take yourself out of a situation where the business cannot run without you. As we teach in our Value Builder advisory practice, this is one of the eight key drivers for driving the value of your business (see here for the other seven).

 

As 2017 is just around the corner, I hope you too will more attention to your business and see how you can grow your investment in it by taking small steps to build value. Our Value Builder score is a quick way to know in 13 minutes of where you are in terms of improving your valuation.

From all of us at TechnologyPark.com, cheers for the new year!

Yatin Thakore

 

Inventory Blues – Is Excess inventory Weighing you Down?

Ideally, you want to have as little inventory on hand as possible in your business. Afterall keeping a lot of inventory, ties down your money. Having to keep a large amount of inventory on hand means that your money is sitting idle and not making money for you.

Large Inventory costs also affects the value of the business. If in addition to the business, if they have to also buy a large amount of inventory, their return on investment becomes smaller and you have a smaller pool of buyer.

However, some businesses are unique and they need to keep a large inventory. For example, if your business is built on buying very old cars, restoring them, and selling them for a fat profit, you will try and buy old cars whenever they become available, restore these and then sell them for a fat profit. And you may have several years of inventory sitting with you.

However, a typical buyer who is looking for buying your business based on cash flow, will not only have to pay for the value of the business based on the cash flow, but also buy the inventory which may not generate profit for some time, but still needs the inventory to generate profits.

In such cases, one may have to come with some creative ideas.

We came across a similar situation where this Company services and sells refurbished equipment of a very specialized make that is currently not manufactured and the owner was contemplating selling his business. Based on current sales, the Company had 3-4 years of inventory in stock. One of the ideas that we suggested to them was that the they would create a supply / management agreement with the buyer where they would supply the refurbished equipment to the buyer over a period of time, and build in a profit component in it. It will be somewhat similar to seller’s note but with higher return as he is also providing some service. Otherwise the buyer would have  to pay over $2 million more for inventory for a business that is generating about $500K of earnings, and would be a difficult proposition.

Inventory Blues – Under Reporting the Inventory

tip-7-understating-inventory Business owners often report a lower inventory value to reduce the taxes.

The logic is simple – when you report lower year-end inventory value, it implies that you have consumed more raw materials, your cost of goods is higher, and your profits and hence your taxes are lower.

However, this short term gain could create a problem when you are about to sell this business.  How will the inventory be valued in the Purchase Allocations? How will you convince the buyer to pay for the actual inventory value? And if they do, who is going to have to pay the taxes on the larger amount that the buyer will have to report?

Not reporting the right inventory value is not only unethical, it is just not smart business.

 

Don’t be a Juggler!

juggler_juggling_balls

A common occurrence in many small businesses is that the owner makes all of the important decisions. After starting and building the business, owners are afraid to relinquish control. They do not feel that the others are capable of running the business like they can. So you are constantly juggling various tasks and making every decision.

This is what we describe in the Value Builder System as “Hub and Spoke” system. You as the owner are the Hub and everyone else is the spoke. This can also happen if you are not the owner but a manager where you are making all the decisions.

But what happens when you, the Hub, are away? Things don’t get done. And as a result you have a hard time to get away from work. You may not have taken a vacation in years.

Not only this is stressful to you, it is also very inefficient and demoralizing for your employees (or those who work under you). And more importantly, this will drag your value down value. Research by the Value-Builder team has shown that businesses following the Hub-and-Spoke model, where owners are in control of most of the decisions, sell on an average of 2.92 times their pre-tax profit. However, the businesses where the owner is not significantly involved in day to day operation and has management team and employees empowered to make decisions and running day-to day operations, sell on an average of 4.54 times the  pre-tax profit.

By making your business much less dependent on you, you can increase the value of your business by 55%! Not only that, you will have happier employees and less stress for you. You can now afford to take vacation.

But how do you do this? To start with, create operating manuals for your company. Write detailed procedures for everything that needs to be done. For each job function, you have a system or operating manual describing what needs to be done. Once you have these ready, train your employees to follow the processes and systems and give them the right tools. To quote Michael Gerber in E-Myth Revisited: “Organize around business functions, not people. Build systems within each business function. Let systems run the business and people run the systems. People come and go but the systems remain constant“. How does McDonald’s delivers the same burgers and same experience across thousands of outlets – they have the system and procedures nailed down.

Making yourself as a business owner (or manager) less important and having a system in place is just one of the eight value drivers that improves the overall valuation of your company. If you are curious about what is your score on this ValueBuilder scale, take this 13 minute survey.

So long for now.

Yatin

 

 

 

 

Selling Your Business – Why Giving to Uncle Sam May be a Good Idea!

be careful about adding too many personal expenses in business.

Small business owners add personal expenses into business expenses to show less income and hence pay less taxes. Minimizing tax liability is a strategy all business owners think about. But when it is time to obtain financing or sell the business, buried personal expenses and assets can create a problem in determining the true cash flow.  When showing cash flow, we as advisors, usually adjust the cash-flow by adding non-business expenses to the bottom line – these are commonly referred to as add-backs. Some of the add-backs are easy to show or defend – e.g. salaries and benefits paid to a non-working family member, or owner’s retirement savings, or even a personal car paid for and maintained by the Company. Others are more difficult to defend. For example some of the personal expenses charged on company credit card, gifts for family members bought on company expense, personal travel mixed in with business travel, and the list goes on.

The problem is that the buyers and bankers won’t always give credit to many of these items. As a result, the cash flow can be suspect. And when you apply a multiplier to determine the value of the business, the results can be disappointing. For example, many small businesses (say up to about $10 million or so, typically sell at multiples of about 2.5-4 of adjusted EBITDA. So if you tried to shield say $100K of profit by putting personal expenses on the company account, you may lose up to $400K of valuation on your Company.

Even worse is when one does not even report some of the income on the books. This seems to be more common in certain main street businesses where cash transaction is common. One of the businesses which we were trying to sell had a cash component to it (selling parts). The owner’s Tax Returns showed an annual income of about $600K. However, he swears that his real income (and cash flow) is at least $100-150K higher. Problem is how can you prove it? And who will believe it? Had he reported his true income. the business would have been very attractive, it would have found ready buyers and bank would have been willing to finance it. As it turns out, banks are not willing to finance it at the price he is looking for, and the business is not attractive to the buyers (and hence has not sold).

So, it is in the best interest of a business owner to show a healthy bottom line in the years preceding the sale of their business to get the highest price possible, and make it attractive for buyers and lenders.

Achieving Work-Life Balance – Parkinson’s Law

Sometimes Less is more. Less time for work that is.

Today, work-day often is 24×7 affair, particularly if you are running your own small business. You are always checking your emails, answering emails from your prospects or customers. Although you may be seemingly enjoying your weekend or vacation, it is often hard to get away from work completely.

I used to be that way too. But lately, I have found that getting away from work completely, say for weekends or on short vacations, actually rejuvenates you and make you more productive. And you get just as much done in the allotted time, if not more. Remember the famous Parkinson’s Law: “Work Expands to fill the available time for its completion”?

This statement, first made in 1955 by British author Cyril Parkinson for an article for “The Economist” is one of the most profound observation. So when you reclaim your personal time to be spent with family, friends, and on non-work things, you end up compressing the time available to finish the work and you manage to do it!

This past memorial day was amazing. Our two sons were back from college and with us for a few days. The week before my older “twin” boy (older by 7 minutes),  declared that on Memorial Day, we were going to clean up both, our garage and basement. Our detached garage (which is actually used as a workshop and storage area) had become a complete mess – it was impossible to make your way from the front to the back). Basement had also piles of paper and stuff – things that we collect. So we had a three day deadline to clean up the mess that we created over past 10-15 years. Actually we got a late start on Saturday, but by 3 pm we had over half the stuff in the garage separated out as trash to be thrown out. And we discovered how great the “1-800-Got-Junk” was. While we were creating a giant pile in the driveway for a trash hauler, I was pleasantly surprised that I could book a time for Got-Junk people to come an haul away all the junk the same day in the 3-5 pm window! So with 3 pm deadline looming (which was just about 3-4 hours since we started our clean-up), we had to finish separating out the trash in just a few hours. And true to Parkinson’s law, we managed to do it. On Sunday, while my sons put up some organizers and shelves in garage and organized the tools and other stuff in the garage, me and my wife tackled the basement and got it completely cleaned and organized by Monday evening. One long weekend, two seemingly endless tasks, done very well and within the available time. One more victory for the Parkinson’s law.

Yes, with Teamwork, focused energy, and a hard deadline, we are capable of doing amazing things. But we are after-all humans – we need to be reminded of this often.

Do you find yourself procrastinating on things that must be done? Or always falling behind in your tasks? And always stressing out because things are not getting done? Or working all the time?

We needlessly stress out on things on our “To-do” Lists, make complicated plans, give our tasks unnecessarily long time lines and then put them off till the last minute because we fear tackling them.

Next time, just try these few simple things:

  1. Enjoy your weekends and reclaim your personal time. Get unplugged from your laptop or cellphones and get plugged in to your family and friends and hobbies
  2. Remember Parkinson’s law – You do have time to finish your tasks and goals. Give focused effort, compress your time-frame to get things done, rally your team members, and simplify your tasks and goals
  3. And keep reminding yourself about Parkinson’s Law every time you try getting stressedI love Nike’s slogan – ‘Just do it’. Instead of endless planning, just plunge ahead and start tackling things you are putting off.

Are You Ready to Receive ‘Divine’ Help?

 

alchemist_cover

How did we end up in this business and why did we choose a few niche marketplaces – laboratories, imaging centers / medical businesses and IT? We are often asked this question from our clients, customers, and prospects.

I wish we could say that it was part of our well thought out strategy, but in reality it was was a combination of serendipity and in terms of start-up lingo, ‘pivoting’ or course-correcting, to take advantage of new opportunities.

Years ago, I read the book called The Alchemist – an international best-seller by Paulo Coelho of Brazil. Although, the book is a fiction, I thought it provided some of the most interesting business lessons. Its central themes has always resonated with me. One of the message is that when you want something bad enough, the universe conspires in helping you achieve it. And it also goes on to illustrate how the hero in the book, Santiago, gets a number of signals or dreams guiding him.

I personally have experienced many situations where some voice has guided me or helped me – whether it is an intuition, a dream, an inner voice or just a seemingly unlikely coincidence which solved some intractable problems. And I have spoken to many people who seem to have had similar experiences.

In Alchemist, our hero also has these dreams or signals, which provided a guidance or help, seemingly out of no-where. And the message is to accept such help that will allow you to reach your goal.

You should be open enough to receive these signals and courageous enough to act on these signals, even if it may need you to change your course.

In my case, as a research scientist for a start-up, we were trying to solve a particularly tricky problem of getting pure plasma out of a drop of blood using a membrane ( a super-fine filter). At the time, in the early 1990s, this was a big deal. and no-one except one large company was able to do this. They used glass fibers and the process was patented. It worked but not particularly well. If we succeeded, this could allow a large number of other blood tests to use a simple way to extract plasma for a quick 1 or 2 minute tests.

As a lead scientist, I had probably tried every type of membrane that I could lay my hands on and nothing worked. However, the way things were going, I was confident that somehow we will solve it as there was a feeling within me that this was destined to succeed. One day, I was sitting in my lab, kind of stuck, thinking of what else I could do. And then the “signal” came. Someone came to the lab and delivered me a small fed-ex package containing some other type of membranes from that I had ordered a while ago. I had forgotten all about it since I had ordered so many. It was nitrocellulose membrane from a company called Gelman. Thinking that I had nothing to lose by trying out this membrane, I quickly put it over my test strip and put a drop of blood and I could not believe it – within a second, I got pure plasma coming out on the other side. I was amazed as I had tried similar nitrocellulose membranes from other companies and they did not work! So we thought we had the problem solved!

But what happened next was even more amazing. We soon were running out of this membrane and we ordered some more from the same company. But when we got it, we found that this time, these new membranes, which were from a different manufacturing lot, did not work. So we ordered several different lots. It turned out that only the first lot from this company worked!

In other words, I was just lucky enough to get the right lot from this company at the right time. If I would have gotten a sample from one of the the “bad” lots, I might have easily given up! We eventually figured out how to convert the “bad” lots of this company’s membranes into good lots. We went to file patents and license this technology.

But it just proves to me that often there is a “divine” intervention. I wanted this to work badly, and the universe intervened to make it happen for me.

And over the years, there have been a number of situations where when I or when our company was stuck, there was always some event, or signal or guidance, that helped us at the crucial moments. Or when there was a fork in the road, somehow we had a guidance of which road to take.

I have spoken to a number of people who have had similar experiences. In fact there are dozens of inventions and ideas (including nobel prize winning ideas), that originally came to the inventors or creators in dreams. Example include, the sewing machine, discovery of benzene, and many more. And I think that is one reason The Alchemist has resonated with so many people and sold over 65 million copies in 56 languages.

Even Steve Jobs, in his famous Stanford University commencement address of 2005 talked about connecting the dots : “So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”

For me the book represents – If you want something badly enough, work very hard to achieve your goal, have faith that you will succeed, and when help appears out of nowhere, whether it is in a concrete form or through intuition, dream or a signal, be ready to accept and act on it.

So long friends.

Yatin

Time to Tune-up Your Business

spark plug

time to tune up

New year is a good time to take stock of your business. Like your car, business needs periodic tune-ups to make it run smoothly.

Car needs oil change to reduce friction and wear and tear on the engine, new spark plugs for for it to accelerate smoothly, and replacing worn out parts  so that it will not break down on you and leave you stranded. Your business deserves the same care.

 

Here are some quick thoughts on tuning up your business this year:

Streamline Your Processes and Systems (Oil Change)

Every business has systems and processes – in how you handle new and existing customers, how you handle your products and services, manage your people, etc. In a young, growing, organization, these constantly change. Dig deeper into your  systems, talk to your people who use these systems and see if you can change some of the steps or processes to make these more efficient. Identify a few flaws in your system and fix some of the easier ones right away. This will help your company run smoothly.

For example, in our company, to keep track of our inquiries and status of each inquiry, we have switched to a master spreadsheet which tracks new inquiries and their progress. This master spreadsheet as a google doc, accessible to all of the relevant staff members – so everyone sees the same copy, and can make edits. This now allows us to see the progress on each project and makes us more efficient.

Accelerate Your Growth (Change Your Spark Plugs)

When you look at increasing value of your business, nothing beats the bottom line – revenues and profits. Always think of how you can push the business. This could be offering more products or services, improving or upgrading your products or services, gaining more customers by better sales and marketing or a combination of all of these. Or it could be acquiring another company to gain new products or market share.

For example, in our company we are implementing a few changes this year. A simple thing is just making the whole process more efficient – from the time we get the listing to the time we put it to market and the way we approach prospects and follow up with them. And trying to Another thing we have already started doing is offering our customers additional products and services by expanding our marketplace. We have already invested in software that will allow us to offer directory and classified services as well as way to sell their own products or services. Over a period of time, we see this as an important extension of our marketplace.

Make Your Business Sturdier (Replace Worn out Parts)

Just like you don’t want to be stranded somewhere because the car won’t start due to an old battery or broken fan-belt, you certainly do not want to be to have your business suffer due to breakdown in your critical systems or equipment.  Time to examine your critical systems and see if  you need to invest in new equipment, software or hardware and how to ensure that your business will not suffer down-time.

One of the important steps that we have undertaken is to put all of our important documents and data in the cloud. We use ShareFile , Dropox, Mailchimp and Evernote software so that our whole team has access to the important files from anywhere in the world. We also use cloud-based email systems (Google appliance) and use software as a service whenever possible (for example for accounting and tax, ) so that we always have access to these services. We are also going to invest in a smart scanner such as Fujitsu that can digitize and file all your documents and has an ability to take different sizes of papers and scan them very fast.

You can think of what your business needs and upgrade or replace the critical systems that you cannot afford to be without.

Build or Buy – That is the Question!

carpenter toosWhen you are looking to get into the laboratory business – should you go out and try and buy a lab or should you build it from scratch? Well it depends.

It depends a lot on the type of lab (whether it is in highly regulated industry, such as a clinical lab and where someone else, such as insurance companies decide on what you can charge), whether you can find the type of lab that you are looking for in your preferred geographic area, and last but not the least, your own personality, skill sets and knowledge.

Case for Buying a Lab

More buyers seem to prefer going this route as it seems like a safer route to take. Particularly, if you are not experienced in this industry. For a healthy laboratory, you avoid the steep learning curve, you get a business that is generating a positive cash flow from day one. You inherit a working system and a trained staff. You also are more likely to get a loan from the bank to fund your dreams. You can bring your own skills and capabilities to grow the company. As they say, it is much easier to make the second million than the first million.

And in some industries, it may be perhaps the only preferred choice. For clinical labs in certain states such as NY, it takes 12-18 months or longer to get CLIA-accreditation. and in certain states, small independent labs have a hard time getting accepted by the insurance companies. It would make sense than to buy an existing lab with CLIA-accreditation and existing insurance contracts if such  a lab was available.

But expect to pay a price for this – the labs are typically (but not always), valued by a multiple of EBITDA. EBITDA is a metric defined as Earnings before Interest, Taxes, Depreciation and Amortization. We’ll discuss lab valuation in an upcoming post, but expect to pay about 3-5x of EBITDA for a healthy lab. So if an EBITDA for a lab is say $300K, expect to pay on an average about $1.2 million.  Can you afford it? Is it worth the price? Are you better off building on your own? Exception to this maybe if you find a good lab which is doing poorly but you see great potential in it and are confident that you can turn it around. Such “turn-around” labs can sometimes be had at a bargain.

 Case for Building Your Lab

If you (or someone in your team) is great at sales and marketing, have rich contacts in your industry, and are confident that you can bring the business to your new lab, or you are buying a lab for internal research, perhaps you should build your own lab (as long as regulatory hurdles are not too high). The advantages include cost savings (you could save as much as 50-75% over buying a healthy lab), you can have it at a location you prefer, equip it as you want it, and build your own culture in your business. And if you are unsure about how to go about setting one up, there are companies and consultants who can help you set it up.

 Summary 

Buy a lab if:

a. You are looking for a “turn-key” lab with ready cash-flow and which may perhaps need only a few tweaks

b. Regulatory and insurance constraints makes this a much more practical solution

c. You are flexible as to the exact location

d. You are looking to grow your market share via acquisitions

 Build a lab if: 

a. You can bring in business or have captive internal business

b. Want to work on a shoestring budget without taking in a lot of debt

c. Want to have it on your terms – building your own culture, your preferred location, and choosing your own equipment

d. You enjoy creating business from scratch

e. You can survive for some time without an income or salary