The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
I recently saw a fantastic Charlie Rose interview with Bill Gates and William Gates, Sr. They discuss vision, curiosity, capitalism and much more. It is a fascinating and inspiring conversation I am sure you will enjoy. For the full interview, go to www.charlierose.com; below is a preview of the interview. Also, be sure to read the new book Showing Up for Life by Bill Gates Sr.; it is a great window into the childhood of one of the great visionaries of our time.
It likely does not come as a surprise that business valuations have dropped dramatically since October 2008. Many owners are wondering how to assess their current value and how to plan for the future. Here are some current trend observations by American ValueMetrics Corp, which is a national business appraiser. Please remember that these are broad trends, like the tide, and that individual transactions may be waves upon the tide, either significantly higher or lower because the markets are currently very volatile.
The Size Premium has Disappeared. This phenomenon arose with the growth of private equity funds which were willing to pay a premium for small business acquisitions based upon easy credit with banks. Prior to the collapse, the typical multiplier of price/EBITDA on $1MM EBITDA was 7 to 8 X, where at about $200K EBITDA the multiplier was about 3.5 to 4.5 X. The size premium is now gone, and the trend for larger small businesses is to sell at the same multiplier as the smaller ones. ((Note: EBITDA = Earnings Before Interest, Taxes (Income) Depreciation and Amortization))
Price/EBITDA Multipliers themselves have Decreased. The multiplier for businesses in general has dropped by about 23% since October, 2008, -- meaning that the basic multipliers are now tending to range form 2.7 to 3.5 X EBITDA. This is likely due principally to the difficulty in financing acquisitions.
Demographic Trend. The outlook for the next 10-15 years is not promising. Aside from the turbulence caused by political and regulatory policies, there is an underlying demographic trend that is inescapable. The “baby boomer” generation has now reached the retirement age range – meaning that their propensity to consume is declining. And they account for about 70 million Americans. Economist Harry Dent (see www.hsdent.com) has studied this trend. His research shows that the proclivity for maximum consumption occurs at about age 45-50. This age cohort is in steep decline as the boomers enter their retirement years. This trend alone will likely generate a “permanent” decline of 25-30% in consumer sales over the next ten years or so until the echo-boom generation picks up a little speed.
Coming Decline in Consumer Spending. Easy credit is gone, and the personal net worth of those with real estate and securities investments has been roughly halved from its peak. Institutional borrowing is no longer a viable way to spend money you don’t have. So not only will there be fewer consumers in the coming years, they will have less buying power.
Increasing Job Losses. Actual people employed is currently declining by a staggering 8 million a year or more. It is expected to do so until the excess capacity of business is absorbed. This could take two or more years.
So What Should Business Owners Do? First of all, for those who are able to do so, eliminate leverage (debt) to the extent possible. Renegotiate everything you can – leases, vendor agreements, terms, etc. For those with cash it will be a lifetime opportunity to acquire weak over leveraged companies at distressed prices, and increase market share. Consolidations to increase efficiency and reach higher economies of scale will be beneficial. Remember, even with a decline in sales, of maybe 40%, there will still be 60% of business available. Companies which can survive will inherit these customers. The “Last Man Standing” strategy will likely be successful. More than ever, those who can provide goods and services at the lowest prices will be more successful.
Those who cannot escape their over leveraged position, and cannot sustain a positive cash flow, must redouble their efforts to reduce overhead or increase sales, or face bankruptcy. It is a good time to consider some assistance from qualified consultants to explore merger or consolidation possibilities.
For those who want a successful sale, it will be necessary to cure defects that would diminish marketability. Two of the common ones are lack of a management team (all executive control in the hands of the owner), and a poor marketing program. It is not essential to hire staff to perform these functions in house – it can be done quite cost effectively by contractors. Businesses that can be owned semi-passively, sell much better than those that don’t.
But remember, that the economy will not totally disappear, it will merely shrink. There will still be people buying luxury items, just not so many of them. Well-managed, low-leverage, companies will compete for this market.
The Leading Blog has a fantastic review by Michael McKinney of the new book Hit the Ground Running: A Manuel for New Leaders by Jason Jennings. Below is an excerpt of the post with a top ten list of rules to follow to hit the ground running. Check out the full post here.
Rule 1: Don’t Deceive Yourself—You Will Reap What You Sow Let the Golden Rule guide every decision. Richard Smucker says, “In matters of style, swim with the current but in matters of principle, stand like a rock.”
Rule 2: Gain Belief Leaders gain belief by being authentic and humble, getting rid of regal trappings, proving their worthiness, asking others for belief, and surrounding themselves with others who are also trusted. "I need everyone to respect and support one another and work with each other. Everything else is B.S." says Fred Eppinger of the Hanover Group.
Rule 3: Ask for Help Howard Lance CEO of Harris Corporation “has a keen sense of humor and doesn’t have a problem generating a laugh even at his own expense.” He says, “Sometimes you have to take the veneer and let people see you for who you really are and share a chuckle or two.” To “hit the ground running" requires that you admit that you don’t have all the answers and engaged the assistance of others when assuming new duties.
Rule 4: Find, Keep, and Grow the Right People Ronald Sargent’s strategy at Staples is to promote from within, move people around, identify rising stars, make everyone an owner, communicate with your workers and make diversity your priority. Promoting from within “creates a career culture that encourages people to stay longer and stretch their skills.”
Rule 5: See Through the Fog Pat Hassey, CEO of Allegheny Technologies told Jennings, “It’s the job of the CEO to see through the fog and to be a destination expert. People want to know where the company is headed, what their future holds, the opportunities that exist for them, and what their role is going to be. And they don’t want to wait forever to find those things out.” (See page 97 for Hassey’s well thought out Team Rules that all team members have to agree to part of a Hassey-led team.)
Rule 6: Drive a Stake in the Ground Jennings writes, "Driving stakes into the ground allows a leader to provide a clear vision about what the company is, where it’s headed, and how it’s going to get there so it can hit the ground running. But it isn’t for the faint of heart. Once you’ve driven a stake in the ground you have to talk about it and promote it relentlessly.” Mike McCallister, CEO of Humana says, “The problem with most businesses is that instead of driving a stake in the ground, they stick a toe in the water and when it gets hard or boring they start thinking about it too much, begin questioning their decision and pull their toe out, changing things, and starting all over again.”
Rule 7: Simplify Everything "Oversimplify everything! Sit down and ask, `If I could start with a blank sheet of paper today and create the best answer, what would I do?'" says Jeff Lorberbaum, CEO of Mohawk Industries.
Rule 8: Be Accountable “Setting a personal example of accountability is where many leaders fall short,” writes Jennings. “Instead of starting by being accountable themselves, they use the threat of accountability as a tool to drive others.”
Rule 9: Cultivate a Fierce Sense of Urgency Keith Rattie, CEO of Questar says, “You must have a sense of urgency—if one doesn’t exist, the CEO’s job is to create one. The mind-set needs to be ‘We’re not as good as we know we have to be.’” Rattie adds that it will be time for him to leave when he loses the “sense of urgency and the belief that we have to be better tomorrow than we are today… it’ll be time to get somebody else in the chair who will bring a new pair of eyes and fresh thinking to the job.”
Rule 10: Be a Fish Out of Water The CEOs interviewed don’t fit the typical picture of what a CEO should be. They have been described as “humble, authentic, accessible, highly ethical, compassionate listeners and truly, believable committed to doing the right thing for all stakeholders.”
America is full of small businesses, businesses like mom & pop grocery stores, printers, clothing stores, photo studios, computer repair shops, and restaurants. Many of these businesses are their customers' first choice when they shop because the customers know that those businesses always give their best. Those business owners also know how important their customers, and the repeat business and positive word-of-mouth advertising are to their success. Success will lead to growth of the business, which may have the unintended consequence of alienating those customers who made them so successful. Managing success and growth may be a business owner's greatest challenge. How fourteen companies managed their success and growth is the subject of Bo Burlingham's Small Giants: Companies That Choose to Be Great Instead of Big.
Burlingham, editor-at-large of Inc. Magazine, spoke with the heads of fourteen privately held companies for the book, some of them so famous that one would hardly guess that they are still privately held. He met with Fritz Maytag of San Francisco's Anchor Brewing, Ani DiFranco of Buffalo's Righteous Babe Records, and the founders of Ann Arbor's Zingerman's Community of Businesses, and Gary Anderson, co-founder of Clif Bar & Co. All of these multi-million dollar companies faced obstacles to growth at one time or another, but for them the answer was always found in putting quality before quantity. In many of the cases cited by Burlingham, growth was more of a problem than success. Company owners were often faced with the problem of diluting their product and reputation for the sake of meeting customer demand. They all chose to be the ultimate deciders of their fates.
I found this book to be quite inspiring. It encourages excellence in all that we do and reminds us that good relationships; whether personal or professional, with employees and customers are our greatest asset.
Affiliate marketing, is bringing about big changes between advertisers and media outlets, and between buyers and sellers. Usually, whether web based, print media or a broadcast, the advertiser pays a fee based on the number of readers, viewers, or visits to a site. The advertiser pays the fee no matter how many sales or inquiries the ad generates. This conventional form of advertising can cost a lot of money and produce little. At a time when longstanding newspapers and publications are going under, the affiliate marketing industry is thriving!
Affiliate marketing, changes the traditional equation drastically. The owner of one web site might be a “publisher,” just as the newspaper is a publisher. In affiliate marketing, owners of other web sites are the advertisers. Advertisers typically only pay a commission to the publisher when a visitor takes specific action by clicking a link or banner, resulting in an inquiry or sale. The advertisers try to solicit publishers rather than the publisher soliciting advertisers. The advertiser entices publishers by the amount of commission paid, popularity of the product or service advertised, and the rate of conversion. The conversion rate is the crucial; simply boils down to how many sales were brought in!
Affiliate marketing has worked for countless sites, if you feel this is right for you, take your time and thoroughly research the industry before beginning.