You’re Invited: Rob Slee presenting on Creating Value in Your Company

Call or e-mail Stephanie Johnson at (719) 579-9090 or sjohnson@biggskofford.com for more information or to reserve your seat!

How Can You Prepare to Exit Your Business | BiggsKofford’s Entrepreneurial Series

Last week at BiggsKofford’s monthly breakfast, Entrepreneurial Corner, Chris Blees, CPA, CM&AA, and Austin Buckett, ACA, CM&AA, presented on how to garnish the most value out of your business when the time for transition is right.

You can find the PowerPoint presentation here.

If you were unable to make the presentation or have questions about preparing to exit your business, please contact Chris Blees or Austin Buckett.

Interested in attending our future events? Contact Stephanie Johnson.

Cultivating Ideas within Your Organization

Every business once started out as an idea in someone’s mind. While that initial idea is the source of the business, it is the continual stream of ideas that keep a business vibrant and give it a sustainable competitive advantage, which is even more important in today’s environment than ever.

However, too often you hear people say “I don’t know what else we could do to improve this business” or “We have tried a lot of things, and we’ve found that what we do know is the only way for this business to operate properly.”

The main reason for this situation is not for a true lack of ideas but the fact that new ideas are most likely to be rejected that are considered. This is due to our thinking system, which is nurtured from birth, to prove the truth of existing ideas rather than change them.
To the extent that a new idea means we have to change our thinking, our natural inclination is to reject it because change is hard, possibly risky and implies that what we’ve been doing is wrong. There are many idea-destroying tactics that have been developed, including some of these common ones:

• Point out the main reasons a new idea won’t work rather than looking at the benefits of the idea first.
• Tell the proponent that they do not understand the broader issues of the business.
• Say that you have already tried it before, and it didn’t work, even if it was the execution that caused the idea to fail initially.
• Say that something has been done the same way for 50 years, and there is no reason to change it.

There are many more idea-destroying tactics that get deployed in businesses on a daily basis, but in order for a business to overcome these and give an opportunity to benefit from a continual stream of ideas, the business leaders need to develop a culture within the organization that challenges the status quo and continually seeks to improve processes.

It is important to remember that the ideas do not need to be big to make an impact on the business. In fact, there are very few big things that a business can do to make it more successful, but there are most likely many little things that could be improved. Yet small ideas are often overlooked precisely because they are small ideas and do not warrant doing anything about.

There is an opportunity for improvement in virtually every business process, but in most businesses there are several problems that prevent improvement:

People who are close to the improvement opportunity have no channel to communicate their suggestions, they don’t know how to make a suggestion, suggestions are killed early and there is no formal system for getting ideas into action.

To overcome these problems and create an environment that welcomes and makes the most of teams suggestions, businesses can incorporate some of the following ideas:

• Communicate to the organization that innovation is a priority.
• Challenge everyone in your organization to look for improvement in everything they do and talk about this at every opportunity.
• Eliminate the idea-destroying behavior and replace “can’t do” language with “can do, will do, help-me-do”.
• Create formalized opportunities for ideas to be heard. This could be accomplished through planned meetings between departments and/or creating a suggestion box for everyone to access.
• Praise and reward all ideas, not just good ones. Such as verbal recognition in team meetings, movie vouchers, team lunches, etc.
• Have senior team members’ work alongside their team and cross department teams to get a different perspective on processes.
• When evaluating ideas, force the person who does not like the idea to spend five minutes discussing the benefits of the idea and the person’s idea it is to spend five minutes discussing the negative aspects of the idea.
• Create a cross functional idea group that meet on a regular basis to discuss new ideas or issues that there areas are having.
• Ensure employee performance review feedback to incorporate a section for discussing ideas, especially at the management level.
• IMPLEMENT, IMPLEMENT, IMPLEMENT. Failure to perform this step will negate any efforts done above and kill innovation and team motivation. Therefore, there needs to be a formal process to convert an idea into an action.

Creating an environment that welcomes and listens to the ideas of the entire organization is not designed to create an atmosphere of unconditional empowerment. Ultimately the CEO and senior management need to make all the critical business decisions and clearly defined processes, responses and systems for approving, and implementing ideas will allow the team to feel empowered but know who is in control.

Austin is a manager at BiggsKofford, specializing in Mergers, Acquisitions and business consulting and a Principa Alliance member.

Capital Markets Update

As we began 2011, we took a look into a myriad of crystal balls, dealt tarot cards and spoke to many soothsayers to see if we could determine what the future holds for the coming year with regard to the private company capital markets for such things as raising capital, selling or buying a company.

Overall the expectations indicate that we should see a slight improvement in 2011 over 2010, which might not seem like a great story, but at least it’s a step in the right direction. Here are some of the expectations for 2011:

• Many of the surviving banks will be looking to increase their lending in 2011, as older loans have been paid down (or written down), and they have to put money to work. However, underwriting policies have not eased up, personal guarantees will be mandatory in most cases and banks are still very selective over the industries that they lend to (Yes, this means that land development loans are still not in available!).
• Interest rates are expected to rise by the end of 2011, although only by 0.5 percent during the year.
• Bank lending for business acquisitions has increased from the lows of 2009. This has mainly impacted the larger deals (>$50m in value),but these trends tend to flow down the food chain, so we expect there to be more availability to finance larger portions of smaller deals. This should result in a continued uptick in business valuations at the smaller end of the market, albeit a small uptick.
• Business valuations for companies in certain industries have already seen large increases. In particular, ‘hot’ industries that are likely to remain of interest in 2011 include telecom, technology, media, chemicals, energy and healthcare. Real estate, construction and agriculture remain towards the bottom of the list in terms of deal interest.
• Private business owners are optimistic about growth, with 79 percent of those surveyed expecting to see growth opportunities in 2011.

We certainly hope that 2011 is at least as good as expected, but only time will tell if these expectations were well grounded or dumbfounded. If you have questions about where the capital markets are going, please contact Austin Buckett.

Data used in this article comes from information and reports provided by GF Data Resources, LLC, Mergermarket and Pepperdine Private Capital Markets.

New Year’s Resolutions for Your Business

What is your New Year’s Resolution? About 40 percent of Americans will make a resolution this year, yet less than 20 percent of them will be successful. Despite the fact that most of us look to improve our surroundings, we have a very low success rate when it comes to identifying what those improvements are and acting upon them.

Unfortunately, the same trends seen on a personal level can be seen at the business level. Most businesses do not have a clear strategy or focus on where they want to be in the future and, as such, do not have goals established to get them there. For example, a common goal in business is to increase revenue (especially after the last few years), yet this type of goal setting has two main issues that usually prevent it from being maximized:

• First, it is not specific enough, so we don’t know what level of increase would be deemed a success or what specific steps we will take to achieve the goal.
• Second, it might not be aligned with our overall goal of increasing the value of our business. For example, we could win some new contracts but if they are unprofitable or a drain on our resources they could actually lessen our bottom line or have minimal impact despite significantly increased effort.

Another interesting statistic with regard to New Year’s Resolutions is that as people age, the likelihood of them setting resolutions decreases. The thought being that over time people get disenchanted with this process, as the success rate is low. However, the success rate is a function of poor implementation, rather than the goals themselves. If we can improve the way we set goals, then we can improve the likelihood of success and ultimately increase our chances of meeting our goals rather than leaving it to chance.

Before setting any goals, it is important to set your overriding goal first and then ensure all other goals are aligned. For example, if your primary goal with your business is to sell it when you reach 60 years and retire, then maybe buying a new facility when you are 56 is not a good goal. You would likely not own the new facility long enough for it to create significant value, and your resources might be best served being invested in other areas. Alternative goals that would be appropriate would be to determine who you would most likely sell to when you do sell, what value a buyer might place on your business in its current form and what parts of the business should you focus on over the next four years to increase its value the most.

Once you have an overall goal established, keep these three things in mind with all other goals and your chances of success will greatly improve:

1. Ensure your goals are achievable. Setting goals too high can be demoralizing for your team if they have a very low percentage chance of actually happening. Setting goals that can be a stretch but have a good chance at being exceeded if the stars align can give everyone the right amount of motivation to work towards them.
2. Be specific. Once you have determined your goals, start creating a plan around how to achieve them. For example, if you goal is to increase your revenue in 2011, you will need to determine specific targets to aim for over the course of the year: what type of clients you will want to win, how to increase revenue from and what your marketing plan will need to look like in order to achieve these specific revenue goals.
3. Be flexible. Don’t lose sight of your original goals during the year. Monitor your progress throughout the year on a regular basis. If situations have changed or things aren’t working out as quickly or as well as you had predicted, feel free to adjust your goals rather than abandoning them once they look out of reach.

If you have questions about how to move your business to the next strategic level, please contact Austin Buckett.

Do you know the value of your business?

What color of car would you rather buy? Based on your personal preference, the answer to this question will affect how much you are willing to pay for a vehicle that is identical in all aspects other than color. You might ask what does this have to do with the Market Value of your business? Simply put, traditional valuation techniques generally ignore one important factor in their calculation, the buyer.

A traditional valuation certainly has its uses, particularly for IRS and litigation cases, such as determining value for a divorce settlement. However, they usually all assume a willing buyer exists and that this buyer doesn’t have any personal preferences outside of the normal industry standards.

Let’s go back to the car example, assuming a dealer has two used cars that are the same make, model, year, etc., but one is blue and the other is silver. They will almost certainly be priced exactly the same. However, if your preference is for a blue car, you would no doubt buy the blue car. In fact, the dealer would have to discount the silver car for you to consider that as an option. Therefore, your preference has effectively determined a higher value for the blue car over the silver one, despite the market suggesting that they are both worth the same.

So how do you apply this logic to the value of your business? If you’re thinking about selling your business sometime in the future, you probably have no idea of who will buy it and what their preferences are, so what can you do now to position your company to maximize value from an exit, and where do you start?

In terms of business acquisitions, there are generally two main buyer groups, each with very different views of what is important to them. These groups consist of financial and strategic buyers. Financial buyers generally consist of individuals or groups of individuals looking to invest in a business, whereas a strategic buyer is normally a company looking to add to its existing operations.

As an example, assume that after some initial research, you determine that the most logical and likely buyer type is a strategic buyer. You determine, based on other acquisitions in your industry, that the primary focus of most buyers is the quality of the customer base being acquired, rather than say the management team, who will most likely be surplus to requirements after the deal. Therefore, if the last five years have been spent investing and training a good management team these efforts could be ignored by the buyer who will discount this aspect of the business. However, if those efforts had been channeled into increasing and maintaining quality customers over the same time frame, the buyer would most likely pay a higher price for the business.

The above example highlights the impact of focusing attention on the right aspects, which we call Value Drivers, of the business to make it the most attractive to likely buyers when it comes time to sell in the future. Value Drivers can include, among other things:

• Customer Base
• Management Team
• Products & Services
• Competitive Advantages
• Location
• Quality of Financial Reports
• Financial Performance

While you can control and manage most of the value drivers of your business, other aspects specific to a buyer will also determine the potential value that they can justify paying, including:

• Risk Tolerance
• Required Rate of Return on Investment
• Ratio of Equity and Debt used to purchase the business
• Cost of Debt

The impact of these factors is not possible to plan for but is buyer specific and will result in different values being placed on exactly the same business by different buyers. They should be considered when negotiating an actual sale with actual buyers.

In order to position your business to maximize value when the time is right, we recommend going through the following exercises:

1. Undertake a market analysis of who is buying similar businesses to determine the most likely buyer type for your business.
2. Review recent transactions to determine what values are being achieved.
3. If possible, contact ‘typical’ buyers anonymously to understand the value drivers they are primarily looking for in an acquisition target.
4. Understand the level and source of debt that could reasonably be secured to finance an acquisition of your business so that you can estimate the likely ratio of debt and equity.
5. Perform a strategic planning session for your business to ensure the long term goals of the Company are focused on growing the right value drivers based on your analysis above.
6. Create Key Performance Indicators in order to track specific value drivers on a monthly basis and include as part of your monthly financial package to ensure efforts are maintained over time.
7. Review the process on an annual basis to ensure any changes in buyer types and value drivers are known and addressed in a timely manner.

If you have questions about knowing the value of your business, please contact Austin Buckett.

Benchmarking – Can It Help Your Business?

Many business owners think benchmarking is for big or troubled companies. But no company, regardless of size and performance, can afford to ignore it. In today’s changing business environment and economy, it’s hard to keep up with your competitors, and benchmarking allows companies to compare their productivity and efficiency to other businesses.

Two Types of Benchmarking

The first step in a benchmarking program is to understand what benchmarking is. Most of us know that it is the process of comparing your own company to others to identify areas in which you can improve your performance. However, there are at least two principal types of benchmarking: overall benchmarking and process benchmarking. Overall benchmarking looks at business performance in general, such as total return on capital.

It’s important to do both types of benchmarking. Overall benchmarking may tell you that you need to improve, but without process benchmarking you may not know how or where to improve. Overall improvements cannot be made without improving key processes.

Choosing Models

The second step in the benchmarking process is to choose the company or companies you want to benchmark. Many companies assume that they should benchmark within their own industries. Often, this assumption is correct. If you are below average, it’s a good idea to learn how to meet your industry average, and to do that you need to benchmark other companies in your industry. But if you want to excel, to become superior to your peers, you should look outside your industry for ideas. Motorola, for example, benchmarked L.L. Bean when it wanted to improve its order shipping process.

Where can you find benchmarking data? Most experts agree that within the industry, you should contact key executives such as vendors, trade associations, competitors, former employees and customers for suggestions. You should also obtain analyst reports, proxy and financial statements and 10Ks from industry competitors. Outside the industry, it would be best to obtain annual reports from publicly traded companies and investigate private firms in publications such as Ward’s Business Directory or Dun & Bradstreet.

Setting Benchmarks

The third step in the process is to identify benchmarks. What do you want to compare? This is the most complex stage of the benchmarking process.

It’s critical that the benchmarks you choose reinforce the company’s strategy. If you want to offer the best price, you must set benchmarks that are different from a company that focuses on total customer satisfaction. For example, Nordstrom benchmarks would be very different from K-Mart’s benchmarks.

To choose proper benchmarks, keep in mind the stakeholder categories of any business: customers, employees, vendors and shareholders. Determine which of these relationships you are trying to improve upon with your primary goal, but keep in mind that they’re all related. For example, if you try to improve customer satisfaction, you should also ensure you maintain sufficient returns for your shareholders. A complex set of relationships needs to be balanced.

Comparing Data

After you have determined who and what you want to benchmark, you can begin the benchmarking process. Although the process involves the close scrutiny of another company’s methods, taking a tour of another company’s plant to learn how it works isn’t enough. You’ll also need to scrutinize the other company’s business goals, operations and finances.

Your accounting firm can help in these areas. Some companies prefer that their accounting firm focuses only on financial benchmarking, but this often provides inadequate information. Many companies work with their CPA firms to design a “Balanced Scorecard”. A Balanced Scorecard brings both financial and nonfinancial measures clearly into view. It measures traditional financial data like total return, inventory turnover and margin. It also measures nonfinancial data, like market share, relative quality and employee satisfaction.

Take Action

The final and critical step is to make changes based on the benchmarking process. All too often, companies go through the benchmarking exercise but don’t take the actions needed to improve or give up when improvement is not seen fast enough. Benchmarking, however, is not the only analysis companies should make; it’s simply one element of a comprehensive improvement program.

If you have questions about how your company could benefit from benchmarking, please contact Austin Buckett.

Need help with your business loan?

Recently the Colorado Springs Business Journal published an article entitled “Delinquent loans hurting local banks”, giving a good perspective of what businesses and banks are facing alike when it comes to financing in this economy.

If your business is facing any of these issues:

• You can’t renew your line of credit.
• Your loan has a balloon payment, but the bank won’t extend.
• You have an opportunity to expand your business, but you can’t get the financing.
• What are you to do to keep your business afloat?

BiggsKofford has developed solutions:

• We can help you develop, plan and present your financial story for lenders and capital sources.
• We have successfully placed clients with new lenders, when others have turned them down.
• We have identified alternative capital sources – when traditional lenders won’t do the deal.

For more information on how BiggsKofford can help, contact Chris Blees or Austin Buckett. You can also find more information on capital sources here.

Four Ways to Grow Your Business

It wasn’t long ago when it seemed that the answer to every business challenge was to “get out and sell more”. Now, business owners are scrutinizing their operations for ways to squeeze out every last drop of profitability. This is a healthy exercise for any economy to undergo and the surviving businesses tend to emerge from difficult times as leaner, more disciplined enterprises poised to take advantage of every opportunity as the general market conditions improve. Let’s look at four ways to increase your profitability and grow your business.

Increase Average Price

The classic example of increasing prices was when Starbucks turned the 25 cent cup of coffee into a $3.50 specialty drink. Part of their success was with branding and perception, which can both be powerful tools for increasing your prices as well. Do your customers treat you as a low-cost provider in your industry? How can you change that mindset? One of the best ways to overcome the customers’ arguments to paying a higher price is with value-added services. While “value-add” is tossed around an awful lot these days as a buzzword for consultants and marketing spinsters, savvy entrepreneurs develop ancillary services around their core products to differentiate themselves from their competition and justify higher average prices. Whether your barista takes an extra few seconds to smile and ask about your day or your key supplier includes your marketing on their website, these services set their businesses apart and keep you happy paying a higher average price because you actually receive more value. Do the same for your customers to increase your profitability.

Increase Average Transaction Quantity

Assuming your products and services generate more revenue than they cost to produce, increasing the quantity each customer purchases also increases the average sale and is another way to improve profitability. Offering discounts at certain volumes is a great way to convince your customers to buy in bulk. A small discount at 5,000 units and a larger discount at 10,000 trains them to think in bigger numbers and to find ways to use more of your products. Choosing your discount carefully will ensure you improve your profitability at the higher volumes.

Increase Number of Transactions

Once your average transaction value is where you want it to be, increasing the number of transactions is your next challenge. Marketing is the key here, both to your existing customers and to potential new customers. Highlight your value-added services, find your target market and get in front of them consistently, sell, sell, sell. Customer loyalty cards are often a great tool to increase the number of times your existing customers purchase. If they only need three more purchases to “get one free”, the motivation is strong to keep buying.

Reduce Costs

Cost reduction tends to be the default for business owners when pressed to increase profitability and most businesses are ripe with opportunities to streamline operations. Costs generally fall into three categories:

Reduce Average Cost of Goods Sold

Cost of Goods Sold consists of those expenses that vary directly with the volume of revenue generated. Gross Profit equals Sales minus Cost of Goods Sold and is the revenue left over to cover selling and administrative functions and to pay yourself. Reduce variable expenses with improved engineering, outsourced manufacturing, less expensive materials and streamlined delivery.

Identify and Reduce Direct Costs

Direct Costs are those overheads that can be easily traced to a revenue generating activity but not always to a specific unit of product. Examples are advertising, sales salaries, and location-specific overhead in a business with multiple locations. The important thing to remember when reducing direct costs is that these costs generate revenue. Cutting advertising to save a dollar today can come back to haunt your business in the form of reduced sales tomorrow.

Reduce Overhead

Overhead is that administrative function that is necessary for running a business but not tied to revenue in any way. These are expenses such as rent on corporate headquarters, administrative salaries, insurance, attorney fees, etc. Reducing your overhead is only limited by your imagination, frugality, ability to maintain compliant and risk tolerance. Perhaps you don’t really need a full-time CFO and can outsource that function to your CPA; you find your IT administration can be handled more efficiently by a third-party; or your insurance agent can restructure your policy to provide coverage targeted to your specific risks at a lower cost. Savings in overhead generally roll directly to your bottom line to improve profitability.

There are many other ways to grow your business during tough times, so keep working on your business and thinking forward. When the economy booms again, your business will be well structured to maximize all of the opportunities to grow and profit.

Need Capital? | BiggsKofford’s Entrepreneurial Series

BiggsKofford’s Entrepreneurial Corner for March 18, 2010 covered the topic of raising capital and how to handle your bank calling your loan or line of credit.

Presented by:
Chris Blees, CPA, CM&AA, CEO of BiggsKofford
Austin Buckett, ACA, CM&AA, Manager at BiggsKofford

A copy of the presentation can be found here:
BiggsKofford, P.C. Entrepreneurial Series March 18, 2010

If you are interested in attending or sponsoring a future Entrepreneurial Corner, please contact Stephanie Johnson at 719-579-9090.