What's Really Going On Poll

Welcome to our 1st Semi-Annual Harvest Associates ‘What’s Really Going On” survey.

There is a lot in the news recently about all the incentives and programs designed to benefit small business owners. So, like Ed Koch, the famous mayor of New York who always wanted to know “how am I doing”… we thought we would take an informal poll to see what was really going on.

Our goal is real simple…get serious, honest, unbiased input from those who are in the “hot seat”. We wanted the comments to be meaningful so we contacted people in different businesses and different markets. By the way, we aren’t concerned about political correctness and putting lipstick on anything. We just want to know “how are you doing?”

The question we asked was: What is the biggest challenge you and / or your clients have been dealing with this past year? What have you done to solve it?

We were going to do a list of the Top-10 items but really the responses really came down to four items.

Problem 1: Cash flow is very tight.

Problem 2: Making New Sales is Difficult

Problem 3: Planning and Strategy is very tricky right now.

The solutions we are hearing can be summarized as, manage cash, prospect and sell like big dogs, cautiously keep your eyes out for opportunity.

Details and representative comments follow.

Problem and Solution 1: Cash flow is very tight. There is no easy answer. The solution has been to carefully manage cash flow by focusing on payables, receivables, and reducing all non-essential expenses and costs.

Representative Comments:

Larry Ely, Professional Graphics Printing Co, Sales Manager
“…the biggest challenge will be controlling labor costs, managing cash flow and growing the business back to previous sales volume in a down market. The solutions are managing overtime costs, hawking our accounts receivable and working on creative marketing”

Michael Fisher, SITE Resources, Principal
“…our accounts receivable is a problem we haven’t solved but we’re doing a better job with timely billing and follow up…competition is causing us to lower fees and in some cases we just decide not to chase certain clients for work. We WILL NOT play the low-ball game and then go back to clients for extra billing. In some cases we have had to limit the scope of work we can do for a given fee. Lack of funding has always been a problem but much more so today. Clients just don’t have the available funds to pay for their “wish list”. More often, we are providing supplemental services in the middle of a job just to get the job done even though we don’t get paid for them”


Shiela Cox, Performance Horizons
“...The biggest challenge I’ve seen is maintaining profits in the face of declining revenues due to reduced demand for products/services coupled with downward price pressure.”

The best solution I’ve seen is:
**careful analysis of profitability by product, service, channel, and customer
**limiting or eliminating low profitable activities
**expanding or creating high profitable activities



Problem 2: Making new sales is difficult. Solutions include increasing marketing (although not always to success), providing extra services, and looking carefully at product mix and value of offerings.

Representative Comments:

Kay Rosburg, Dever Designs, VP
“…the biggest challenge has been the loss of clients and projects that were put on hold and replacing the work. No question, revenue stability is our challenge. Our solution…have not come up with one yet! Have spent WAAAY more on marketing in 2009 but didn’t get the results I hoped for. The reduced revenue has forced us to delay the capital expenditures and our salaries have been substantially reduced…across the board”

Dean D’Camera, D’Camera Group, Principal
“…we have spent the year transforming our approach and our process. ..we are bringing greater measurable value to our clients designed to manage total cost of risk for the mid-to-large size commercial insurance clients. A recent insurance study (RIMS) indicated that the total cost of risk insurance premiums represent 59% of the total cost. Our focus now is to work with clients to address 100% of the risk. We actually have trademarked our process."

Paula Worthing, PLDA Interiors, LEED, AP, Principal
“…the biggest challenge is too maintain our income…the economy is having a huge effect on our client’s ability to get the funds and lease procurements which of course filter down to us. We are trying to meet the challenge with a forward focus and creative marketing. We also are doing things to strength our in-house capabilities. Still, we need some luck!!

Carol Coughlin, President, Bottom Line Growth Strategies
“…Projecting revenue has been especially difficult for companies that have consulting projects. It’s hard to tell whether the ups and downs are cyclical or a pattern related to the overall economy. The past year was definitely unlike prior periods. For 2010, revenue projection will continue to be a big challenge. Some companies have hired business development people but are finding they don’t work for intangible service income like IT projects.”


Problem 3: Planning and Strategy is very tricky right now. While volumes have been written about this the response we heard in our words is, deal with it, do your best, and look for opportunities.

Representative Comments:

Jeff Whipple CPA, Mattos Pro Finishes, VP Finance
“…In two words the hardest thing we are dealing with is Risk Assessment - is it a time to be cautious or a time to be a risk taker to position yourself for the future? How do you sit down and really strategize the business especially when it comes down to longer term investments such as marketing programs or expansion?

We think that you have to be as consistent as you can be. If you were aggressive you still have to be somewhat aggressive; you can't do an about face and become ultra cautious since that would confuse both the market place and the employees.”


Michael Mercurio, Esq, Chair, Business and Real Estate, Offit Kurman
“…For my business (and for my clients), the biggest challenge is convincing clients that the world is not ending. This market place, though challenging, is replete with opportunities for business that are willing to take calculated risks….... grab market share, eliminate competitors, add effective product offerings, increase client loyalty as well as bootstrap into other opportunities. The best solution is for owners to listen to fellow entrepreneurial business owners who can provide real life wisdom as to what works….”

In summary - we are hearing loud and clear right now that it is important to manage cash, prospect and sell like big dogs, and to keep your eyes out for opportunity.

Watch for our mid-year poll in June. We are projecting a better market and perhaps even concerns about hiring again (we are optimists you know!). If you would like to participate, don’t wait for us to call…please contact us. We are small business junkies and would love to talk with you.

Thanks to those who responded to our 1st poll. Thanks a million.

http://www.harvestbusiness.com/

Saving Taxes When Selling Your Business

When transferring your business to your children taxes often become a big costly issue. And who wants to pay high taxes?

One possible solution (there are quite a few if you plan in advance) you can use is to gift some of the business over to your children.

If you gift less than 50% of the business your children will not have control of the business. When your stock is not "control" stock it is less valuable than control stock. This fact is reflected in something called a minority ownership discount or lack of control discount.

For this reason the non-control stock will have less value than the control stock. For instance Company A is worth $1,000 and there are 100 shares outstanding. If you give 10 shares the pro-rata value would be $100. Yet the "discounted" value of those shares is likely to be $70 or $60 instead of $100. This fact in proper business situations can greatly reduce your gift and estate taxes.

This fact has been used in succession and estate planning for quite some time. Unfortunately it is one of the areas that the Obama administration has set out to change. But, the good news is that it appears that discounting will continue next year. After that - who knows - but these provisions will clearly be subject to change.

What this means is if you need to gift assets to your children and grandchildren as part of your succession or estate plan the best time to do it may be now.

We can help you either put together a complete team to assess your situation or take care of the valuation to support your decision. Contact me if you have questions or would like to start. For more info visit Harvest Associates website.

Merger and Acquisition Strategy Checklists for Rapid Growth

Buying growth is an effective way to rapidly expand your business. It works best when both financial and human capital is carefully evaluated and transition integration is planned in advance and implemented rapidly.

Acquisition Strategy Checklist – Can You Answer These Questions?

• What is your ultimate goal and plan?
• Why are you buying a company? Will this provide new markets, new product lines, intellectual property, quality organization and systems, key people?
• What criteria should you use for a search?
• How will you find prospects?
• Who will manage or oversee the process?
• What are your strongest “selling” points to a prospect – high price, more cash at closing, great growth opportunity we can share, remove administrative burden, etc.?
• What is our pricing and negotiation model?

Preliminary Underwriting of an Acquisition Checklist

• Why will their customers stay and transfer?
• What assurances do you have the key people will stay?
• What real risks are you missing?
• Are the company cultures the same or will they assimilate?
• Do you intend to have two units or merge into one?• How will you effectively and quickly integrate people, technology, production, etc.
• Does the financial information make sense? Do the price and terms make sense?
• Where is the synergy that will produce very high returns justifying the effort and risk?

Deal Negotiation Factors Checklist

• Have you performed an effective search to flesh out all suitable prospects?
• Are they under bank, balance sheet, or other forms of duress?
• Do you have any competitors in the hunt?
• Why might they want to be owned by you besides money?
• What is motivating their wanting to do the deal?
• What will they absolutely not do?
• Can you improve income tax outcomes and/or liability issues and renegotiate if necessary to gain the savings?
• Are we talking terms or cash and what is cash worth if it is available?
• Honestly – have you become emotionally caught up in winning or does this company meet your strategy goals?

Gregory Caruso, Harvest Associates, www.harvestassociates.com

Critical Steps for Transitioning Key Managers With Ownership Potential

A major problem confronting many privately held businesses is the lack of critical key managers. It is not that a quality management team is completely lacking, it is that they are all the same age as the owner. Typically these people intend to retire at the same time as the owner. This presents difficult transition issues. The key is to bring in an appropriate number of younger key managers and grow them to succeed the current key managers. If you bring on younger managers with "ownership" mentality you will also provide yourself with an additional exit strategy. Below are steps to do this:

• Determine if you are going to need to reduce current staffing in order to bring on new people or whether growth will support the additional payroll
• Critical positions (CFO, President, Vice Presidents) requiring succession candidates who must stay through a transition are identified and the list updated periodically
• High potential individuals are recruited from within or from the community. Remember when recruiting from the community, no matter how hard you screen many will not work out. This takes time.
• You or another senior manager must mentor each prospective Key Manager to assist with their development
• Ownership interest, financial ability, and "owner mentality" are reviewed and monitored for prospective owner/successors.
• Candidates are removed (and depending on the size of the firm, position held, salary etc. let go) when they repeated fail to progress on their development plans, or they lack integrity, or continually experience poor performance where they have control
• Candidates are given a variety of assignments and job experiences to help them develop the skills necessary for a leadership/ownership role.
• These may include: Internships, Special projects, Educational opportunities, Peer groups, Coaching, Experiential learning
• The succession planning process is regularly monitored (with a timeline) and updated. Key managers who can buy you out and stay in the event of a market sale are an essential element to ANY business succession strategy.

Make sure you are working on this today. Click or Call Greg Caruso at 410-507-5441 to discuss you situation confidentially.

Risks of a Rapid Revenue Growth Strategy

I attended a fabulous presentation recently by Manny Skevofilax of Portal Finance http://www.portalfinancegroup.com/ titled, “Navigating the Risks of a Rapid Revenue Growth Strategy”.

His takeaways were:

Review your strategic plan on a monthly basis to ensure that you are achieving your goals. All goals must have a timeline and responsible party.

Be willing to make changes to your business model and plan. Track results. It is riskier to stay the same than to implement intelligent change. Continuously and forever improve.

Whenever possible use variable costs instead of fixed costs. This will allow your costs to drop rapidly if your revenues unexpectedly drop.

Make sure you have a rear view mirror, a dash board, and a windshield. The rear view mirror is your bookkeeper telling you the past. Your dashboard is your Controller telling you what is happening today. Your windshield is a CFO helping you look into the future.

Another great thought…

A company growing at 5-10% is like driving down a city road at 15 mile per hour. You have time to look around and adjust.

A company growing at 25-100% per year is like driving down that same city road at 100 miles per hour. You don’t have any time to look at anything. Make sure you have the right team and the right plan to go 100 miles per hour.

How Large Does a Professional Services Firm Need to Be in Order to Sell?

The concern in the purchase of a consulting firm is always one of, “is all the spark from one excellent owner” or is there really a business system there that the next owner (or investment group etc.) can run. In general larger will be worth more (presumably both a higher multiplier and a larger profit).

My belief, one man's opinion, is that if you have about 10 competent people who can procure and/or do the work (partner caliber) depending on your model then you are starting to prove it is a business model and not just an exceptional owner. You also start having some security from the law of averages that if a few of the key people leave you are not losing the whole business.

A sample model might be a strategy consulting firm where the owner believes that each partner level person can sell $300,000 to $400,000 per year. I would put his bottom size at $3-4M assuming he has ways to keep the people together for at least 2 years after the sale. Employee or contractor non-competes and stay agreements will be very important to the purchaser. In order to obtain these restrictions you generally provide bonuses for staying through the transition.

Another issue is how hard is your service to sell vs. how sticky is your service. This is a function of your industry, your model and frankly your track record with customers. Sticky services and long term relationships are always good. For instance accounting firms where the clients need the same service every year tend to be sticky. One man accounting firms can be sold readily.

If your service is a difficult sale but you get a big profitable sticky tail it has value. This is probably closer to the true situation for a strategy consulting firm. If the service is a difficult sale for few $$'s it will be difficult to build and difficult to sell.

In general the easier the sale and the stickier the service the smaller the business can be.

To recap the primary issue in professional service business sales is proving that there is a business system that will continue to generate profitable cash flow after the sale and settlement. If you can demonstrate that you will be able to sell your professional consulting business whether it is very small or quite large.

What Every Business Owner Needs to Know About Selling a Business

A few pointers business owners should know about selling a business.

• Report all income to the IRS and keep clear books and records. It is the right thing to do. If that is not enough motivation for you I have a broker friend who is old school. He and his seller pulled out the 2nd set of books – the “unreported cash” books. Unfortunately, it turned out that the “buyer” was an IRS agent.

• Do not “hide”, “ignore”, or “overlook” serious business problems. This is an invitation to a lawsuit. Every business has a few problems. Either fix your problems or provide reasonable notice of them. Different buyers will see different things as risky. For instance I was involved in the sale of a machine shop where one client accounted for 80% of total revenues. In order to overcome the problem we talked to the customer who was willing to meet with the buyer and confirm that so long as product quality and delivery commitments were met the relationship would continue.

• Have the sales contract prepared by a competent transactional attorney. Many unexpected things can go wrong after a business changes hands and a proper contract will provide protection for most of them. For instance I was involved in a sale of an engineering firm and the seller agreed to warranty obligations to the extent of and for the period that they were covered by his professional liability tail insurance. This provided reasonable protection for the buyer and seller without leaving the seller open to endless potential liability.

Selling a business is complex. Work with people who can help you get the job done right.

Two Laborers - A Short Story

A story:

Many years ago two hard working guys took jobs as laborers digging ditches. The first laborer worked hard 10 hours a day but never lifted his head up and looked around. 40 years later he was still a laborer.

Whereas the other guy also worked 10 hours a day but after a year or two he asked for and received training to learn how to lay brick. After working as a mason for 5 years he figured out how to oversee other men for the owner and became a foreman. Finally, he took a big chance and started his own masonry company.

Did he really work harder than his associate who 40 years later was still digging ditches 10 hours a day?


Now more than ever you need to both work hard and work smart. Make sure you have a way to grind out the work but also be keeping your head up, looking for opportunities. They are out there waiting for you (or your competitor).

Build a Sales and Marketing Process

Sales and marketing is the most important system in at least 90% of the businesses we look at. It is also one of the biggest weaknesses in many companies. Many businesses are started by tradesmen and technical experts who are determined to deliver a better service or product. Yet, there business suffers because they do not learn how to build a pipeline of clients.

Many industries like construction subcontracting and engineering are very dependent upon relationships. An owner with a few good relationships can build a fairly large volume business. This is great until it is time to sell. Then prospective buyers will view the high risk of loosing major clients negatively. This reduces the value of the business.

The solution to these two problems is the same. Build a professional sales and marketing system independent of the owner.

For instance, build a system based on networking by staff, advertising, word of mouth, direct mail, location, or other technique that generates leads. The leads are given to trained salespeople who know how to close a reasonable percentage of the prospects. These systems are tracked and fine tuned to improve performance. Auto dealerships, software companies, distributors, and many other businesses use these techniques to improve their business and increase the transferability of the business.

A sales system that is independent of the owner and proven over time increases the likely survival of the firm. If there is any way possible in your industry to build an independent system do so. This will increase your business value.

Five Things Every Specialty Trade Contractor Should do to Increase the Sales Value of Their Business

Five suggestions that will increase the value of specialty trade contractors like plumbers, electricians, HVAC, etc. Generally these are items that need to be worked on every day, over long periods of time in order to garner the greatest benefit.

1. Increase service work. Service work that will be performed over a period of time provides proof that customers exist and cash flow will continue. Service work is more likely to continue versus new construction when the economy takes a dive. The ability to prove that some work will continue even in slow times in order to pay debt, salaries, and overhead is essential.

2. Avoid the one or two large clients syndrome. No matter how much you love each other eventually that will change. Then where will your business be? Reduce risk by having many smaller clients.

3. Keep overhead low. In good times it is tempting to buy every gadget, toy, and big expensive piece of equipment available. The same goes for purchasing yards and real estate to house the business. This is fine - just stay tuned to where you are in the economic cycle – namely buy early or use short term rentals if possible. Always focus on the amount of debt, long term rent, and other long term cash drains that you have committed to. By keeping overhead low, especially overhead you cannot shed; you will be able to survive if revenues take a dive.

4. Develop a sales process that is not owner (you) oriented. This is often a bigger problem with most new construction contractors than companies that perform service work. Make sure you have a process to generate leads, perform estimates, and obtain work orders or contracts that is not solely dependent on you and your relationships. If it is all you, how will you ever convey it to someone else.

5. Hire great people and create enticing golden handcuffs or stay agreements for the top tier. Most businesses are only as good as their people. In fact when your people go home at night so does most of your business value. Finding and keeping great people will allow you to grow and maximize your value at the same time.

Follow these steps and create a valuable company that you can enjoy owning and others will want to buy when the time is right for you to move on.

3 Steps to Build Business Profits

We are seeing many very good businesses that are having a difficult year or two. Most of the problems are the result of reduced revenues due to the downturn. Three steps to get your business back on track and rebuild profits and business value are:

1. Monitor business results daily. You should have a system so that you know where your business stands at the end of every day. It is better to be approximately right rather than 100% accurate 60 days later. For larger businesses this may be a sophisticated dash board computer program. For smaller businesses it may be a notebook with vital statistics. Most industries have vital statistics that experienced owners watch. For instance in the auto repair business shop owners watch number of tickets and average ticket size. Since they know their typical gross margin on each ticket and they know their fixed overhead costs they immediately know if they are gaining or losing.

2. Stress Test your business. Develop business projections based on what is really happening today. Then reduce revenues another 20 to 50% depending on your industry. What will you cut - how will you at least break even. Finally set firm bench marks as to when you will make those cuts. It is too easy to keep hoping tomorrow will be better.

3. Sell, sell, sell. Sell new products and services to your existing customers. Look for new customers for your existing services. As a sales & marketing expert told me: “If I was advising buggy whip manufactures on how to increase sales, I would suggest porn shops.” Be creative, take a stab and track results.

Obviously there are endless ways to get your business back on track. Each business experiences its own opportunities and challenges. These three steps are a starting point. You are welcome to contact us to discuss these ideas or any others you may have in order to build your business profits and value.

What is Goodwill?

Goodwill is an area of confusion for business buyers and sellers.

Some believe that goodwill value is something that grows as their business gets older. “Our business name is 20 years old so it must be worth a lot.” Some believe that goodwill increases as the business gets larger. In general neither of these factors creates goodwill by themselves. Goodwill is a function of business profits. The more profits, the more goodwill. No profits, no goodwill.

An example from the recent headlines is Linens and Things. At its peak Linens had over $2.6 Billion of sales and $86 million of profits. They had over 12,000 employees and over 580 stores. Think of the infrastructure, systems, and people they had in place. Think of their name recognition, website hits, and advertising budget.

In 2006 this company was purchased for $1.3 Billion in a leveraged buy-out. Unfortunately the cash flow did not begin to support the purchase price and the buyers were not successful increasing profitability. Linens and Things was one of the first casualties of the current recession.

As part of its bankruptcy Linens’ goodwill in the form of its name, web URL, and trademarks, sold for One Million Dollars. Using that sale as a baseline for goodwill without profitability means that a company with Ten Million Dollars in revenues but no profits would have goodwill of $3,846.00. So much for goodwill without profits.

Making profits keeps you in business in difficult years and creates long term value when you want to sell your business.

Current Trends in Business Succession and Mergers and Acquisitions

Current trends in the market related to business valuations, owner succession, and merger and acquisition activities.

For many the economy is not as bad as it is being projected by the media. Companies doing maintenance, medical services, security based government contractors, utility type services, and technologies that provide cost savings etc. are humming along. Some companies in more stressed sectors have made the adjustment and cut costs in line with the new reality of reduced revenues.

Banks are engaging in their usual game. Having granted too much credit over the past five years they are now granting too little. In their defense I am glad I don’t have to underwrite credit risk as it seems like fortune telling to me.

Forward looking people, (like the recent Forbes Index findings) think that we are at bottom and that by the 2nd half of this year things will slowly be improving. The emphasis unfortunately is on slowly.

What Does This Mean?

Transactions are occurring in sectors with steady revenues at decent multiples so long as sellers maintain flexibility. We are working with a medical device company and finding plenty of interest.

Buying opportunities abound in those sectors of the economy that are more cyclical. It may be a little early to jump although it is clearly time to start looking.

If you own a highly leveraged, or even a reasonably leveraged company - look out if you need a new loan or to renew an existing loan or line of credit. Bank policy is being driven by a fear of short term losses. Get close to your banker, be responsive and communicate often. If you sense you are in trouble with the bank shop alternatives early. Several companies we work with are changing lenders.

It is a great time to transfer your business to your children. We are preparing the valuations on several right now and the projected tax savings are substantial.

It is a great time to begin planning or implementing exit strategies. One example is that owners with substantial companies should be looking at two step transitions to take advantage of lower values to lower estate taxes in a family transfer now followed by a planned market sale when there are higher values in the future. Finally, while the rules are uncertain and it may be too late, there may still be time to discount minority interests in family businesses.

In summary, while many businesses will continue to struggle there are opportunities available from business mergers and acquisitions, succession planning, and other prudent business strategies.