Friday, May 17, 2013

Small business valuations are heading south; don't shoot the messenger.


Tuesday, May 17, 2013  

The age of 67 is effectively becoming the new retirement age with the phasing in of changes in social security rules reflecting increased longevity. Given the post-WW2 birth explosion, which lasted from 1946 to 1960,  the United States will therefore witness a tidal wave of independent business owners trying to unload their businesses and retire between 2013 and 2027.

What does this mean for business valuations? 

Most small businesses are valued at a multiple of profit.  The great recession of 2008 caused substantial downward pressure on profit. As we entered 2013, there were signs that the economy was picking up, including most-tellingly increases in housing starts. Business owners can expect to see the profitability side of equation picking up. 

On the other hand, despite increased consumer and business confidence, as we move into mid 2013, there is substantial downward pressure on the multiples. Why?
  
There is already an over-supply as a result of the last recession. Those baby-boomers who were ready to retire between 2008 and 2012 were caught in what was the worst recession since the thirties. Many refused to accept what appeared to unreasonable low-ball offers.  After all, they "knew" from their experience with real estate and the stock market that you don't sell when the overall market is down. For decades, the strategy of "wait and see" has paid off in these markets, at least in nominal, if not always in inflation-adjusted terms. 

But this strategy of "wait and see" may not work when it comes to selling a small business. Why? Lifestyle issues dictate that owners may not be able to wait for more than a few years, for fear they will miss those golden retirement years when they are still healthy enough to complete their bucket-list. And during business negotiations time pressure on one party favors the other party.

Even worse news...as the number of baby-boomers reaching retirement age continues to climb over the next few years, thereby increasing the already over-bloated pool of businesses available for sale, the number of potential buyers will likely dwindle. The rapidly declining cost of technology allows more and more entrepreneurs to start their own businesses and access far-reaching markets. Sure, many will fail. But they're more likely to try again, than take on the twin albatrosses of traditional business…bricks and mortar; and a fixed payroll, (as evidenced by the growing army of 1099ers.)


Am I suggesting that valuations of traditional small businesses will continue to decline over the next decade? Yes, that is very likely. The benefit of post-recession increases in profitability will be more than offset by declines in multiples.

What should you do if you're approaching retirement age? 

1) Now is the time to make sure all the business fundamentals are in place; cash flow management; financial controls, web reputation; elimination of unprofitable relationships etc.

2) Obtain an independent third party valuation by a professional valuation firm to get a realistic sense of what your business is currently worth. Remember that listing-brokers are not independent in the sense they may be over-anxious to under-value the business to increase the chance of obtaining a sale.

3))  Don't be tempted to wait and see. You are not going to be healthy forever. The baby-boom demographics are not going to change. Gen X is not going to abandon its own start-up dreams and suddenly re-embrace the high cost of getting into traditional businesses.

4)  Don't shoot the messenger. In other words, come to terms with the multiples used in the independent valuation.  Accept the hand you've been dealt and focus on dealing with the profitability side of the equation, which to a large degree is within your control. 


About the author:
Jonathan Copley is CEO of business consulting firm CFOCare Inc, which provides business valuations; M&A and strategy consulting. He is the founder of Grow50 a consortium of leading professional firms, which helps entrepreneurs plan, fund, grow, operate and sell. He can be reached at jc@cfocare.com

This article was first published in Valuation News

Thursday, May 16, 2013

Seeing through Investors' Eyes is Key to Raising Capital


Many entrepreneurs fail to attract the funding they need because they fail to put themselves squarely in the shoes of their potential backers. 

Most funding pitches are jam-packed with information about the company, its products, markets and management. By the time the presenter gets to the inevitable hockey-stick showing a huge ramp up in sales in year 3, followed by the request for growth capital, he or she may well have lost the potential investor who is still trying to answer the question, "How will this help my current situation?"  

The investor's current situation will include, for example: tolerance for risk; desired returns; desired public profile; payback interval; social objectives; geographic preferences; prior experience.  Once an investor has addressed these "what's in it for me" type questions, he or she will likely be more receptive to listening to the rest of your pitch about what you plan to do with the money. 

This principle is featured in a recent book* on influence which is currently being serialized in the Harvard Business Review.  Researchers Mark Goulston and John Ullmen note that high-impact influencers  are masters in engaging other people in "their there". While their work primarily describes how successful influencers converse one on one, the same principles can be applied to informal small group presentations to potential investors.

Their There
... Imagine that you're at one end of a shopping mall — say, the northeast corner, by a cafe. Next, imagine that a friend of yours is at the opposite end of the mall, next to a toy store. And imagine that you're telling that person how to get to where you are.

Now, picture yourself saying, "To get to where I am, start in the northeast corner by a cafe." That doesn't make sense, does it? Because that's where you are, not where the other person is.

Yet that's how we often try to convince others — on our terms, from our assumptions, and based on our experiences. We present our case from our point of view. There's a communication chasm between us and them, but we're acting as if they're already on our side of the gap.

Like in the shopping mall example, we make a mistake by starting with how we see things ("our here"). To help the other person move, we need to start with how they see things ("their there").

For real influence we need to go from our here to their there to engage others in three specific ways:

...Situational Awareness: Show that You Get "It." Show that you understand the opportunities and challenges your conversational counterpart is facing. Offer ideas that work in the person's there....

...Personal Awareness: You Get "Them." Show that you understand his or her strengths, weaknesses, goals, hopes, priorities, needs, limitations, fears, and concerns...

...Solution Awareness: You Get Their Path to Progress. Show people a positive path that enables them to make progress on their own terms. Give them options and alternatives that empower them...


Seeing the world through the eyes of investors is one of the keys to raising capital.

:* Real Influence: Persuade Without Pushing and Gain Without Giving In 



About the author:
Jonathan Copley is CEO of business consulting firm CFOCare Inc, which provides business valuations; M&A and strategy consulting. He is the founder of Grow50 a consortium of leading professional firms, which helps entrepreneurs plan, fund, grow, operate and sell. He can be reached at jc@cfocare.com