Inorganic Growth: Debt

Last time I posted before the Holidays, I started talking about Inorganic Growth or buying a business.  One of the things I pointed out was the use of an Small Business Administration (SBA) loan as part of the path forward.  As I have worked with many businesses, I find them increasingly adverse to debt.  They are proud that their balance sheets are clean of liabilities.  I think to myself about the lost opportunity.  I expect that many of you are surprised by that statement.

One of the things that has happened is that people misunderstand Business Debt from what I would preach them on Personal Debt.  These work differently financially.  I do not mean that you don’t owe principal plus interest.  I mean they accomplish different things.

Personal Debt accelerates the purchase of things that we want in our life.  We pay interest for the purpose of having them sooner than we might otherwise have them.  Most of the time we don’t need these things.  They are wants.  They add nothing to our financial situation.  There are exceptions.  Most of the time a Home Mortgage can be a very good financial decision.  This is not always true.  However, the majority of the time you will have spent considerably less than renting.

On the other side, Business Debt is used to grow a Business or that is the theory.  The term that we look at here is “Return on Invested Capital”.  You might be able to open a new location, purchase a more efficient machine, or hire a new Sales person.  In any case, you should have a Business Plan that shows that you make more money because of the money that you borrowed.

Let me give you an example.  I did some work with a Food Manufacturer that had Retail Sales.  They were looking to raise equity capital.  This was an established business and had a model that was working.  Their plan for the money was to pay off the debt that the company had and open 1 new Retail Location.  An alternate use of money would have been to open more locations.  Another choice would have been to break into the Grocery Market.  Yet another choice would have been to expand Online Sales.  All of these latter choices potentially made the company more money.

And that is the point.  Debt used properly in a Business should increase Cash Flow and Business Value.  That is completely different than Consumer Debt.  What would you do in your Business if you had enough money to do more?

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

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An Initiative for Next Year?

As we come to the close of the year, I want to talk some about something you should consider for next year:  Inorganic Growth.  That’s right, buying a business to add to the one you have.  Most small business owners that I have met do not really think this is an option for them.  I have posted this Fall about buying a business instead of starting one and about using an SBA loan to fund your business.  In fact, if you look through my postings I think you will find ample ways of buying another Business.

The question is why buy instead of build?  Well, the answer is that you are not buying instead of building.  You are building and using buying as one mechanism.  This does not discount all types of ways of growing your business.  Buying one has a single advantage:  Time.  Imagine you run a $1M Revenue company and are growing at 10% per year.  It will take you about 7 years to become a $2M Revenue company.  But you might be able to buy a competitor Business and make that change overnight.

So, what is special about being bigger.  You will hear it called “Scale”.  What this means is that there are parts of two $1M business that are duplicated or asked to do multiple things.  When the two businesses come together you can eliminate the duplication (this is called “Synergy”).  People can focus on wearing fewer hats in a larger company so that they become more efficient at what they do.

This works in lots of ways.  Let’s suppose both companies had websites and that they used both Search Engine Optimization (SEO) and Search Engine Marketing (aka Pay Per Click or PPC) to drive traffic into the business.  By buying a competitor, you can eliminate one company that was competing in the Search and have better search results through SEO.  You also can allocate more money to the one company and have more PPC traffic as well.

There are challenges with this approach and we will cover them as well.  But you should consider Inorganic Growth as part of what you plan to do.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Annual Plans: Putting them to Work

When I last posted about Annual Plans we were talking about Key Performance Indicators (KPIs) and Key Results Indicators (KRIs).  I want to talk this week about making this plan a living document that works for you and your business.  Going through the exercise can help, but nowhere near as much as using it on an ongoing basis to judge your performance.

When we talk about the Indicators, we are talking about things to measure in your business.  The next step is to put these measurements in place with what is often called stop and go gauges.  In this case 2 levels are assigned to the performance of each metric.  There is a lower point between the Red (bad) and the Yellow (Danger).  The higher point is between Yellow (Danger) and Green (Good).  There are some binary metrics, but most of the time the 3 color levels are a more likely measurement.

So, let me use an simple example.  We are going to measure the number of Sales appointment per month and use a number of 90 a month as our Green Goal.  If we get 75 per month, we will call that gauge Yellow.  Anything below 75 is Red.  This is a typical KPI and might be found in many companies.  The next part is to match the KPI with the monthly revenue total.  Green in the Sales Call number should strongly correlate with Green in the Revenue KPI.  There might be some delay (depending upon your Sales Cycle), but that is the mission of this style of measurement.  Create a set of KPIs that generate the KRIs that you want in your business.  Then measure both and make sure that it happens.

There are a couple of problems to diagnose with this setup.  The first is whether your business can meet the KPIs that you have established.  If you can’t then there needs to be another plan – something different put in place.  If the KPIs do not lead to the KRIs that you want, then either you have the wrong KPIs, the levels are off, or the correlation is not as strong as thought.

All of these errors are likely to occur, especially the first time you use this strategy to build a business.  In many ways, it is similar to the first time you do anything.  You learn, adapt and grow.  Over time you will build excellent measures and predictors of performance.  And when you do, your business will move into a phase where you can grow in a controlled manner.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!