Tuesday, June 28, 2016

Sunday, June 26, 2016

Don’t fall for this income double-counting trap when analyzing a small business


In the past month I’ve had two business-buying clients who’ve gotten caught in this trap. 

If you buy a business believing that the cash flow to the owner is $200K and in reality it’s only $100K, you’ll be in big trouble.

How does this happen? Watch the video here:  https://youtu.be/64KgCW9I0wo



In order to understand what is going on in a small business, a process of normalizing the income statement is necessary.

We need to understand the true benefit of ownership.  Sometimes, personal benefits are hidden in the expense lines.  For example: a restaurateur who takes personal groceries home from the business.  These items can add up substantially.

In the normal process of doing this, the analyst takes the net income and then starts ‘adding-back’ items to get a new normalized cash flow.  This cash flow figure is called the Seller’s Discretionary Earnings or SDE.  It is the total cash available to an owner of the business.

Small businesses are typically valued as a multiple of SDE.

Here’s the problem: sometimes owners don’t take a salary which would appear in the wages expense, they instead take dividends which happens on the balance sheet.

Net income from an income statement appears in the equity section of the balance sheet.  At the end of the year, it gets rolled into ‘retained earnings.’

So if a seller is taking dividends, it is removed from the equity section of the balance sheet.  If you add the dividends to net income, you are effectively double-counting the same dollars.

Don’t let it happen to you. 

Learn how to buy a business the right way and control risk.  Visit www.BusinessBuyerAdvantage.com to learn more.  If you want to engage my help, send me a message or call me at 506 381 8416.  I work with people all around the world.

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it.
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Do you live in Toronto?  I’ve got three workshops coming up for Toronto in September.  Early ticket pricing ends June 30.  http://davidbarnett.eventbrite.ca


Thanks and I’ll see you next time. 

Wednesday, June 22, 2016

Local Investing Course Discontinued June 30

How to do Small Local Investing Deals from A-Z will be discontinued as of June 30.

This course has been available for more than 12 months and it's going to be removed and re-formatted.  If you want to do this self-study program on your own, buy it today: www.LocalInvestingCourse.com

It will be replaced by an online academy program which will feature:
  • A semester schedule.
  • A private FaceBook group for students to communicate and learn from each other.
  • A moderated mastermind group for 4 months which will take you from your start to doing your first deal.
  • Lifetime membership to the graduates  group to help you keep in touch with other students who've gone through this process and are doing deals today.
The new program will require a larger investment.  If you are sensitive to price, you should buy the existing online self-study course which will no longer be available after June 30.  It features hours of video tutorials and is just like sitting in a class room.  Visit www.LocalInvestingCourse.com to learn more.

If you're interested in doing the new program, e-mail dbarnett@alpatlantic.com  and let me know.  I'll send you an early-registration offer when the new program is ready this summer.

Thanks

Dave

Sunday, June 19, 2016

Should you Sell Your Business to your Employee? Viewer Question - David C Barnett



Two weeks ago I was in Dartmouth, NS talking with the commercial loan officers of Atlantic Canada’s credit unions about business valuation.

At the end, I got a question from the floor about succession planning.  ‘Does it make sense to sell a business to an employee?,’ asked one of the attendees.

I know you’re going to hate this but, it depends.  Watch the full story in this video: https://youtu.be/ODZF3gTeETc



In well organized, maybe larger businesses, managers have well defined roles and responsibilities.  They manage their own business plan and make decisions about resources and employees.  It’s up to them to perform and they’re accountable for what happens.

This type of person may be able to transition into entrepreneurship.

In many smaller businesses which are ‘technician run,’ to borrow the terminology from Michael Gerber’s E-Myth book, it is not so easy.

These small business operators keep most of the strategic procedures and policies in their heads and ALL the responsibility.  Sometimes a long-time employee who is really great at handling a long list of complex TASKS is given the title of ‘manager.’  This doesn’t actually make them a manager.

I’ve been involved in two such successions and both buyers failed after about two years.  They were never the right candidate to weather the stress involved in business ownership. 

Most importantly, however, they didn’t have the drive and ambition.  If they did, why were they still working in someone else’s shadow for all those years?

Most business owners want to try to find a buyer on their own.  80% of small businesses are sold in the private market and mostly because owners don’t want to pay any type of commission to a broker.
So who do you look for when you need to find a buyer?

Try the ones who got away.  The good employees that you hated to lose because they knew the business and were really capable.  The ones who left because they wanted more.  These are the people with ambition.

If you want to learn more about how I help business owners sell their own business and avoid paying a commission, check out www.HowToSellMyOwnBusiness.com

There are plenty of FREE resources there to help you begin planning your transition out of your business.

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it.

If you would like to hear from me weekly before anyone else, you can sign yourself up in the form to the left of this post.  

Improve your business each and every day, download my FREE daily cheat sheet and hang it in your work area to keep yourself focused. https://gum.co/15Questions/FREE 

Do you live in Toronto?  I’ve got three workshops coming up for Toronto in September.  Book now to get early ticket pricing.  http://davidbarnett.eventbrite.ca

Thanks and I’ll see you next time. 

Wednesday, June 15, 2016

The Story of two ways to exit a company in the tech sector.

My friend Jim Flemming's latest e-mail contained this great story about two exits from tech companies.  I thought the story was so interesting that I would share.  I've seen my share of people who focus too much on sales over actually building value in their companies as well.

Back to you Jim......

Rich vs. Famous  

    Have you set a goal for your company this year? If you're like most business owners, you're striving for an increase in your annual sales. It's natural to want your company to be bigger because that's what everyone around us seems to celebrate.
 
    Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.
 
    Growth can come at a steep price and can even detract from your ability to build your personal wealth.
 
The Contrasting Exits of Michael Arrington
 
    For example, let's take a look at an entrepreneur named Michael Arrington. Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company's expansion.
 
    Achex was ultimately sold to First Data Corporation for $32 million in 2001. Unfortunately, because Arrington had been focused on growth above all else. He had raised two rounds of financing and also reduced his personal stake in the company down to next to nothing. As he told Business Insider, "When I started my first company,Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal."
 
    Arrington then went on to start the technology blogging website TechCrunch in 2005.This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.
 
    Apparently Arrington had learned his lesson....growth is good, but not at the expense of all else.
 
The Alternative to Growth at All Costs
 
    The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company's value, although your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company's value, and your personal wealth. For example:
  • You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
  • Selling your largest customer more products and services may be a relatively easy way to grow your top line, although if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because "Buyers" discount companies with too much "single customer" concentration.
  • Giving "lazy" customers 90 days to pay may keep them buying, although those charitable payment terms may detract from the value of your business because a "Buyer" will have to fund your working capital.
  • You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales although this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.
    Growth is important and how big your company can get is one of the eight drivers of your company's value. Growth is only one of eight factors....
 
To learn about the other seven, just click on this link to my website

Sunday, June 12, 2016

When does it make sense for a one-person business to hire its first employee? Viewer Question - David C Barnett



Being a one-man business can be tough.  There is never enough time to do everything.  When is the right time to make that first hire?  One of my viewers wants to know.  Watch my answer in this video: https://youtu.be/qZ_16gRcO00



I love this question because it’s all about perspective.  Here’s my two step process for determining if it is the right time to hire that first employee: 

First: rack every task you do all day long.  Every 15 minute block must be accounted for.

Second: Once you’ve got a week of data, go back and decide if each block was spent doing a $10, $100, $1000 or $10,000/hr task.  Use colours.

$10/hr task are the menial, simple tasks that don’t add much value.  Photocopying, running errands, etc.

$100/hr tasks are things like sales and customer service, maybe difficult technical work.

$1000/hr tasks are sales of big ticket items or project management of big ticket jobs.  Think of a $25,000 renovation.

$10,000/hr tasks involve long term planning and strategic decision making.  For example, ‘Should we add this new product?’  This decision could mean hundreds of thousands of dollars in sales per year.   It is definitely worth the time of an owner.

Now that you’ve colour-coded our time audit we can see how much time is being spent on each category of task. 

Let’s take a moment and re-phrase the question.  How can an entrepreneur afford to spend 25, 30, 40 or 50% of his time doing $10/hr tasks? 

Once you hire that first person, usually an assistant or some type, you can unload those tasks and make room for more of the higher-value tasks.  Probably this will be sales or customer service, asking for referrals, etc.  These are the things that bring in more revenue and are certainly worth your time to do until you can expand again to offload the next tier of tasks.

Leveraging the efforts of others is the single biggest advantage of being in business.  It’s what allows businesses to grow and create wealth for their owners. 

If you’re not going to get others to help take the low-value items off your schedule you don’t actually own a business, you own a job!

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it.

If you would like to hear from me weekly before anyone else, you can sign yourself up at the form to the left of this post.

Improve your business each and every day, download my FREE daily cheat sheet and hang it in your work area to keep yourself focused. https://gum.co/15Questions/FREE  

Do you live in Halifax or Toronto?  I’ve got two workshops coming up at the end of June in Halifax and three coming up for Toronto in September.  Book now to get early ticket pricing.  http://davidbarnett.eventbrite.ca

Thanks and I’ll see you next time.





Sunday, June 5, 2016

Robert Kiyosaki likes MLM systems. What about you Dave? Viewer Question - David C Barnett



I got an e-mail from one of my YouTube viewers.  AndrĂ© wrote and quoted Robert Kiyosaki.  Kiyosaki likes MLM programs because it can be an easy-to-start business that gives you the opportunity to learn how to sell.

I think selling is the most important skill an entrepreneur can have.  I do have some concerns, however, about MLM programs.

Back in the day, Mr. Ponzi created an ‘investment system’ where he paid early investors money from later investors in order to convince people that he could obtain stellar returns.  Bernie Madoff did the same thing a few years ago in New York City.

The big difference between a Ponzi scheme and an MLM program is supposed to be that an MLM is about selling goods.

Too often though, MLM programs require minimum order levels on a monthly basis in order to maintain ‘status.’  Without this special status, the participant loses out on goodies that can range from commission premiums to losing their ‘downline;’ the people they have recruited into the system.

Watch the video to hear a story of how I observed this happening in my own family at one time. https://youtu.be/hzSC5hJRWnA



Because of all these silly rules, and the fact that many MLM systems actually do focus on recruitment over sales, I don’t really like them.

Do you know what I DO like? Direct sales opportunities. 

When I was a teenager, I was a representative of Regal Greetings and Gifts.  I purchased catalogues and distributed them to my customers.  I then placed orders and the bigger the order, the higher my commission rate.  If I didn’t place an order then nothing happened.  No loss of magic jellybeans.

There are many such opportunities  out there and they have one big thing in common, you deal directly with the supply company or wholesaler.  There are no pyramids of recruiters all trying to shave a penny off your efforts.

So if you’re looking to get a small taste of entrepreneurship without quitting your day job, check out the internet for a direct sales opportunity.  I did it for years and it definitely helped me learn much needed skills at an early age.

Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it.

If you would like to hear from me weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com

Do you live in Halifax or Toronto?  I’ve got two workshops coming up at the end of June in Halifax and three coming up for Toronto in September.  Book now to get early ticket pricing.  http://davidbarnett.eventbrite.ca


Thanks and I’ll see you next time.