Be an Ethical Entrepreneur, Marketer, and Business Builder

My best investment ever!

August 10, 2008 By 1 Comment
My best investment ever!

My best investment ever!

In less than 60 days I managed a 28% ROI netting me a quick $1400 in cash with almost no work and minimal risk.

Now of course these deals don’t come along everyday but you have to be ready for them when they do… And it wasn’t luck in the stock market, flipping a property (cause that takes lots of time and risk), or even growing my business. Nope – this investment was a motorcycle. :-) One that I bought, put 1444 miles on and sold for a quick profit.

Ironically, the formula I used to make this deal work has a lot of parallels to buying, building, and selling a business. Here are a few:

  1. The most important part is always the purchase. No matter how hard you work to build a business in a short time, the purchase price is what dictates your ROI.
  2. I knew a good deal when I saw one and acted quickly. Honestly, I know a lot more about motorcycles and engineering then I know about business so even though I knew the price was right, I did my homework and verified that the bike was WAY underpriced.
  3. I was in the right place at the right time. Granted, with business if you’re willing to travel you can always find the right place at the right time. If not, then sometimes you get lucky and find a no-brainer like I did with the bike.
  4. The bike required some minor maintenance and cleaning that I knew how to take care of.
  5. Selling the bike required knowing where to sell (i.e. craigslist), who the target audience was, and how to build value in the bike including negotiating a fair selling price and offering additional valuable services in addition to the bike (i.e a free helmet, thorough review of the bike, explanation, and inspection with an experienced mechanical engineer).
  6. I had to get the buyer and the seller to both like and trust me. The seller wanted cash and all I had was a personal check and a bank statement so he had to feel comfortable enough with me to accept that and let me ride off with his bike. The buyer had to trust that I was accurately representing the bike over the internet (to warrant a 3 hour drive to pick it up) and that my knowledge and experience with bikes was legitimate.

Some of those ideas may be a stretch, however I can’t emphasize enough that the most important part is the purchase price. With that in mind, you better spend time educating yourself on EBITDA and Free Cashflow calculations. EBITDA, as I’ve pointed out, is a bit of a farce, however Free Cashflow times some arbitrary multiplier is more “acceptable” though it’s not without it’s flaws.

Free Cashflow is basically your net income (or profits) with a few allowed add-backs such as 1 owner’s salary, vehicle and other perks. Interest is also an allowed add-back along with depreciation and amortization. At least with free-cashflow we all agree that everyone has to pay taxes regardless of the quality of your accountant. My issues with the free cashflow method (which are important to know when you negotiate the purchase of a business) are:

  1. Only 1 owner’s salary and perks can be an add-back, however what if the owner doesn’t take a salary because he has a great General Manager (Team Leader) in place? Isn’t that “automatic” business worth more then the one that requires the buyer to be the Team Leader?
  2. Very few people buy a business without some sort of financing whether it’s from the seller, bank, or rich uncle so completely discounting interest can be kinda silly.
  3. Depreciation as an add-back again is a bit ridiculous because those numbers represent legitimate expenses that had to occur before and will occur again (though hopefully not in the time it’ll take you to buy, build, and sell).
  4. The multiplier is “arbitrary”. As a business broker informed me a business is worth whatever a ready, willing, and able buyer is willing to pay. Most business owners think their business’ are worth 1 times revenue and, when you go to sell, if you can get somebody to believe that then more power to you. In reality most small businesses are worth 2-3 times free cashflow which means unless your business is making a NET profit margin of 33%-50% it’s probably not worth 1 times revenue.

Granted, my understanding and even experience with all of these is a bit limited, however the most important things I’m trying to stress are:

  1. Educate yourself completely
  2. Everything is negotiable (there are no hard, fast rules)
  3. Be willing to walk away if the seller doesn’t agree with your purchase price and go find another deal

To your success, Bryan

Filed Under: General Business Tagged With: , , , ,

The 3 basic leaders every business needs…

June 27, 2008 By Leave a Comment

Imagine in its most basic form that for any business to truly excel it requires 3 main pieces. Picture a triangle with following at each point:

  1. Sales & Marketing
  2. Finance & Administration
  3. Operations & Service

Here’s the basic idea, without marketing you can’t sell and you won’t have any customers. Without effective operations and service you can’t install or service what you’ve sold. Without finance and administration you can’t pay your bills, issue paychecks, track if you’re making money, or if your margins are high enough to cover your overhead.

If your business has excellent leaders taking care of all 3 then you’ll be humming right along. Without even 1 piece, and your business will never reach its full potential.

As a team leader I take a portion of the responsibility for each one. Not necessarily because I have to, but because I enjoy it and like to think I’m good at it. :-) My leadership requires me to control marketing, handle financials and payables, and manage all of the numbers and systems. That means I have a few gaps to fill. My business still requires a Sales Leader and Operations/Service Leader. As a matter of fact, nearly any business that I’ll be involved in in the near future will require leaders with a passion for those areas of business. Eventually the goal is to find leaders for all aspects so I can completely step away or simply work on marketing and reviewing the numbers.

Let me explain more thoroughly. As a mechanical engineer, it’s no secret that I love numbers. Cash flow projections, margin calculations, break-even analyses, closing ratios and ROI evaluations are a few things that get me excited. :-D On nearly a daily basis I’m creating one or more spreadsheets to help me track the proficiency of some area of my business in the hopes of finding areas of improvement. Those (and many other) numbers help me find, address, and then ultimately plug holes. Then as we implement changes the numbers again tell me if we’re going in the right direction or if we need to make a U-turn. Every business owner uses his or her “gut” to make decisions, but completely shooting from the hip will never allow you to make the most educated decisions. Additionally, as my aunt recently pointed out to me “You love to know how things work.” For that reason, designing and implementing systems for my business gets me pumped. Scripts, check lists, flow-charts, training materials and on and on are great fun for me. (As a matter of fact, this blog itself is a system of “indoctrinating” my team leaders without having to repeat myself every time.)

My other talent and passion is marketing. Without getting into too much detail, cross-marketing, up-selling, sales scripting, back-end sales, and the like are all areas where I focus a good deal of my time. As Michael Masterson pointed out in Ready, Fire, Aim: Zero to $100 Million in No Time Flat (Agora Series) a Stage 1 business’ main priority is sales. If your business doesn’t have an efficient system for generating leads and closing sales then you probably have a lot of room to grow. Which probably also means I’d be interested in buying your business. hahaha

So what do the 3 pieces to the business triangle mean?

  1. This is about the most basic way to create an organization chart for your business to make sure you’re taking care of the crucial aspects of leadership.
  2. If you’ve read my last blog and are still a little fuzzy on how you could fit into the picture as one of my team leaders this should narrow down the passions my leaders will need.

For example, if I’m looking to buy an oil services business and you don’t know a thing about sales, marketing, finances, administration, or systems BUT you know how to lead people and are passionate about the service and operations of customers in that field, then you have the potential to be the Service and/or Operations Leader.

If you have the ability to sell and you have the talents and motivation to teach others how to sell, you could be a sales leader for almost any business regardless of what you’ve had experience selling before.

However, that thinking is a bit backwards don’t you think?

Before we delve into why that’s backwards, let me quickly reiterate why I keep saying “Leader” instead of “Manager”. My main goal as a Team Leader is to enable all of my team members to do the absolute best that they can at their jobs. Leaders lead people and managers manage resources. To fire on all cylinders, the main leaders of a business need to not just tell someone they aren’t performing up to standards – they need to be able to lead them into improving themselves. James Rhome, I believe, was the one to say “Work harder on yourself then you do on your business” and the same is true for your team members. A leader is willing to invest in her team and gets excited when someone improves. Leaders with a passion for and ability to positively communicate with their teams are the people I’m constantly searching for.

Since my strengths are Finance and Administration its my contention that with the proper Sales and Operations leaders we could grow any business. Conveniently for me, calculating profit margins, closing ratios, lead sources, or creating systems for phone scripts etc. etc. etc. are almost exactly the same for every business everywhere in the world. So with a little adaptation to a few spreadsheets I can quickly get all of the important numbers from any business. However, without a sales leader and operations leader I can’t effectively make the changes the numbers tell me I need to make.

For that reason, my approach to buying businesses is shifting. My first goal is to find the 3 main leaders I’ll need (usually it will be 2 since I can handle Finance & Admin with a bit of help) and THEN I’ll find the business that would allow all of us to excel at something we’re passionate about. That is why I’m completely vague on what businesses I’m researching, evaluating, and looking to purchase in my blog – If you have the ability to be a top-notch leader of service or sales, I’ll find a business we can excel in together.

“The only failure is the failure to participate.” – Brad Sugars

To your success, Bryan

Filed Under: General Business Tagged With: , , ,

What to do the first 2 weeks onsite at a business you've just bought…

April 21, 2008 By Leave a Comment

Had I written this article 2 weeks ago before I actually lived through 2 weeks onsite in my business then it would have probably been something like observe, gather data, and try not to make too many changes…

Well I would have been partly right. Observe, gather data, prioritize the changes, and start making them immediately would have been more accurate. You really have to act and think quickly.

Here’s what I did when I got to New Mexico…

  1. Make sure all of the details of the business purchase are sealed up. Since my business is 1900 miles away from my home, there had to be a bit of verification, legal work, loan paper signing, etc. that had to be handled. No point in proceeding further without that.
  2. Gather data. When you go into a business that has a great database application that you already know how to manipulate, the job is 10x easier. Since I worked for 5 years for the software company that provided the database for the business I purchased I know it inside and out and can “instantly” figure out what areas we can cross-market to, which technicians were most productive, how many service calls we were doing for free, how many leads have been coming into the business, and what questions those prospects were most interested in. Maybe even more importantly, I could quickly determine what they weren’t tracking that we needed to start tracking immediately. This data also told me what changes we needed to make immediately and which ones we needed to make next week and next month. Without data you can’t possibly make any educated business decisions. Ask Michael Gerber.
  3. Get your team to buy into your philosophy. My business has 10 team members including me. They didn’t know what to expect from a new 26 year old boss. Now instead of just “observing”, almost immediately I started meeting with each of them individually and my first change was a mandatory weekly team meeting. It was important to address outstanding team issues immediately. For instance, one team member had recently had some issues with his driving record and his job required that he be able to drive. He was extremely stressed because he didn’t know what I was going to do about it. I got the story from my partner, who has owned the business for 10 years, and, with my partner’s permission, asked the team member to tell me what was going on. We brainstormed for a while on how he could still help the team, I told him exactly what I thought of the situation including that, in his limited capacity, he couldn’t command the same wage from the business. He immediately agreed and understood that he put me in that position not the other way around. Two days later I cut his pay by 25% which he was completely OK with and he almost instantly was happier and more productive. His physical demeanor literally improved because now he knew what was expected of him and what was going to happen even though he was being paid considerably less. Had I not seen it with my own eyes, I wouldn’t have thought it could have possibly been so “easy”.
  4. Have a solid team-based philosophy and share it with the team. If you have a philosophy on business that includes being the boss so you can intimidate your employees into working hard or you’ll fire them, then you’re probably not going to get a lot of buy-in from the team. Now I tried to evaluate the team as quickly as possible, to determine if everyone is worth keeping and at this point it seems that way. They all just need a bit more direction and motivation. Brad Sugar’s claims that at most businesses he’s bought (53 at last count) he had to fire 50% or more of the people right away. It doesn’t look like I’ll have to do that but I can’t rule it out yet. My team philosophy is best summarized in a few points:
    1. We’re a team working together not me dictating what everyone needs to do. If I can help you be more effective at your job I can be more effective at mine so that’s my goal as the Team Leader.
    2. Honesty is paramount. I’ll always be upfront and honest with you and I expect the same.
    3. Teams must communicate effectively. That means your ideas will be respected even if they’re not followed.
    4. We can all learn something from every single person we encounter.
    5. Everyone (especially me) is accountable for doing quality work that generates the company revenue. I will give my team members the benefit of the doubt, however everything is being tracked and the numbers tell the story in black-and-white.

A couple of things to keep in mind.

First, I did not have an exact plan written out on paper as to what I would do my first week. It just kind of came to me as I went through. Granted, in my head I know exactly what the finished product (meaning the business) looks like and the pieces that would need to come together for that finished product to become a reality. Next time, I’ll take a more structured approach, however.

Second, most of my “team” philosophy sounds real “touchy-feely”. Make no mistake about it, if someone is losing me money, they will not be around long and I made that very clear right from the start. Everyone expects that so me actually saying it really isn’t a negative. However, if I don’t tell them what they need to do to generate profit for the business every single day, then it’s my fault if they don’t produce. As a 26 year old, it was important for me to let the team know that no one bank-rolled me. That it is up to me and only me to make this business work and if I don’t, there is no one to bail me out. I am completely accountable for the success of the business and the team needs to know that.

Third, I don’t know the technical side or the sales side of this business and I don’t care to become an expert at it. Honestly, I don’t know how to sell, service, or install our products. That’s not my job. In reality, those things aren’t my strengths. My goal is to make sure I have the right people in the right positions to excel at those things so I don’t have to. Then it’s my responsibility to keep them motivated and adequately compensate them for their quality work. The idea that you need to be able to do everything in your business so that no one can hold you hostage is not the philosophy of someone whose goal is to massively grow businesses. Let me explain that a bit more clearly. If you own an electrician business, some business owners think they need to be expert electricians so that their electrician employees can’t hoodwink them by doing sub-par work. Those owners also believe that that employee may hold them “hostage” because they can’t possibly fire the employee with all of the specialized knowledge. If your business is THAT specialized and its THAT hard to find a replacement, then it’s probably not the proper business to fit into the buy, build, and sell philosophy. Off the top of my head I really can’t think of any businesses that are that specialized. No one (including me) is irreplaceable.

In 2 years I’ll be working on another business (or 2 or 3) so how can I possibly become an expert at every aspect of each one? As intelligent as I may be, I can’t. However I can become an expert at buying, building, and selling businesses of every sort because they all have the same basic fundamentals.

There are a lot more thoughts and details to cover about my first weeks on the job and since I’m working 7 days a week it may take a while to put them all in the blog… However I will outline all that I can as fast as I can. :-)

To your success, Bryan

P.S. Had I not spent thousands of hours reading books, attending seminars, and asking questions of business owners (most particularly my father), my first few weeks would have been nearly overwhelming with very little progress. Ignorance truly is the most expensive thing in life.

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Business Valuation – Why banks don't know what your business is worth.

February 24, 2008 By Leave a Comment

Ask nearly any business owner, “What’s your business’ most valuable asset?” and most likely you’ll hear, “my customer base”. (Every once in a while you may hear, my employees.)

Microsoft obviously agrees with that as they recently injected $240 million into Facebook in exchange for a very minor stake in the business (~5%). That projects a value for Facebook of around $15 billion dollars with between $150-200 million in revenue in 2007. You heard that right, Microsoft values Facebook at around 100 times revenue! Why? – Because they have a loyal customer base of over 65 million users with 250,000 more added everyday and over 50% of whom log into their Facebook account every day. Granted, this $15 billion dollar company does everything out of a few offices in California and New York. They have very few tangible assets.

Since few of us are looking to buy, build, or sell a Facebook style business any time soon, what does this have to do with those of us involved in small business?

Well if you’ve ever tried to get a business loan from a standard bank, contrary to the “real world”, you learn quickly that they don’t consider “customer base” an asset at all. As a matter of fact, it’s not worth anything. A bank looks at 2 things:

  1. EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) multiplied by some arbitrary multiplier OR Indirect Cashflow (both are poor measurements for available cash if your business is based on accrual accounting, but we’ll address that in another blog).
  2. Liquidated Assets – If they sold everything your business owns EXCEPT for the customer list, what’s that worth?

If one of those 2 things isn’t up to par, no loan. That means if your business has revenue of $1 million and EBITDA times their arbitrary multiplier (generally 3 to 5) is $500,000 and your building and other tangible assets are worth $150,000, the bank will only loan you about $120,000 (80% of the “assets”). After all, they’re not in the business of selling businesses so they HAVE to do it that way.

Let’s consider a bit of irony in the system. If you have ever learned about how banks handle foreclosures you’ll understand that most banks have a department called Real Estate Owned (REO) to help resell properties that they have foreclosed on. In theory, they are trying to resell these homes as soon as possible because as all banks will tell you “we’re not in the real estate business.” In essence all REO properties in their portfolio are liabilities because of that. That seems to make sense. They’re in the money business not the real estate business so if they don’t have a mortgage against the property they’re not making any money.

So then why, when they look at my business (or any other business), do they insist that I am in the real estate business? After all the only “asset” they claim I have are my buildings and tangible property. What kind of business owner with a healthy, well-established business, would break it into pieces to sell it asset by asset? None (unless they somehow alienated their customer base).

My first house and rental propertyThat’s literally the same thing as if the REO departments of banks sold foreclosed homes piece by piece. First they send someone over to value the doors, windows, and carpet. Then they get a value on the cabinetry, kitchen items, toilets, sinks, bathtubs, etc. And then piece by piece, sell it off. After all, they’re not in the real estate business so how could they possibly try to sell real estate?

Business works the same way, it makes absolutely no sense to value a business as a sum of its tangible assets because no business is in the asset gaining business. Just like banks will often enlist the help of real estate brokers, business brokers can also be utilized. Heck, as a requirement to secure the loan you could ask the business to indicate 3 ways, places, or people who they would sell the business to if they had to.

Now here’s the worst part of all of this. A banker has recently told me they are tightening up their criteria for commercial loans because of the sub-prime loan fiasco.

Come again? You’re punishing commercial loan seekers because you didn’t have the foresight to realize sub-prime loans were a bad idea?

If you’re not familiar with sub-prime loans, here’s a quick review. You want to buy a $200,000 home and can’t afford the $1200 a month payment at the current interest rate. So the bank says, no problem. Just pay $900/month for the next 3-5 years (the time frame is set forth up front). By then you’ll have been promoted, got a better job, won the lottery, etc. and can afford a $1200 payment for a few years and then eventually you’ll have no problems with a $1500 payment waaaaay down the road when you’ll obviously be making tons more money than you are now because that’s what happens in everyone’s life. Now the bankers get together and think

A. we’re going to make a killing on all of these new loans and all of the interest from them AND

B. worst case scenario 3-5 years down the road the properties will have gone up in value and have plenty of equity in case this person can’t make the payment and we foreclose.

That appears to meet the 2 heralded criteria every banker reviews for a loan mentioned above. Does the person have the cashflow (uh, well, sorta… I mean, I’m sure they eventually will…)? Is the loan secured by a tangible asset that we can sell if necessary? As it turned out, not everyone got that extra promotion to afford the higher payment. To make matters worse, real estate values in most of the country actually went down. So why does this annoy me? Because I thought banks weren’t in the real estate business… If that was the case, why were they “investing” in the real estate appreciation? The ONLY way the sub-prime loans could have worked based on the 2 criteria that banks developed for themselves, was if real estate steadily went up in value. So, yes, the banks got themselves into the real estate business in a big way.

So now, a business I’d like to buy with a bank loan has a nice net profit margin (enough to easily pay back the loan), has been around for 40 years, has had substantial growth for at least the past 3 years, and continually grows its most important and valuable asset (i.e. it gets new, loyal customers on a daily basis) and yet the banks can’t see past the “tangible assets” of the business to secure a loan… Partially because they thought it was a good idea to give money to people who couldn’t afford to pay it back…

Now what? Do I give up? Of course not. I’m not one to present a problem with no solution because where there’s a will there’s a way. This snag, like most any other business challenges, can be overcome.

Here are 3 potential ways to still buy a business without a standard bank loan:

  1. The majority of business purchases are vendor financed so that may be an option.
  2. Friends and family can always be an option (either to loan you the money or to loan you their signature to get the financing you need).
  3. As nearly every software and internet company in the Silicon Valley has found out, Venture Capitalists are alive and well.

If you’re in the process of securing a commercial loan, hopefully this blog gives you a few negotiating points you may want to use with your banker. Otherwise, you can’t get too worked up about things you can’t change – no matter how ridiculous they are. If you’re in the business buying mode, start with a business that would require a smaller loan. Or keep looking for one where the owner is willing to finance it for you.

To your success, Bryan

Filed Under: General Business Tagged With: , , , , ,
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