Do You have the Right People?

We have talked about the challenges of Finances, Sales, and Marketing.  Now, we come to the last of the big 3 company problems:  People.  For most companies, people directly contribute to about 70% of Operating Expenses.  That means having the right people and employing them properly is a top priority.

To start with, this means that the people in your business need to understand their job descriptions.  Many small businesses do not have formal job descriptions and employee handbooks.  You should consider that unless you tell people what you want them to do then they will what they consider is correct.  The first step here is to define the job and the rules of employment.  By doing this, you provide a shortcut to productivity increases.

The second thing is that there needs to be a model for delegation.  I prefer the Trust Model of Delegation.  This means that people are given more discretion and more freedom over time.  This needs to start with what I call Bright Line decision making.  When you have a new employee or an employee in a new situation, give them Bright Lines to make decisions with.  Things that fall out of those stark choices should be escalated.  This gives the employee a front row seat to you making decisions and the reasoning behind it.

Finally, on the topic of decision making, this is the place for Mission, Vision, and Values. By guiding your employees to what is important to you as a business, you make it more likely that they will make decisions the way you want them to.  Remember, they represent you in the public. You need them to represent you as you want to be represented.

If you are a sole proprietor, this extends to any partners and vendors that you have.  You need to be sure that they are clear on what you are doing and their role within it.

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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Do You Have Enough Money?

We have been walking through why Small Business fail and this is one of the big questions.  In a technical context, I would argue that most startups are undercapitalized.  They don’t really have enough money to start their company and struggle before it can become profitable.

Why is that?  So many people that I talk to don’t have any financial background and have little interest in learning.  This means that they are unable to create an estimate for the startup costs of their business.  I normally run into them when they have an idea and ask me to work for a percentage of the company or for free/barter.  I know that you are now thinking, “Is it that he has not been able to demonstrate a value proposition?”  That may be true some percentage of the time, but I know many cases where they just did not have the money.

Let me give you an example.  I met with a Woman who wanted to start an Alzheimer’s Care Center.  This center would be located on a farm so that they could grow their own food.  This was to provide the residents with animal interaction and organic food.  I asked if she had a property in mind.  I was not sure that such a property would be available for sale and she might have to build.  I also was unclear on the insurance and liability issues involved by mixing two industries as she wanted to.  Her plan was to keep her full-time job and run this facility.  She needed her job to pay bills while this facility was starting up.  In the back of my head, I expected that this would take $5M – $10M to start.

Now I recognize that this is an extreme case, but I have a multitude of lower end examples.  They ask for my help in developing and sometimes writing the business plan.  When they find what I charge for this, they turn white and say thank you.  I know that I am not unrealistic in what I am asking.  They are asking for anything from 10 – 100 hours worth of work and want me to take less than $5/hour.  If you are in that situation and cannot afford to get professional help in areas like bookkeeping and website development, then you need to consider whether you are doing the right thing.

So, if you don’t know how to create a budget and estimates for a 2 – 3-year ramp-up phase of the business, then expect to hire an expert (like me) to do them.  Unless you are my personal friend, don’t expect my help for free.  If you cannot afford that help, do something else until you can afford it.

Thanks, and have a great day!

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

Change Your Business – Change Your Life!

Inorganic Growth: Integration

Last week, I posted about how the Integration Plan needs to derive from the Business Strategy involved.  I want to talk about what Integration is and how it gets done.

The basic is pretty simple.  Integration is the act of making two companies into one company.  The need is to make sure that this change happens as smoothly as possible.  There are 3 groups that are of great concern:  Customers, Employees, and Vendors.  Each one of them will have separate concerns along the same time:  “What is going to change?”  Because of this, the most important part is a communications plan.  Everybody involved needs to be informed.  When I was involved in larger acquisitions this could be as simple as an email for smaller customers to phone calls and visits to larger customers.  Vendors will be aware of this change normally as contracts are going to be assigned to the new company.  There will be a desire to ensure the financial stability of the new entity and some idea of any changes in forecasted need.  Employees will want to have some insight to how this is going to work, especially in the acquired firm.  This normally takes place in the form of All Employee meetings.

This communication has to be clear and consistent on what is going to happen next and how decisions will be made.  Imagine two small firms in a city merging.  Something as simple as where will the company be located can become an issue.  By having clarity and upfront planning, many challenges can be avoided.

After that, comes the hard work of looking at overlaps within the new firm.  At the simplest level, there will be a number of direct functions duplicated in the Administration of the firm.  This includes things like Bookkeeping and Accounting, Human Resources and Information Technology.  Generally, the acquired firm’s systems will be replaced by the acquiring firm’s systems.  This is not always the case, but is normally true.  It is important that the people that support those systems that are going away are maintained while the two systems are combined into one.  There may be a need to retain some people after that, but most will exit at that point.  Having clarity on timing and compensation will be important as people have to make choices about what they do next.

Once these basic systems are combined then it is time to move into the strategic part of the purpose of the acquisition.  In reality, there is significant overlap in the strategic and integration portions of the acquisition.  Intellectually they are very separate and I will talk about strategy next.

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

Change Your Business – Change Your Life!

Inorganic Growth: What to Buy?

One of the challenges that owners have is that they are not sure how to look for companies that they might want to purchase.  I want to go over four types of companies to look at and the strategic rational for each.

The first and most obvious purchase is that of a competitor.  The goal here being to be able to expand the customer base by the direct absorption of the competitor’s customer base.  There should be significant overlap in function, so there would seem to be the best chance for synergy savings.  However, some attention to the demographics of the customers to ensure that the combined firm addresses an additive segment.

The second kind of acquisition is purchase of a company in an adjacent market.  This will create a broader product and service offering.  Many times buyers will prefer to do business with one firm instead of two.  This lowers friction in the transaction and can simplify the business arrangement.  This can be successful if the buyer for each different product or service is the same.

The third kind purchase is to purchase a vendor of the company.  This is a form of vertical integration where the goal is to get more of the profit from a transaction.  This makes the most sense if the vendor is used in a large portion of the sales of the buyer.  The caution here is that if the vendor company does not sell to the general market it will change the economics of the company.

The fourth kind of acquisition is the purchase of a sales channel for the company.  This is a different form of vertical integration where the purchaser is looking to lower the cost of sales for their product or service.  Additionally, there is the possibility of locking competitors out of these sales channels.  The issue will be whether the other sales relationships can be efficiently maintained.

All of these types of purchases can work and I have been involved with all of them in one way or another.  The biggest issue is the mix of the strategic rational with a plan to execute the new business post acquisition.  We will get to that over time.

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

Change Your Business – Change Your Life!

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!

Financing Your Business:  Heading to an IPO or Sale

 

Much of what I have posted in this series is about the every day happenings at most small businesses.  However for a minority of them, there is a chance for a large exit.  This would be an IPO (Initial Public Offering) or the Sale of the Business to a Strategic Buyer.  These exits are generally many times the invested value and are a huge source of wealth for those involved.  These are generally Product Companies (those that make something) instead of Service Companies (those that have people do something) or Sales Companies (those that sell goods and services of others).

The reason for this is scalability.  Service Companies will need people to deliver the service and they scale only when you add more people.  Sales Companies scale with space or Sales People.  Product Companies scale on Production Volume, which is something that can be bought with cash one time.  It is not to say that the other kinds of companies can not grow and become large.  It is just that the path to getting there is different.  The kind of returns that a Venture Capitalist wants and the time allotted for these returns are normally not met by these companies.

So if a Product Company is in a rapid growth phase, it will often need additional money past the “A Round” (that first round of external VC financing).  There are companies that have gone through many Rounds (F, G, etc.).  But most go through one or two more before some sort of exit happens.  There are funding sources that the VC companies know that specialize in this.  They are often different than those that will fund an A Round.  The A Round guys have a higher potential outcome.  Those that join later have some more certainty but less return potential.

So, how will this work.  The company will sell shares to raise that money at a pre-money valuation.  Investors will agree (or not) to purchase shares under these terms.  Note, that the founders will own less of the company than they did before.  If the pre-money valuation is above an earlier round, it is called an “Up Round”.  Otherwise it is a “Down Round” and generally the existing shareholders will lose a lot percentage of their ownership.

Once the Round is completed, the company will have a new valuation called the post-money valuation.  That will come with a change in the ownership structure (called a cap table).  The company gets the money it needs to grow and things move on.

Have a great day!

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

Financing Your Business: Closing Thoughts

As this series comes to a close, I wanted to add a few things.  I left off many of the more odd forms of business finance.  The ones that I have discussed are what I would say are the most typical.  There are more.  In fact, there are so many varieties that it boggles the mind.  Some of these are for rare situations.  Others are for specific industries.  If you are unclear of what you are being offered, drop me a line.  I am happy to talk to you about it.

Some of these financing options come at really high interest rates.  Credit Cards are generally very expensive if they hold a balance.  The better credit that your business has, the more likely you can get a lower rate.  There are business credit counsellors that can help with that as well.

There is a natural tension in the Accounting world between Credit and Taxes. Saving money on Taxes means you are lowering your Profit.  By doing this, you lower your ability to obtain Credit.  There is no way around this except to identify the ways that you have lowered your taxes and keep them separated from other expenses.  This can allow you to show a lender or investor what you have done.

Finally, I want you to think like an investor (and lending is a form of investing).  They want to know how they are going to get their investment back with a rate of return.  A CFO that I worked with said once that they (investors) don’t care if you make dollies or donuts.  What they want is to make money.  The primary vehicle to communicate this is a Business Plan.  If you don’t have one, get one.  Learn to make it a living document and understand your numbers.  Again, feel free to contact me if you don’t know how that works.

Have a great day!

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

Change Your Business – Change Your Life!