Creating Value

The following factors create value in a business:

• A good recent profit history
• Good condition of company facilities, accuracy of books, employee morale, goodwill in the community.
• Demand for a specific type of business
• Current economy – the more investment capital available, the better the demand for purchasing good businesses
• Transferability of company assets. If intangible assets make up the bulk of the business’ assets, buyers question the viability since the asset may not transfer well to new owners
• Future profit potential – where is this business in the marketing cycle? Is the market pretty well saturated? Will the products become obsolete? Or is the business relatively young?
• Special circumstances of buyer or seller. If either the buyer or seller needs the sale, the resulting price changes based on the need. If the seller needs to sell, the price decreases. If the buyer needs a business investment, the price probably increases.
• Special terms available. Buyers may pay more for a business with special financing terms such as: less cash down, seller financing, lower payments at the start of the loan, etc.
• Tax consequences. Sellers experiencing a huge tax debt based on a sale stick harder to their asking price.

Valuation Methods to Avoid

While a “rule of thumb” might give you the ballpark price of a certain type of business, avoid using it to actually determine price. There is no such thing as a “one size fits all” in business. Location, inventory, the current state of the economy and many other factors toss “rule of thumb” rules right out the window

Comparable Sales once again provides a bench mark for the value of a business, but by no means provides a good sales price. No business is like another even if they sell the same product. The condition of the business, both physical and internal structure, changes from business to business

Reliable Valuation Methods

The adjusted book value balance sheet method of valuation provides a good look at value. (Note: Three balance sheet methods exist in accounting, book value, adjusted book value and liquidation value. Book value varies depending on accounting methods used, liquidation value really looks at the value at disillusion of a business.) Adjusted book value takes into account possible allowable but deceptive accounting methods. It looks at valuating the business assets in their current condition less current liabilities. Adjustments might also be made for obsolete inventory or inventory in poor condition, old accounts receivable, current market value of real estate, age and condition of furniture and fixtures.

The income statement method of valuation provides the most meaningful approach of valuation to the buyer. The buyer wants not only value, but cash flow, in order to remain a viable business. The discounted cash flow method looks first as historical cash flows and then projects future cash flows. Future cash flows are discounted to current value with a calculation for the residual value of the business at the end of the future cash flow projection. However, even the balance sheet and income statement methods of valuation are not without error. Looking at both methods of valuation along with viewing comparables and “rule of thumb” figures may give the buyer the most accurate point in which to start negotiations.

A limited liability company offers owners limit liability for a business’ debts and contractual obligations much like a corporation, with a less complicated formation. Unlike a corporation, a LLC passes all income and losses through to its owners like partnerships. Unlike a partnership or sole proprietorship, the creation of a LLC requires a state filing and designation of at least one officer. In a sense a LLC is a hybrid of a corporation and partnership.
 
Below we list some general advantages and disadvantages of the LLC entity. However, because state laws differ, these lists may or may not apply to the state in which you operate.

Advantages of a LLC

• The income from a LLC passes through to the owners, usually meaning a reduced income tax on income and avoidance of the corporation double taxation where income is taxed at the corporation level and again when distributed to individuals.
• Owners of the LLC receive legal protection from the debts and acts of other members of the LLC.
• A LLC requires only one owner (in most states)
• A LLC can continue after the death of its owners
• Setting up and continued operation of a LLC requires far less paperwork than a corporation.

Possible Disadvantages of a LLC

• Income received from a LLC is subject to self-employment taxes
• Sale of more than 50% of the capital and profit of a LLC within a 12 month period terminates the LLC for federal income tax purposes.
• An LLC with losses greater than 35% passed to non-managers of the company may not be able to use the cash method of accounting.
• Each state’s laws regarding the LLC entity differs, possibly creating confusion for entities operating in more than one state.
• An LLC with less than two members is treated not as a partnership but as a sole proprietorship.

The students provided Complete Parachutes information as to how a Democratic President might affect their business and also found new overseas markets for the company. They also spent time critiquing the company’s website and provided recommendations for making the site more user friendly and with better navigation.

The Kauffman Foundation, formed by Kansas City’s dynamic Entrepreneur, Ewing Kauffman, also encourages this type of collaboration. Vice President for Entrepreneurship, Bo Fishback cites how students research and find answers for companies interested in marketing new products.

Didi Davis Food in Ipswich, MA used a college consulting program at Babson College for putting her new business featuring gourmet condiments on track. Her business didn’t even have a business plan until she teamed up with students. Their first recommendation brought Mrs. Davis and her business into the “real world” with the recommendation for a proper accounting system. The Masters Degree student, Aditi Chowdhary, who headed the team, found the venture gave her management expertise she expects to use in her family business in India after graduation this week.

Stetson’s program is so popular with those contemplating starting a business or needing consulting work from students that Dr. Oliphant reports turning away requests from those wanting a “free diagnosis”.

If you choose continued use of the previous owner’s unemployment insurance account, ensure the previous owner paid all previous taxes owed and that you make timely application. See http://dwd.wisconsin.gov/UITAX/trans.htm for application deadlines. Also investigate whether any former employees are currently receiving unemployment benefits; if former employees currently receive benefits, these payments get charged to the account you assume. This may cause rate changes in the future.

If you are a current Wisconsin employer, the rate of any account assumed is combines with your current rate for an adjusted new unemployment insurance rate. If you choose not to assume an unemployment insurance account, use your current account if you already have one. Wisconsin unemployment insurance assigns new accounts to those without a previous account.

When You Must Assume an Unemployment Insurance Account

Spouses, parents and children must take over the unemployment insurance account of a business transferred to them. A business changing entity types, current partial owners assuming additional ownership and subsidiaries merging with a parent corporation must also continue use of the previous unemployment insurance account.

When a business transfers ownership, the Wisconsin Unemployment Insurance agency must be notified, regardless of whether the new ownership continues using the previous unemployment insurance account.

When s Business Transfers Occur:

Sales, leases, business reorganizations, mergers, consolidations, foreclosures, inheritance and bankruptcies usually signal a business transfer.

Sales of corporate stock, corporate name changes, transfers of employees or payroll and sales of assets in the normal course of business are not business transfers.

Hedge funds and large banks experienced a huge financial crisis in 2007 when fool hardy sub-prime loans; some economists believe these troubles hit the small business community in 2008, but if these instruments passed on any affect to small businesses, it wasn’t from poor investments, but rather the inability to stay afloat when credit dried up.

Unfortunately, many businesses attempt survival on credit cards. In a credit crunch, interest rates on credit cards take a big bite on monthly cash flow. Banks, after the slaps faced with sub-prime mortgages, tightened their lending standards, making it difficult for small businesses to find additional working capital. It’s a warning to all businesses that conserving capital for a rainy day means survival in hard times; failure to do so means the probable demise of the business.

The number of failing businesses could easily be much larger than shown in the above statistics because businesses without creditors simply close down. More and more businesses also avoid court and the bankruptcy stigma by out-of-court settlements. The business owners simply meet with creditors and work out an agreed settlement. In both of these situations, businesses failed but weren’t reported in the Automated Access to Court Electronic Records (AACER) system reported on by BusinessWeek.

Many of the reported failed businesses may be those involved in residential building and residential real estate in states like Florida and California. With the huge profits realized in residential real estate in these states, building was at an all time high. Don’t expect things to even out for awhile in the residential market. The housing market isn’t expected to settle down for at least another year with some warnings of a housing market down trend expected for about 5 years.

In 2005 a group of Monmouth University in West Long Branch, N.J started the company that now sells its product in 400 grocery and gourmet shops in New Jersey and New York. Their professor worked as a chef previously and brought them a recipe for a successful sauce he’d never had time to market. The team of students divided into smaller teams, covering sales and marketing, finance, information technology, research and development, and production.

The Monmouth students researched their market, created a business and then followed through their blueprint, getting the sauce on supermarket shelves. The following semester the students followed through with a course in small business management where they learned through on-the-job training to run their company day to day. Massari predicts $1 million in sales this year. Not bad for a company 3 years old.

More than 2,000 of our nations’ colleges and universities jumped on the creating entrepreneurs band wagon with offerings from one class to an entire curriculum for entrepreneurship. In return 200,000 students enrolled in these classes. Small businesses generate 75% of all new jobs created in the USA.

Kansas City’s Kauffman Foundation is spending $50 million of money left by the great Kansas City entrepreneur and owner of the Royals Baseball team, Ewing Kauffman. The Foundation’s vice president, Marjorie Smelstor, insists that entrepreneurship can be taught, but the method of teaching must go beyond teaching theory. Former class learning coupled with a hands-on approach successfully teaches entrepreneurial skills. Smelstor also extols the importance of a well rounded, strong liberal arts education.

Active or retired business owners make the best teachers. These teachers teach students to get on the bicycle and ride rather than discussing the theoretical points on how bicycles can be ridden by humans.

The following list provides important considerations when choosing the franchise right for you and your location:

Franchise Market Appeal

•  Choose a franchise you like; the product must appeal to you. Pride in your business makes a better salesperson.
•  Study your location and what appeals to the specific market. A successful franchise in one location provides no guarantee as to its successfulness in another market.
• At the same time, ensure that the competition for the product or service hasn’t over saturated the market in your location.

Research Franchise Offerings

• Not all franchises are clones. Each franchise sets their rules, prices and procedures. Make sure the requirements of the franchise meet your business concept and the way you like working.
• Match your skills and interests to available franchises. Don’t try to put a square peg in a round hole. Databases exist where you plug in your criteria for a business and you receive a list of franchises meeting your criteria.
• Some franchises offer only seasonal concepts – if you want or need to work full time year around, steer clear of these.

Comparative Research

• Compare various franchises with each other. Compare what you get versus the price you pay and what’s included with the offering. Some franchises offer training and ongoing support, others offer less.
• Compare earnings, costs of maintaining the franchise. Have your accountant review this information.
• Do your own income and cost projections with your accountant for your location.
• Compare contractual provisions such as terminations. Turn these over to your attorney for review.
• Talk to existing owners of the franchises on your short list and ask about the good, the bad and the ugly. Find out if the franchisor meets their obligations.

Soldiers and sailors show discipline and a true grit when times are tough. Long hours, hard work and meager facilities equip military men with necessary skills for starting and surviving in business. The “can do” attitude drilled into soliders is just the right skill for starting and building a sucessful business.

The Patriot Express program expedites many of the document processing procedures by reducing the paperwork required and allowing participating financial institutions the approval authority. The SBA program offers guarentees to participating financial institutions, making the financial institutions much more willing to grant business loans.

New small businesses jump start lagging economies for states involved in the program. States also recognize the potential of small businesses become much larger businesses over time. It’s a win-win situation for both veterans and the states in which they live. Military members get the opportunity to apply their skills; states gain revenues.

The Patriot Express program guarantees up to $500,000 in business loans for a new or expanding business. The program offers benefits to National Guard, active duty military ready for retirement, reservists, veterans and spouses and children of deceased military veterans. For more information go to the SBA Patriot Express Program

However, leaders who refuse to admit when they are wrong, who delude themselves with self-justification and expect employees follow in blind faith, appear only arrogant and self-absorbed. These leaders soon find no one following, having lost all credibility with their previous followers by their refusal to admit when they are wrong.

Leaders can be so blinded by their need to be right that they see any evidence in a biased fashion, thereby confirming a wrong decision as being right. This is called cognitive dissonance and is something hard wired within us. In this case, followers see the wrong decision before their delusional leader. Depending on the time between followers recognizing the wrong decision and the leader finally admitting, the leader may lose a lot of loyalty and confidence of his followers.

While we can’t change the phenomena of cognitive dissonance – the wish to be right and therefore viewing evidence in a biased manner – we can recognize this malady in decision making and thereby more carefully review evidence. Leaders also need to listen to and encourage contrary opinions, evaluating the message rather than seeing it as an attack or lack of loyalty.

Resolve and commitment sometimes blind leaders. They resist a change in direction and guard against alternative ideas and evaluations. Good leaders admit when they are wrong, change direction and take responsibility. They earn far more loyalty and respect by simple admissions of being wrong without excuses or cover-up.

Authors Carol Tavris and Elliot Aronson explain cognitive dissonance in their book Mistakes Were Made but Not by Me, discussing how corporate America rewards positive results; mistakes demonstrate failure of results. This conditions leaders to avoid admitting mistakes and continue a failed course. Great leaders avoid this fallacy, knowing that trial and error makes better decision makers and accepting candid feedback often brings mistakes to the forefront before the business faces disastrous consequences.

Not so says the New York Times Business Section. A recent investment conference in Southern California attended by 1,000 investors demonstrates that investment money is readily available, especially for clean energy, environmental, communications, water treatment and biomedical companies. Of the 330 companies represented, 50 came from China.

Plenty of Venture Capital

Less competition encourages investors who seek small, dynamically growing companies hidden from the broader investment market. James W. Montgomery, Chairman of Montgomery & Company, saw the same enthusiasm at a technology conference held by his firm in Santa Monica, CA. Montgomery said “There is plenty of capital around because venture capital hasn’t been in the bubble mode in recent years like real estate and debt markets.” Montgomery also mentions that companies providing entertainment and services for cell phones do well right now because the communications industry is hot.

Venture Capitalists are not throwing money around by any means. Many still remember the years of the Dot Com Boom and the resulting bust that left venture capitalists holding the bag. But companies with reasonable valuations with the potential for a nice return in two to three years find small amounts of capital for investment. Internet start-ups usually fall within this category because they don’t require expensive plants and equipment.

Green is the “In” Color

“Green” companies such as those that convert contaminated water into drinkable water, solar energy companies also attract investment funding. Investors aren’t just oriented on California, even Chinese companies in the technology field find US capital. Those getting the nod from investors include everything from steel finishing products for appliances to lithium-ion batteries.

Investors also look to acquire operating companies with great earning potential. Large companies expend millions researching companies to acquire and operate. With the down turn in private equity funds who often bid prices up on their reign of buying everything in sight, other investors believe prices have become more reasonable.