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.
Friday, March 27, 2009
Friday, March 20, 2009
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.
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.
Wednesday, March 11, 2009
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.
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.
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