Category Archives: efficiency

Exit Planning

As we Exit 2016, Time to think of Exit Planning

Contrary to common belief, you have to start thinking of planning exiting your business several years in advance. And even if you do not want to exit the business for many years to come, we strongly advise business owners to think about exit planning.

Why?

One of the reasons you do this is to improve the way you run the business so that you can improve the value of your business. Even if you have no intention of selling, the steps that you take in running your business better have other benefits – It helps improve your cash flow, allows you to have more money in your pocket, and most importantly, it will give you more time for you and your family and decrease the stress of running the business.

How?

Value Builder Platform identified eight factors that influence the value of the business. One of the important factors is that you do not run your business using “Hub and Spoke” model. This model is very common in the airline industry where all the flights of an airline converge at one hub before going to their destinations. Whereas there is value for this in the airline industry, many entrepreneurs, and small business owners run their businesses so that they become the “hub”. Everyone comes to them for advice and sign-offs and all decisions, big and small, are made by them. By promoting other people in your organization to take up most of these responsibilities and building a management team. you become less important and you have less stress and more time.

For more on how Value Builder Platform can help you run your business better, please visit this page and take a 13-minute survey to get your Free Value Builder score.

Here is to a less stressful and more productive 2017!

Talk to you soon.

Yatin B. Thakore

Your Company’s Worth

Do You know How Much Your Company is Worth?

We usually keep tab of money in the bank, how much our stocks, bonds, and other investments are worth and how much our home and real estate investments are worth. And we know how much debt we are in – either from a mortgage, student loans, car loans or other loans. We use these numbers to calculate our net worth, and it helps us build a nest egg for retirement. However, strangely, many entrepreneurs have no idea of how much their business might be worth. Your business could be one of the biggest assets that you may have. It is an investment of time, labor, and your financial investments. Shouldn’t you know the value of your business and try to protect and grow its value just like your other assets?

You can hire a valuation expert or an M&A advisor/business broker to get some idea about the value of your business, or you can run some back of the envelope type of calculations to get a rough idea based on your financial performance. Very often, for small businesses with gross revenues under $5 million, you will see that the value is often 2-3 times discretionary earnings (DE, also known as seller’s discretionary cash flow) or 2.5-4 times adjusted EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). In many industries rules of thumb also calculate valuation based on a multiple of gross revenue (e.g. dentist practice is often said to be worth between 0.5-0.7 times revenue). However, for me, cash flow, either as DE or EBITDA is a better measure because a substantial revenue without profits does not do much.

Couple for valuation

If you are like entrepreneurs shown in this cartoon, who can go on a world cruise for a year, then I would say that you have probably done well – both from profiting from your business and running the business. You have put your business on auto-pilot so that you have a management team who can run the business with minimum involvement from you. As a business owner, you want to take yourself out of a situation where the business cannot run without you. As we teach in our Value Builder advisory practice, this is one of the eight key drivers for driving the value of your business (see here for the other seven).

As 2017 is just around the corner, I hope you too will more attention to your business and see how you can grow your investment in it by taking small steps to build value. Our Value Builder score is a quick way to know in 13 minutes of where you are in terms of improving your valuation.

From all of us at TechnologyPark.com, cheers for the new year!

Yatin Thakore

Inventory Blues – Is Excess inventory Weighing you Down?

Ideally, you want to have as little inventory on hand as possible in your business. Afterall keeping a lot of inventory, ties down your money. Having to keep a large amount of inventory on hand means that your money is sitting idle and not making money for you.

Large Inventory costs also affects the value of the business. If in addition to the business, if they have to also buy a large amount of inventory, their return on investment becomes smaller and you have a smaller pool of buyer.

However, some businesses are unique and they need to keep a large inventory. For example, if your business is built on buying very old cars, restoring them, and selling them for a fat profit, you will try and buy old cars whenever they become available, restore these and then sell them for a fat profit. And you may have several years of inventory sitting with you.

However, a typical buyer who is looking for buying your business based on cash flow, will not only have to pay for the value of the business based on the cash flow, but also buy the inventory which may not generate profit for some time, but still needs the inventory to generate profits.

In such cases, one may have to come with some creative ideas.

We came across a similar situation where this Company services and sells refurbished equipment of a very specialized make that is currently not manufactured and the owner was contemplating selling his business. Based on current sales, the Company had 3-4 years of inventory in stock. One of the ideas that we suggested to them was that the they would create a supply / management agreement with the buyer where they would supply the refurbished equipment to the buyer over a period of time, and build in a profit component in it. It will be somewhat similar to seller’s note but with higher return as he is also providing some service. Otherwise the buyer would have to pay over $2 million more for inventory for a business that is generating about $500K of earnings, and would be a difficult proposition.

Don’t be a Juggler!

A common occurrence in many small businesses is that the owner makes all of the important decisions. After starting and building the business, owners are afraid to relinquish control. They do not feel that the others are capable of running the business like they can. So you are constantly juggling various tasks and making every decision.

This is what we describe in the Value Builder System as “Hub and Spoke” system. You as the owner are the Hub and everyone else is the spoke. This can also happen if you are not the owner but a manager where you are making all the decisions.

But what happens when you, the Hub, are away? Things don’t get done. And as a result you have a hard time to get away from work. You may not have taken a vacation in years.

Not only this is stressful to you, it is also very inefficient and demoralizing for your employees (or those who work under you). And more importantly, this will drag your value down value. Research by the Value-Builder team has shown that businesses following the Hub-and-Spoke model, where owners are in control of most of the decisions, sell on an average of 2.92 times their pre-tax profit. However, the businesses where the owner is not significantly involved in day to day operation and has management team and employees empowered to make decisions and running day-to day operations, sell on an average of 4.54 times the pre-tax profit.

By making your business much less dependent on you, you can increase the value of your business by 55%! Not only that, you will have happier employees and less stress for you. You can now afford to take vacation.

But how do you do this? To start with, create operating manuals for your company. Write detailed procedures for everything that needs to be done. For each job function, you have a system or operating manual describing what needs to be done. Once you have these ready, train your employees to follow the processes and systems and give them the right tools. To quote Michael Gerber in E-Myth Revisited: “Organize around business functions, not people. Build systems within each business function. Let systems run the business and people run the systems. People come and go but the systems remain constant“. How does McDonald’s delivers the same burgers and same experience across thousands of outlets – they have the system and procedures nailed down.

Making yourself as a business owner (or manager) less important and having a system in place is just one of the eight value drivers that improves the overall valuation of your company. If you are curious about what is your score on this ValueBuilder scale, take this 13 minute survey.

So long for now.

Yatin

Achieving Work-Life Balance – Parkinson’s Law

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Sometimes Less is more. Less time for work that is.

Today, work-day often is 24×7 affair, particularly if you are running your own small business. You are always checking your emails, answering emails from your prospects or customers. Although you may be seemingly enjoying your weekend or vacation, it is often hard to get away from work completely.

I used to be that way too. But lately, I have found that getting away from work completely, say for weekends or on short vacations, actually rejuvenates you and make you more productive. And you get just as much done in the allotted time, if not more. Remember the famous Parkinson’s Law: “Work Expands to fill the available time for its completion”?

This statement, first made in 1955 by British author Cyril Parkinson for an article for “The Economist” is one of the most profound observation. So when you reclaim your personal time to be spent with family, friends, and on non-work things, you end up compressing the time available to finish the work and you manage to do it!

This past memorial day was amazing. Our two sons were back from college and with us for a few days. The week before my older “twin” boy (older by 7 minutes), declared that on Memorial Day, we were going to clean up both, our garage and basement. Our detached garage (which is actually used as a workshop and storage area) had become a complete mess – it was impossible to make your way from the front to the back). Basement had also piles of paper and stuff – things that we collect. So we had a three day deadline to clean up the mess that we created over past 10-15 years. Actually we got a late start on Saturday, but by 3 pm we had over half the stuff in the garage separated out as trash to be thrown out. And we discovered how great the “1-800-Got-Junk” was. While we were creating a giant pile in the driveway for a trash hauler, I was pleasantly surprised that I could book a time for Got-Junk people to come an haul away all the junk the same day in the 3-5 pm window! So with 3 pm deadline looming (which was just about 3-4 hours since we started our clean-up), we had to finish separating out the trash in just a few hours. And true to Parkinson’s law, we managed to do it. On Sunday, while my sons put up some organizers and shelves in garage and organized the tools and other stuff in the garage, me and my wife tackled the basement and got it completely cleaned and organized by Monday evening. One long weekend, two seemingly endless tasks, done very well and within the available time. One more victory for the Parkinson’s law.

Yes, with Teamwork, focused energy, and a hard deadline, we are capable of doing amazing things. But we are after-all humans – we need to be reminded of this often.

Do you find yourself procrastinating on things that must be done? Or always falling behind in your tasks? And always stressing out because things are not getting done? Or working all the time?

We needlessly stress out on things on our “To-do” Lists, make complicated plans, give our tasks unnecessarily long time lines and then put them off till the last minute because we fear tackling them.

Next time, just try these few simple things:

Enjoy your weekends and reclaim your personal time. Get unplugged from your laptop or cellphones and get plugged in to your family and friends and hobbies
Remember Parkinson’s law – You do have time to finish your tasks and goals. Give focused effort, compress your time-frame to get things done, rally your team members, and simplify your tasks and goals
And keep reminding yourself about Parkinson’s Law every time you try getting stressedI love Nike’s slogan – ‘Just do it’. Instead of endless planning, just plunge ahead and start tackling things you are putting off.