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10 Cardinal Rules for buying your own business

12/9/2013

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Picturephoto credit: Gord McKenna via photopin cc
Many toy with the idea of buying a business for themselves; but it’s such a risk most never take the chance. Here are 10 rules that will guide anyone to making better choices.

1 YOU are the most important consideration
It’s a mistake to first value a business as a financial investment. Most importantly it's a career investment. Your life to date has given you valuable skills and experiences. Use Reflection exercises to understand your Personal Business skills first; then seek an opportunity that will utilize them. Lesson 8 (free preview available) of the online Fit for Life workshop is a great starting point. Also the book Business Model YOU.

2 Discover your preferences 
In addition to skills, your business performance is affected by preferences. Clarify the business preferences that make a difference to you. You can download the Franchise Business Model worksheet which is further explained in the online workshop Lesson 11 (free preview available) as a guide for this. Be comfortable with your risk and sales orientations as discussed in this lesson before buying a business.

3 Search in specific business categories and geography
If you don’t know what you’re looking for, it will be extremely hard to find. Online businesses for sale directories estimate that 90% of the people registering for their services are unable to purchase a business. Most of these failures are those going there to find easy, secure sources of income. They aren’t obvious. What you can find are opportunities that may or may not fit YOU. The directories are organized by business category and geography, so having a set of these criteria to focus your search gives you a reasonable chance of finding those opportunities. Even if you use a business broker, they can do little to help you without focus from you.

4 Creatively research your financial situation
A profitable business or franchise, with good books and records, can be partially financed; however, each opportunity will have a downpayment. You may be surprised at the financing opportunities available to you with a little research. The SBA offers a number of programs, plus there are alternatives to SBA loans that are often even more attractive. Combine your risk preference with your potential financial capabilities to set the financial scope of your search. This can also be added to your search criteria.

5 Have a personal contribution for your business
A business brings resources to a market. In most cases, the owner makes a significant contribution to one of these two areas. If your potential contribution is resource management, look for opportunities with established sales assets. Look for an established brand, location, or sales network. If your contribution is sales and market management, look for established resources like a desired product line or service that appeals to you. The same logic applies to finding the right franchised business to buy.

6 Utilize Key Partners
No one is successful by themselves. Even the Lone Ranger had Tonto. Learn to develop and use Key Partners as soon as possible. These are going to be the people in your life that will help you through difficult decisions. If looking at franchises, ask other franchisees how much support is received from the franchisor? If looking at independent businesses, look for people who will be able to add to your expertise. They can be the former owner, key employees, vendors, and professionals such as financial advisors and business consultants. If married, take time to communicate wholly with your spouse. They may or may not be able to help on any given specific; but they can help you understand YOU; and you will be a big part of the business.

7 Be able to Model any target business
When you find an interesting business to buy, be able to quickly answer the question, so what makes this business work? Financial statements will not tell the story. It’s a Value Proposition that has to make sense to you and that you can easily explain. The Business Model canvas is a proven tool here. Use it or anything similar. You are going to be be buying that Value Proposition, not its cash flow.

8 Understand the cash flows
Most business opportunities are priced on cash flow. The problem is that cash flow is a concept, not something physical that can be easily measured. That allows for a lot of “creativity” in its calculation.  In general, wherever there is a reason to add to profit for cash flow, there is also a reason to subtract from it. For example, if cash sales are not completely reported on tax returns, then suspect that there are cash expenses that may also be missing. If depreciation is added-back to profits, then also be sure to subtract also capital replacement costs. If interest is added-back, then debt service should be subtracted, etc. After  first understanding your reasons to buy a business, then work on understanding the financials to establish reasonable pricing. If you are not comfortable calculating cash flows, find a key partner to help you in this area.

9 Respect the seller
Almost every independent business on the public market is there because the owner has burn-out. This could be from age, sickness, changing personal opportunities, or changes in the business. However, this doesn’t mean they don’t value their business. It’s an extension of themselves as much as a child might be. Deals happen when the owner sees in the buyer someone who can take care of their child as well as pay reasonable value for it. Franchisors are expanding their operations and are looking for team players who can help them. They are looking for someone who can compliment their system as well as afford to participate as an owner. In either case, both sides must first respect each other enough to make any financial considerations worthwhile.

10 Begin with the End in Mind
Do you want to be the one selling this business in the future due to burn-out yourself, or would you rather have used it to achieved the financial goals necessary to move to the next stage of your life? Start with clear ideas for your exit plan. A business is more than a cash flow; it’s a stage of life and will best serve you when seen in that light. Having some idea of what should come next and when you want it to happen will guide you in making better business decisions.


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7 ways to build a Premium YOU

1/9/2013

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As a business broker, I frequently discuss valuation with interested small business sellers. The discussion often starts like this:

"Tell me about your products(services)?
We have an established reputation for being the best source for what we do in the area.
How is your pricing?
We are competitively priced,not too high and not too low."


Do you see the problem? If a premium Value is really being given the customer, why doesn't that result in a premium Revenue Stream?

This isn't just a problem with a business organization. As individual employees, professionals, or contractors are we providing a real premium value or only enough for a competitive revenue stream? 

The Personal Business Model canvas developed in Business Model YOU not only helps individuals reinvent themselves, it serves as a map for developing the premium aspects of their value. Competitive pricing is the natural result of a focus on primarily the Value Proposition and the Customer Segments. To be worth a premium, further separate YOU from the competition (Professional Branding) by considering your other 7 canvas areas.

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1 - Key Partners
No one works in total isolation. When people look to you as the "point man" for those you work with, they see greater value in everything you do. You get to there by clearly defining that team on the canvas, and then finding ways to promote your partners (even is that doesn't immediately help you). Being able to promote a Key Partner's value increases your own.

2 - Key Activities
We tend to focus on developing those activities which meet our goals; however, people will pay a premium if what you give them helps meets THEIR goals. Would the nature of your Key Activities change if you knew your customer's goals and how to achieve them?

3 - Key Resources
This is the cornerstone of the Personal Business model. Have you identified personal resources you own that are not being used in your model? Finding ways to offer these to your customers increases your value to them, even if it isn't directly related to a main Value Proposition. Do you know about a cheap and easy way to keep up with necessary records? I bet there are potential customers who would love to know how you do it (and love YOU for sharing that).

4 - Cost Structure
Competitive pricing is a result of supply and demand. Non-competitive pricing can happen when either value is high or costs are low. Technology and/or organization often drives down costs and there seems to be no end to the possibilities of using them to reduce costs. When reducing costs leads to additional sales, the premium is in the volume rather than the price.

5 - Customer Relationships
Your relationships are more than just between you and the people who pay you. There is a community that encompasses what is done. Participating in that community is what increases the value of your personal stock in the minds of others in it. Community activity may not result in a direct sale; however, it is very hard for it to not result in increasing your premium value to others.

6 - Channels
We are in an information age and that is changing everything in business. There is a need in every community for participants to band together and share how that effects them and what to do about it. There is always a place to increase value through helping to teach new skills to those seeking them. The fact you teach in any capacity increases your credibility an exposure.

7 - Revenue Streams
Most of us believe a Sale ends when the Revenues are finally collected. Once we realize the single most important source of new business is referrals, it becomes clear that a sale isn't really over until the customer stops making referrals. With this in mind, consider what happens after funds are collected and value is delivered? What could compliment the value transaction 7, 30, 60, 90, or even 180 days later? Anyone who delivers value from this perspective deserves a premium.

The Personal Business Model is a source for continual improvement as well as reinvention. I look forward to more future conversations like:


"How is your pricing?
People understand how valuable we really are to them."
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Demographics of Small Business Buyers

9/23/2012

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We think of small business buyers as young aggressive types out to make their fortune. This study of US Census data shows a different story. The data is a comparison of the change in the number of business owners by age from the year 2000 to 2010. 

We had thought that at this point baby boomers would be selling their assets to liquidate for retirement. The net result would be a buyer's market as an over-supply would drive down prices. If this was happening we would see the data showing fewer older small business owners and more younger ones. Just the opposite has happened.

Many baby boomers today are both financially unable to retire and rapidly becoming unemployable. They are people with some retirement funds and many business skills; but with a serious problem. They are seeing buying a business as the solution. Since the start-up failure rate is so high, that is rarely seen as desirable. Buying an existing independent business with an established history or buying a franchise with an established success rate are both viable options.

What the census data in the graph is telling us is the baby boomers are in the market selling their businesses or franchises to other baby boomers. Baby Boomers are the current market's primary business buyers. New tools are now available for both the business buyer and the business seller we are seeing.

Many business sellers are not aware of the dynamics of how their business might be valued. We have seen where an understanding of the value drivers involved can more than double the business value annually. When this is representing the core of your retirement funding, what else could be more important? This is the case for Exit Planning.

Business buyers must understand both the seller's business model and their own Personal Business Model. A business doing well in the seller's hands doesn't mean it will do well in the Buyer's hands. The new book, Business Model YOU, takes any individual through the process of developing and understanding their own Personal Business Model.

Lastly, both sides of a business sale are complex and there is little room for an aging baby boomer to make mistakes. Getting the assistance  of a skilled business broker will be one of the best strategies possible. Our brokerage is centered around the Executive Advocate philosophy described on this website. Contact us to learn more how we can help.
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Planning to Sell Your Business? How to answer THE Question 

8/29/2012

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photo credit: Marco Bellucci via photo pin cc
Many business owners believe that selling your business is similar to passing the baton in a 400 meter relay: once you’re finished running, you get to relax.  In reality, buyers will insist that you stay on for a transition period – anywhere from six months to five years – during which time you continue to work in your business to help the buyer capitalize on the investment they’re making.

THE Question

When in the process of trying to sell your business, a prospective buyer will ask you – often times casually –  “Why do you want to sell your business?” These eight seemingly innocuous words have derailed more deals than any others.

Buyers ask THE question to evaluate how likely and willing you are to stay on or if you already have one foot out the door.

Obviously you don’t want to lie, but there is a right and wrong way to answer THE Question. Answers like “I want to slow down a bit” or “I want to travel” or “we’ve got a baby on the way and I want to spend more time at home” communicate to a potential buyer that you plan on winding down when they take over. However,what they want to hear is your intention to help them realize the potential locked inside your business.

 Here are some suggested responses based on your age.

  • If you’re under 40, you clearly aren’t ready to “retire” so you need to communicate that you see an upside to sell you business and merge with theirs:       “In order for us to get to the next level, we need to find a partner with more <insert sales people,distribution, geographic reach, capital or whatever the partner brings to the table>.”
  • If you’re between40-55 years old,most people will understand the need to shore up your personal balance sheet:       “I’ve reached a time in my life where I want to create some liquidity fromthe value I’ve created so far, and at the same time I want to find a partnerwho can help us get to the next level.”
  •  If you’re over 55, you can start to talk aboutretirement, but you want to make sure you communicate that you still have lotsof energy and passion for your business:       “I’m at a stage where I need to start thinking about retirement. It’s along way off yet, but I want to be proactive.”

Rehearse your answer to THE Question so it becomes a natural response when you are inevitably askedTHE Question by a potential acquirer. 


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Personal Business Models and Professional Branding

8/22/2012

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photo credit: stefano principato via photo pin cc
Tired of fighting the same battles to keep your business afloat? One solution is to just let us sell your business.  A better possibility is to generate more cash flow with less effort with Professional Branding.

The new Personal Business Model YOU Workshops at UTA are now being offered as Professional Branding, changed from last term when they were called Career Reinvention. Just another example of the pivoting process that's involved with the implementation of any Business Model. In interviews with those interested in the first workshops, we found a much greater interest from individuals wanting to be more successful in their current careers than those who are looking for another career where they can be more successful. So while the Workshops are equally applicable to both, we have shifted the focus a bit.

There are two mistakes most of us make when first introduced to Business Models and Canvas Thinking. The Workshops covers these (and more) with specific application to your career. 

The first issue is confusing Key Activities with Value Propositions. It's easy to think that our customers value those things that we do so well. The truth is our customers value what helps them do the things they need to get done. An example might be a plumber who feels their master's license is their Value Proposition. The customer's problem may be leaking water, so perhaps 24 hours service will mean much more to them. We need to see our value from our customer's Point of View.

This is easier said than done for career professionals. The Business Model YOU strategy is to start here and to develop what it is we are, so we know what it is we can offer. The same mistake made in the opposite direction is to try and build a career around something you know customers want but is not at all suited for You. Professional Branding requires understanding what makes You valuable, and then communicating it well.

That bring us to the second major mistake most of us make as we develop our Personal Business Models. We confuse Key Activities with Customer Relationships. After a Business Model is completed we need to Act on it. I am open to anyone to disagree with this; but that has to mean Marketing the Model. No matter what other Key Activities are need for Value Proposition fulfillment, Marketing has to also be added to Key Activities and you need to be successful at it for the model to make money. If your model is for yourself as an employee, you still need to market your abilities to either a new employer for a new job, or your boss to enhance your current job. For Professionals, marketing needs to be done to reach new prospects. Every Business Model effort must conclude with Marketing in some form if it is to be meaningful.

So why isn't that Customer Relationships? CRM software vendors and consultants have confused us into thinking that Customer Relationship is about how we want to relate to our customers. That is not the issue. It's how do our customer want to relate to us? While I have Zero Interest in being a part of my plumber's internet community (no matter how many water saving tips may be found there), I do want to be able to quickly find a competent, reasonably priced plumber when water is found where it's not supposed to be. If that's the case, our plumber may find that money spent advertising on Angie's List might be more valuable than mailing out newsletters. On the other hand, I belong to a local health club and I do read their newsletters. I want to relate to them much differently and they get that.

Your Brand is not your name, logo, or company colors. It's how your customers perceive you. To do Professional Branding effectively, it makes good sense to first know what makes you valuable to others and then know how they want to find-out about that. That becomes your "message". Then all that's left is how to send it. There are many books and consultants who can offer you great advice on the mechanics of marketing; but nothing will define your message more clearly than a well constructed Personal Business Model. 

Here is the bonus. At the UTA Professional Branding Workshop we develop your Personal Business Model and in doing so re-engage you with a career that may have been burning-out. Communicating your value to others in ways they want to hear becomes almost intoxicating. You will reinvent "Your Career, for Fun and Profit".


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How we doubled a Business Valuation within a year

12/14/2011

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Finding the Right Way to exit your business
_Overview
A new Executive Advocate program helps small business owners in Texas achieve rapid results that multiplies their business valuation. The program uncovers the gaps in value drivers and maps their closure.

Problem Encountered
A small business owner had grown tried of her business (Burn Out) and was seeking more interesting opportunities. We were asked to evaluate the potential of selling the business. At that time EBITDA was $113,827. A business valuation, based on the Murphy Business Broker Opinion of Value (BOV) technology, was used to create a baseline value.

The problem facing this business owner was existing debt, which roughly equaled the BOV results. To sell the business now would mean losing her current job, paying off the debt,  and then having no funds to build the next job or to retire. The business needed a higher cash flow to pay down the debt and increase the selling price. Then the owner would have sufficient capital for her future plans.

Our Solution
Murphy Business Services was engaged to develop a Strategic Marketing Execution Map (SMEM). Business owners are engaged in many activities; but not all of them drive business values. The SMEM approach looks at those business functions and defines gaps between current performance and desired performance.

In this case, activities related to cash flow were causing the gaps. The owner already had many ideas on how to generate additional revenues, reduce the cost of goods sold, and better manage overhead expenses. When faced with defining performance gaps, these ideas solidified into tasks and goals that could be directed to the staff.

Results
The power of an organization with goals everyone understands cannot be understated. Having a Business Model everyone understands produces results. Increased revenues, better margins, reduced overheads all worked together to increase cash flow. In less than a year, this same business had an EBITDA $221,578, an increase of $107,751.

To understand how this effects the business valuation, it's important to understand that value is related to the risks involved in a change of business owners. Doubling the EBITDA will double the value no matter what multiples are used!

If the business is generating a cash flow from its internal systems, it's worth much more than one that relies on the skills of it owner. This area was also a gap identified by the SMEM. With new systems in place, this business also represented a reduced risk for a business buyer, raising the appropriate EBITDA multiples. In fact. the business valuation more than doubled and finding interested acquirers was easy.

The new problem facing this business owner is what to do after selling the business. Now that values are climbing so she can finance many business opportunities, which one should she pursue? She is currently engaged in an Executive Advocate Reinvention program that develops a Personal Business Model for her to use in deciding on her next career step.

An online Contact Us form is available to specifically request more information about Executive Advocate programs appropriate to your career situation.

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    Author

    Bob Fariss writes about the issues facing Executives in career development. He teaches Business Model Thinking  and also represents individuals with an entrepreneurial flair seeking to sell, buy, or start-their own business.

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