Some people are lucky enough, connected enough, or occasionally, sometimes against all odds, clever enough, to make it to the Board of Directors of the company with whom they have worked in and for.
They probably, unless they are a ‘junior member’ of the Board and still expected to eat their ‘butties’ (sandwiches) at their desk, ( an atrocious ‘New Yorkism’ which unfortunately seems to have become a precedent in many companies worldwide), get a pretty decent spot of lunch.
Many companies in the City of London run their own “in-house” catering for very good reasons. Trading information about what the particular company or law-firm, insurance broker or shipping agent, stock–market or commodity trader is doing can only be discussed in private, and the monetary size of the involvement prevents the parties to any potential deal, perhaps negotiated over days, ‘entering the public domain’, particularly public restaurants.
This is where discrete, competent, corporate caterers enter the scene. They are there to ensure the perfect atmosphere for business discussions to continue over a delicious lunch. There should be no break in the briskness of trade, but at the same time, a little bit of time taken to savour the delicacies that have, without your noticing, arrived in front of you.
The truly good corporate caterer in these circumstances can make the difference between the company making millions or not. It is a very special function.
Unobtrusive to an incredible degree, the expert chef and his one or two assistants, who also act as waiters/sou-chefs/barman or lady/ will conjure-up from their little rabbit-hutch of a ‘galley’ the most truly amazing food. They have been to the very best markets during the morning to get the very best produce for their dishes. They have marinated, prepared and pre-cooked these commodities and ensured their delicacy.
Without noticing it, the visiting businessmen pick up a canapé of fresh froi-gras to go with their Chablis, try another very nice smoked-salmon and mascarpone offering, munch through a bit of caviar with blinis, and instinctively reach for the ice-cold vodka…. And they are all hooked!
Talk of business takes a second place to the orafractory pleasure they are receiving. Now you have them really starving they are pretty much at your mercy, particularly if the caviar and vodka keeps coming.
“Well, if we can sign this contract now, with your agreement of course, we can have a ‘bit-of-lunch’. The smells of fabulous food have been wafting through from the ‘galley’ for a while. Everyone is ravenous. The pens come out and you can at last get the correct marks on the appropriate pieces of paper and make your ‘significant profit’ on the deal.
Your foreign guests will probably demolish everything put in front of them (your corporate caterers having read all about their culinary requirements well in advance), and depart in a, possibly, orderly-ish manner, to their waiting car, secreted by the Chairman’s private lift, to avoid any alcoholic ‘embarrassment’ of your guests to your staff.
Your company has not only made very good friends, but has made shed-loads of money from the care and attention that your corporate caterers have paid to your guests. They may have to do the same tomorrow for the Arabs or the Japanese or the Sri Lankan gentlemen, so you make sure they are ‘very adequately provided for financially’.
To be a good corporate caterer you have to want to please at any given function. The rewards, if you are any good at it, can be tremendous.
Thursday, January 3, 2008
eCommerce Fundamentals
eCommerce can be VERY complex. To offer a world class customer experience, retailers must incorporate technologies and functionality that exceeds rising customer expectations.
On the flip side however, site fundamentals still play a very large role in converting visitors into customers. Many retailers surprisingly lose sight of these site basics and leave significant sales on the table. This brief examines 4 quick “fundamentals” every eCommerce manager cannot afford to lose sight of.
Think Fast
Speed has become less of a problem due to the penetration of broadband, but don’t forget that a significant number of people still shop by a dialup connection. When creating a site framework, designers and e-commerce teams should ensure that the site is developed with pages loading in less than 9 seconds (over a dial-up connection).
Our recommended page size is within 60-70k in bytes. At that amount, sites will likely load within the maximum wait time of 9 seconds. Online retailers should avoid flash at all costs within their transactional site. Flash’s artistic aspects may help you establish a brand presence – but it will likely lose potential customers before they have even searched within your store.
Image is important
Images are a very important aspect of selling online and are often neglected. All product images should be of the highest resolution possible, be much larger than the product page original, and have
multiple views. Dynamic imaging capabilities can improve the user experience to an even higher level by increasing interactivity (zoom & rotate). At a minimum – retailers should have at least two additional views outside of the product page image to help build emotion.
Be my guest
Shoppers do not like being forced to do anything, especially when they are ready to open their wallets. Forcing a shopper to register on your site before purchasing is a sure way to drive a portion of your traffic to your competitors. Too often, shoppers do not have the time or the inclination to fill out a lengthy form explaining what types of information they desire.
Always offer the ability to checkout as a guest. You will see less customer leakage within the checkout process and can still offer the option to register when the sale is completed.
Make sure it’s “above the fold”
Your homepage is the most important page within your eCommerce store. It sets the initial tone for the shopping experience and offers your best promotions and products to your visitors. Users typically visually scan a web page from top to bottom and then from left to right. All critical content and navigation options should be obvious to the shopper without having to scroll down. If you have your best promotions “below the fold” – you can bet that a large percentage of browsers are not scrolling down to see it.
On the flip side however, site fundamentals still play a very large role in converting visitors into customers. Many retailers surprisingly lose sight of these site basics and leave significant sales on the table. This brief examines 4 quick “fundamentals” every eCommerce manager cannot afford to lose sight of.
Think Fast
Speed has become less of a problem due to the penetration of broadband, but don’t forget that a significant number of people still shop by a dialup connection. When creating a site framework, designers and e-commerce teams should ensure that the site is developed with pages loading in less than 9 seconds (over a dial-up connection).
Our recommended page size is within 60-70k in bytes. At that amount, sites will likely load within the maximum wait time of 9 seconds. Online retailers should avoid flash at all costs within their transactional site. Flash’s artistic aspects may help you establish a brand presence – but it will likely lose potential customers before they have even searched within your store.
Image is important
Images are a very important aspect of selling online and are often neglected. All product images should be of the highest resolution possible, be much larger than the product page original, and have
multiple views. Dynamic imaging capabilities can improve the user experience to an even higher level by increasing interactivity (zoom & rotate). At a minimum – retailers should have at least two additional views outside of the product page image to help build emotion.
Be my guest
Shoppers do not like being forced to do anything, especially when they are ready to open their wallets. Forcing a shopper to register on your site before purchasing is a sure way to drive a portion of your traffic to your competitors. Too often, shoppers do not have the time or the inclination to fill out a lengthy form explaining what types of information they desire.
Always offer the ability to checkout as a guest. You will see less customer leakage within the checkout process and can still offer the option to register when the sale is completed.
Make sure it’s “above the fold”
Your homepage is the most important page within your eCommerce store. It sets the initial tone for the shopping experience and offers your best promotions and products to your visitors. Users typically visually scan a web page from top to bottom and then from left to right. All critical content and navigation options should be obvious to the shopper without having to scroll down. If you have your best promotions “below the fold” – you can bet that a large percentage of browsers are not scrolling down to see it.
Corporate Social Responsibility Corporate Social Responsibility
With the increasing number of scandals occurring in the U.S., companies are trying to establish trust with their stockholders and customers through corporate social responsibility. In the history of corporate social responsibility, there have been many models developed in an attempt to classify corporate responses to social issues. In the early stages it was argued that a company’s main goal should be to gain legitimacy in society through different strategic approaches. This model had three ways in which a company responds to social issues. The first is social obligation, in which companies only respond to the legal requirements. This is below the standards of society. The second level is social responsibility which refers to the company acting at society’s standards. The final level is social responsiveness which is the company exceeding society’s standards.
The next step in corporate social responsibility is a three-dimensional outline for corporate performance.
The first dimension of corporate social responsibility deals with motivation for socially responsible activities, mainly economic, legal, discretional and ethical activities. The second dimension deals with societies’ concerns, like environmental and product safety issues. The third and final dimension has to do with the range of the different levels of response, going from doing nothing, to going above and beyond everyone’s expectations. These two models show the degree to which a company is committed to being socially responsible.
Companies are beginning to notice the benefits of corporate social responsibility. An Interactive poll showed that 79 percent of Americans take corporate citizenship into account when deciding whether to buy a particular company’s product.” This shows just how important it is for companies to be concerned about how society views their company. If society learns about a scandal within the company, they will lose trust in the company and might purchase a competitors product. However if they keep high standards they will gain loyalty with their customers.
An overwhelming percentage of company executives believe that the development of a corporate social responsibility plan will lead to an increase in business benefits but a heavily debated issue is if there really is a relationship between corporate social responsibility and a company’s financial performance.
A socially responsible company can gain access to extra capital through investment capital. Many investors take notice if a company is socially responsible and are more likely to invest in a socially responsible company. Socially responsible investing is one of the most dynamic and rapidly growing areas in the financial world.
By keeping an eye on the trends within society, one can build the trust and loyalty needed to ensure a bright sustainable future.
The next step in corporate social responsibility is a three-dimensional outline for corporate performance.
The first dimension of corporate social responsibility deals with motivation for socially responsible activities, mainly economic, legal, discretional and ethical activities. The second dimension deals with societies’ concerns, like environmental and product safety issues. The third and final dimension has to do with the range of the different levels of response, going from doing nothing, to going above and beyond everyone’s expectations. These two models show the degree to which a company is committed to being socially responsible.
Companies are beginning to notice the benefits of corporate social responsibility. An Interactive poll showed that 79 percent of Americans take corporate citizenship into account when deciding whether to buy a particular company’s product.” This shows just how important it is for companies to be concerned about how society views their company. If society learns about a scandal within the company, they will lose trust in the company and might purchase a competitors product. However if they keep high standards they will gain loyalty with their customers.
An overwhelming percentage of company executives believe that the development of a corporate social responsibility plan will lead to an increase in business benefits but a heavily debated issue is if there really is a relationship between corporate social responsibility and a company’s financial performance.
A socially responsible company can gain access to extra capital through investment capital. Many investors take notice if a company is socially responsible and are more likely to invest in a socially responsible company. Socially responsible investing is one of the most dynamic and rapidly growing areas in the financial world.
By keeping an eye on the trends within society, one can build the trust and loyalty needed to ensure a bright sustainable future.
Sanity Check - Buying a Business
In the business broker community there is a review process that helps a buyer determine if a business purchase makes sense or not. This check can be done by a Fortune 500 company where everything is figured down to the penny and takes 1000 hours of research or it can be done by a small main street shop buyer who figures it out in 1 hour. Each item in this review process requires a decision. This decision can be based on extensive research or just on a reasonable guess.
The beauty of this process is; how long you want to spend on doing this activity is totally up to you. As we review this process, I will explain the variables of this system so you can make the necessary decisions where needed. Remember, this is only a tool to help you make decisions about a business purchase; it is not a sure-fire foolproof system. I will just lay it out for you and you make your own decision as to the validity of this formula for analyzing a business purchase that you may want to make.
The Sanity check requires two mathematical formulas, which require dollar amounts or other numbers to be entered in each formula. The math is calculated and then the results are compared against the purchase price. If it doesn’t work out the way you wanted, you have the option of then going back and change some of the numbers and do the calculation a second time.
The two formulas are:
1. SP + WC – BF = CR
Sale Price + Working Capital - Borrowed Funds = Cash Requirement
2. SDE – FMW (FO) – DS - ROI = Extra Profit/Loss
Sellers Discretionary Earnings - Fair Market Wage (for the owner) - Debt Service - Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) = Extra Profit/Loss
Since each item in the formula needs to have a dollar amount determined, we will define the terms and then discuss how the dollar amount is derived at.
Terms Definition:
Sale Price: The price that is being asked for the business or the price the buyer is thinking of offering. Depending on when you do this analysis. If you are trying to determine an asking price you would calculate all the other numbers in these two formulas to determine what should be your offering price. We will do examples to make this clear later in this article.
Working Capital: The short-term assets minus the short-term liabilities is the accounting definition. The simple explanation would be the amount of money necessary to be invested by the buyer to run the daily operations of the business, once purchased. This would include monies tied up in inventory, and accounts receivables. Money invested to pay the landlord’s or utility company’s deposits. Also included is the money spent on the business purchase to cover the loan origination costs and purchase escrow fees when buying the business. It is the total funds invested into the business to keep it running. The down payment given to the seller is not part of this number, since it is included as a separate item.
Calculation notes:
1. Cost of inventory: $_________________ (+)
2. Accounts receivable: $_________________ (+)
3. Landlord deposit: $_________________ (+)
4. Utility Deposits: $_________________ (+)
5. Escrow fees to purchase: $_________________ (+)
6. Loan origination costs: $_________________ (+)
7. Short term liabilities* $ _________________ (--)
Total Working Capital $_________________
* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.
Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.
Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.
Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.
Calculation notes:
1. Taxable profit from operation $_________________ (+)
2. Cash $_________________ (+)
3. Owners Salary $_________________ (+)
4. Salaries of non-working family members $_________________ (+)
5. Amount over the fair market value of wages
of working Family members $_________________ (+)
6. Family Auto Expenses $_________________ (+)
7. Family Telephone Expense $_________________ (+)
8. Family Office Expense $_________________ (+)
9. Health and Life insurance of
Any/all family members $_________________ (+)
10. Pension plan/profit share family members $_________________ (+)
Total Seller Discretionary Earnings: $_________________
Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and insert this number as .20 amount to represent 20% or .06 to represent 6% ROI. This is an annual return on invested money.
Once you have a percentage return on your investment we need to multiply it by the Cash requirement in order to come up with a dollar amount return needed. This restated is Dollars invested x percentage (stated as a decimal) = Dollar return on investment.
Examples:
1) Investment of $50,000.00 @ 6% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .06 = $3,000.000 (Dollars return on investment)
2) Investment of $50,000.00 @ 20% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .20 = $10,000.00 (Dollars return on investment)
Debt Service: The reason we need this number is because this is a financial expense of owning a business. It is not an operating expense of the daily business operations but if you have debt, in your business, you must be able to make the payments, out of the business operations profit. Usually this payment is mostly interest and a smaller portion is the principal reduction of the loan balance.
Most professionals deduct the whole payment when doing this analysis, because the business must generate enough profit to make the whole payment. My personal preference is to just deduct the interest portion and to add the principal portion of the payment to working capital amount needed. This counts as more money being put into the business just like financing inventory and/or accounts receivables.
For simple one-hour analyses it is not worth splitting up the payment. In the case of a very large principal reduction payment it could be unreasonable to not split it up. It is up to you. You can always try it both ways, since this is a process to raise your understanding, not to come up with a fixed answer of, yes! it is a buy or no! it is not a buy.
Fair Market Wages: This is an amount that the new or old owner would be paid, if he were an employee not the owner. If the owner were the company salesman and also the company bookkeeper working a total 60 hours a week, a reasonable salary would have to be determined for each job. As an example only, lets say that an outside salesman, in your industry, could make $40,000 per year. And a bookkeeper usually charges $15 per hour. The salesman might very well work 50 hours at this job to earn this salary. If a bookkeeper would work 10 hours per week doing the bookkeeping that would mean 520 hours per year (10 hours x 52) times $15.00 per hour which comes to $7800 per year for the bookkeeper. The two Fair Market Salaries would come to $47,800 ($40,000 + $7,800).
Sometimes the market salaries are not so easy to figure. Lets take an owner who owns a 99-cent discount type store. This shopkeeper works 70 hours per week behind a counter in the store. You can hire a counter person for $7.00 per hour so this becomes (70 hrs x $7.00 per hour x 52 weeks).
Then you start discussing that this $7.00 per hour counter person would not be able to do the buying. You might want to figure a purchasing agent's salary. This can be done or you can just do simple numbers, leaving the salary only based on a counter person’s wages.
DOING THE MATH
By now you have the information to come up with numbers to put into the formula. Let us create a scenario. This was a transmission shop. The customers pay COD-upon pick up of the car. The parts inventory is from old transmissions and show on the books as worth nothing. The seller-owner is asking $75,000 for this business that he is able to takes out $50,000 in profit or benefits. In an interview, the owner mentioned that if a buyer will put $40,000 as a down payment he would carry the $35,000 balance at 5% interest for 5 years. By observation, we can see that the current owner sits in the office and does the bookkeeping, orders parts and makes bank deposits. He has a manager who bids jobs and handles production. No one is going out and calling on prospective business, which is one thing the owner should be doing with his time, but he is not doing. Lets go through what the numbers are with this example.
Math Formula #1: Sale Price + Working Capital - Borrowed Funds = Cash Requirement
Sales Price: $75,000
Working Capital: The business requires $10,000 cash infusion upon close of escrow, mostly to pay the landlords deposits and start a new marketing campaign.
Borrowed Funds: $35,000
So, the calculation for formula #1 looks like this:
Sales Price: $75,000
Working Capital (+) $10,000
Borrowed Funds (-) $35,000
=Cash Requirement: $50,000.00
Math Formula #2: Sellers Discretionary Earnings - Fair Market Wages For Owner - Debt Service - Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss
Seller Discretionary Earnings in this case is, let us say, $50,000.00.
Fair Market Wage: You can calculate what you consider fair or you can put all of the other numbers into the equation and see what is left for salary. If you like the salary you buy the business, if not you do not. If we were to calculate what the owner’s salary should be I would not pay much for what he does. Even though he puts in 50 hours a week he really only works 15 hours a week of true production. I am figuring 5 hours for bookkeeping and banking and 10 hours for ordering parts and answering phone calls. At $15.00 per hour he is earning $225.00 a week ($15.00 x 15 hours) and that multiplied times 52 weeks comes to $11,700 per year.
Debt Service: My financial calculator says that if you borrow $40,000 for 5 years (60 months) at 5% and the balance at the end of the 60-month is zero, the monthly payments come to $660.49. Since the formula requires yearly figures we multiply by 12 and get $7,925.92. Most of this payment is principal reduction but we are going to just deduct all of the payment as is generally accepted in the industry.
Return on Investment: We are going to use the 20% figure we discussed above. Formula one determined that $50,000 was needed as an investment which is multiplied by 20% (.20) = $10,000 per year return on investment.
Formula #2 (Sellers Discretionary Earnings - Fair Market Wages (For Owner) - Debt Service - Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss) would the look like this:
Seller Discretionary Earnings: $50,000.00
- Fair Market Wages: $11,700.00 (-)
- Debt Service: $ 7,925.00 (-)
- Return on investment: $10,000.00 (-)
= Extra Profit/Loss: $20,375.00
This means that after deducting from the income, wages, financing costs and a return on your cash investment the business still generates $20,375 more profit. Now would you buy this business under these circumstances? It would appear, yes! Of course this is based on a few assumptions, which might not be true. Lets look at them again.
The owner is only working 15 hours a week or he is only doing 15 hours of real work even though he is sitting around all day. The other assumption is that a 20% return on your investment is a sufficient return for the risk.
We can also consider that if the new owner puts in an extra 25 hours a week doing productive sales the business should be able to afford to pay him another $20,375 for the first year. It would appear that if the sales work was done then the profit should greatly increase in the second year or maybe even the second month.
Conclusion:
This is a tool to help you analyze a business. It is not the end-all of a business appraisal or evaluation. Just a tool to help increase your understanding of a business’s value that you may be seeking to purchase. Have fun with it.
The beauty of this process is; how long you want to spend on doing this activity is totally up to you. As we review this process, I will explain the variables of this system so you can make the necessary decisions where needed. Remember, this is only a tool to help you make decisions about a business purchase; it is not a sure-fire foolproof system. I will just lay it out for you and you make your own decision as to the validity of this formula for analyzing a business purchase that you may want to make.
The Sanity check requires two mathematical formulas, which require dollar amounts or other numbers to be entered in each formula. The math is calculated and then the results are compared against the purchase price. If it doesn’t work out the way you wanted, you have the option of then going back and change some of the numbers and do the calculation a second time.
The two formulas are:
1. SP + WC – BF = CR
Sale Price + Working Capital - Borrowed Funds = Cash Requirement
2. SDE – FMW (FO) – DS - ROI = Extra Profit/Loss
Sellers Discretionary Earnings - Fair Market Wage (for the owner) - Debt Service - Return on Investment (Cash Requirement x Interest rate -Stated as a Percentage) = Extra Profit/Loss
Since each item in the formula needs to have a dollar amount determined, we will define the terms and then discuss how the dollar amount is derived at.
Terms Definition:
Sale Price: The price that is being asked for the business or the price the buyer is thinking of offering. Depending on when you do this analysis. If you are trying to determine an asking price you would calculate all the other numbers in these two formulas to determine what should be your offering price. We will do examples to make this clear later in this article.
Working Capital: The short-term assets minus the short-term liabilities is the accounting definition. The simple explanation would be the amount of money necessary to be invested by the buyer to run the daily operations of the business, once purchased. This would include monies tied up in inventory, and accounts receivables. Money invested to pay the landlord’s or utility company’s deposits. Also included is the money spent on the business purchase to cover the loan origination costs and purchase escrow fees when buying the business. It is the total funds invested into the business to keep it running. The down payment given to the seller is not part of this number, since it is included as a separate item.
Calculation notes:
1. Cost of inventory: $_________________ (+)
2. Accounts receivable: $_________________ (+)
3. Landlord deposit: $_________________ (+)
4. Utility Deposits: $_________________ (+)
5. Escrow fees to purchase: $_________________ (+)
6. Loan origination costs: $_________________ (+)
7. Short term liabilities* $ _________________ (--)
Total Working Capital $_________________
* Short-term liabilities are defined as liabilities that are to be paid off within 1 year – accounts payables and the part of any notes payable that are to be paid within 1 year.
Borrowed Funds: The loan made for a business purchase from a bank or private party. The private party can be the seller or some friend or relative who might be willing to make a loan. This is borrowed money that must be paid back to someone at some time in the future.
Cash Requirement: This is the invested cash required to both buy a business, and working capital-to run the business. The amount of cash needed to make the business purchase and run the operations of the business after deducting all borrowed funds, regardless of source.
Sellers Discretionary Earnings / Owners Total Benefits: This is the total of all the non-business related benefits going to a business owner or his family on an annual basis that have been paid for, by the business. Included in this is definition are taxable profit from operations, unreported cash income, owners salary, salaries to non-working family members, any amount over the fair market value of salaries paid to working family members, family auto expenses, family telephone, family office expenses, health and life insurance for any or all family members, pension plan/ profit sharing contributions paid for the benefit of family members. This can also be stated as the reason why most people go to work everyday; they get family support for working.
Calculation notes:
1. Taxable profit from operation $_________________ (+)
2. Cash $_________________ (+)
3. Owners Salary $_________________ (+)
4. Salaries of non-working family members $_________________ (+)
5. Amount over the fair market value of wages
of working Family members $_________________ (+)
6. Family Auto Expenses $_________________ (+)
7. Family Telephone Expense $_________________ (+)
8. Family Office Expense $_________________ (+)
9. Health and Life insurance of
Any/all family members $_________________ (+)
10. Pension plan/profit share family members $_________________ (+)
Total Seller Discretionary Earnings: $_________________
Return on Investment: We need to have this stated as a dollar amount in Formula two. ROI is calculated as follows:
Cash Requirement X “a Percent” - the greater the risk, the higher the percent
First we must determine what the interest rate return we wish on our investment. This is a very subjective percentage and a change in this number can change the whole result of this analysis. If it is of any help, many financial investors in “Corporate America” feels they need to get a 20% return on their invested capital. Companies do not always make money and therefore the possible loses are built into the ROI. Some of the reasons are: companies are bought and go broke, overseas competition causing expectations of growth and income not to be met, and lastly government regulations periodically close whole industries. These are just some of the many risks involved in owning a business.
Putting your money in a bank has little risk, because the Federal Government insures your deposits in the bank. The stock market has a lot of risk that many people do not fully understand, causing them to accept a long term ROI of 10-13% from mutual fund investments. A 95% drop in stock prices like the dot.com stocks or what happened when we had the oil embargo in 1992 are indications that the stock market can be a much higher risk than people realize.
I personally feel that owning your own business and buying real estate are much lower risks, providing a much higher return. The proof of this can be found in the number of people who got rich in real estate and the over 25 million small business owners across this country.
Figure out what ROI you want and insert this number as .20 amount to represent 20% or .06 to represent 6% ROI. This is an annual return on invested money.
Once you have a percentage return on your investment we need to multiply it by the Cash requirement in order to come up with a dollar amount return needed. This restated is Dollars invested x percentage (stated as a decimal) = Dollar return on investment.
Examples:
1) Investment of $50,000.00 @ 6% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .06 = $3,000.000 (Dollars return on investment)
2) Investment of $50,000.00 @ 20% Return On Investment (ROI) would be calculated as follows: $50,000.00 X .20 = $10,000.00 (Dollars return on investment)
Debt Service: The reason we need this number is because this is a financial expense of owning a business. It is not an operating expense of the daily business operations but if you have debt, in your business, you must be able to make the payments, out of the business operations profit. Usually this payment is mostly interest and a smaller portion is the principal reduction of the loan balance.
Most professionals deduct the whole payment when doing this analysis, because the business must generate enough profit to make the whole payment. My personal preference is to just deduct the interest portion and to add the principal portion of the payment to working capital amount needed. This counts as more money being put into the business just like financing inventory and/or accounts receivables.
For simple one-hour analyses it is not worth splitting up the payment. In the case of a very large principal reduction payment it could be unreasonable to not split it up. It is up to you. You can always try it both ways, since this is a process to raise your understanding, not to come up with a fixed answer of, yes! it is a buy or no! it is not a buy.
Fair Market Wages: This is an amount that the new or old owner would be paid, if he were an employee not the owner. If the owner were the company salesman and also the company bookkeeper working a total 60 hours a week, a reasonable salary would have to be determined for each job. As an example only, lets say that an outside salesman, in your industry, could make $40,000 per year. And a bookkeeper usually charges $15 per hour. The salesman might very well work 50 hours at this job to earn this salary. If a bookkeeper would work 10 hours per week doing the bookkeeping that would mean 520 hours per year (10 hours x 52) times $15.00 per hour which comes to $7800 per year for the bookkeeper. The two Fair Market Salaries would come to $47,800 ($40,000 + $7,800).
Sometimes the market salaries are not so easy to figure. Lets take an owner who owns a 99-cent discount type store. This shopkeeper works 70 hours per week behind a counter in the store. You can hire a counter person for $7.00 per hour so this becomes (70 hrs x $7.00 per hour x 52 weeks).
Then you start discussing that this $7.00 per hour counter person would not be able to do the buying. You might want to figure a purchasing agent's salary. This can be done or you can just do simple numbers, leaving the salary only based on a counter person’s wages.
DOING THE MATH
By now you have the information to come up with numbers to put into the formula. Let us create a scenario. This was a transmission shop. The customers pay COD-upon pick up of the car. The parts inventory is from old transmissions and show on the books as worth nothing. The seller-owner is asking $75,000 for this business that he is able to takes out $50,000 in profit or benefits. In an interview, the owner mentioned that if a buyer will put $40,000 as a down payment he would carry the $35,000 balance at 5% interest for 5 years. By observation, we can see that the current owner sits in the office and does the bookkeeping, orders parts and makes bank deposits. He has a manager who bids jobs and handles production. No one is going out and calling on prospective business, which is one thing the owner should be doing with his time, but he is not doing. Lets go through what the numbers are with this example.
Math Formula #1: Sale Price + Working Capital - Borrowed Funds = Cash Requirement
Sales Price: $75,000
Working Capital: The business requires $10,000 cash infusion upon close of escrow, mostly to pay the landlords deposits and start a new marketing campaign.
Borrowed Funds: $35,000
So, the calculation for formula #1 looks like this:
Sales Price: $75,000
Working Capital (+) $10,000
Borrowed Funds (-) $35,000
=Cash Requirement: $50,000.00
Math Formula #2: Sellers Discretionary Earnings - Fair Market Wages For Owner - Debt Service - Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss
Seller Discretionary Earnings in this case is, let us say, $50,000.00.
Fair Market Wage: You can calculate what you consider fair or you can put all of the other numbers into the equation and see what is left for salary. If you like the salary you buy the business, if not you do not. If we were to calculate what the owner’s salary should be I would not pay much for what he does. Even though he puts in 50 hours a week he really only works 15 hours a week of true production. I am figuring 5 hours for bookkeeping and banking and 10 hours for ordering parts and answering phone calls. At $15.00 per hour he is earning $225.00 a week ($15.00 x 15 hours) and that multiplied times 52 weeks comes to $11,700 per year.
Debt Service: My financial calculator says that if you borrow $40,000 for 5 years (60 months) at 5% and the balance at the end of the 60-month is zero, the monthly payments come to $660.49. Since the formula requires yearly figures we multiply by 12 and get $7,925.92. Most of this payment is principal reduction but we are going to just deduct all of the payment as is generally accepted in the industry.
Return on Investment: We are going to use the 20% figure we discussed above. Formula one determined that $50,000 was needed as an investment which is multiplied by 20% (.20) = $10,000 per year return on investment.
Formula #2 (Sellers Discretionary Earnings - Fair Market Wages (For Owner) - Debt Service - Return on Investment (Cash Requirement x Percentage) = Extra Profit/Loss) would the look like this:
Seller Discretionary Earnings: $50,000.00
- Fair Market Wages: $11,700.00 (-)
- Debt Service: $ 7,925.00 (-)
- Return on investment: $10,000.00 (-)
= Extra Profit/Loss: $20,375.00
This means that after deducting from the income, wages, financing costs and a return on your cash investment the business still generates $20,375 more profit. Now would you buy this business under these circumstances? It would appear, yes! Of course this is based on a few assumptions, which might not be true. Lets look at them again.
The owner is only working 15 hours a week or he is only doing 15 hours of real work even though he is sitting around all day. The other assumption is that a 20% return on your investment is a sufficient return for the risk.
We can also consider that if the new owner puts in an extra 25 hours a week doing productive sales the business should be able to afford to pay him another $20,375 for the first year. It would appear that if the sales work was done then the profit should greatly increase in the second year or maybe even the second month.
Conclusion:
This is a tool to help you analyze a business. It is not the end-all of a business appraisal or evaluation. Just a tool to help increase your understanding of a business’s value that you may be seeking to purchase. Have fun with it.
THREE FACTORS OF LEADERSHIP MOTIVATION
PERMISSION TO REPUBLISH: This article may be republished in newsletters and on web sites provided attribution is provided to the author, and it appears with the included copyright, resource box and live web site link. Email notice of intent to publish is appreciated but not required: mail to: brent@actionleadership.com
by Brent Filson
Leaders do nothing more important than get results. But you can't get results by yourself. You need others to help you do it. And the best way to have other people get results is not by ordering them but motivating them. Yet many leaders fail to motivate people to achieve results because those leaders misconstrue the concept and applications of motivation. To understand motivation and apply it daily, let's understand its three critical factors. Know these factors and put them into action to greatly enhance your abilities to lead for results.
1. Motivation is physical action. "Motivation" has common roots with "motor," "momentum," "motion," "mobile," etc. — all words that denote movement, physical action. An essential feature of motivation is physical action. Motivation isn't about what people think or feel but what they physically do. When motivating people to get results, challenge them to take those actions that will realize those results.
I counsel leaders who must motivate individuals and teams to get results not to deliver presentations but "leadership talks." Presentations communicate information.. But when you want to motivate people, you must do more than simply communicate information. You must have them believe in you and take action to follow you. A key outcome of every leadership talk must be physical action, physical action that leads to results.
For instance, I worked with the newly-appointed director of a large marketing department who wanted the department to achieve sizable increases in the results. However, the employees were a demoralized bunch who had been clocking tons of overtime under her predecessor and were feeling angry that their efforts were not being recognized by senior management.
She could have tried to order them to get the increased results. Many leaders do that. But order-leadership founders in today's highly competitive, rapidly changing markets. Organizations are far more competitive when their employees instead of being ordered to go from point A to point B want to go from point A to point B. So I suggested that she take a first step in getting the employees to increase results by motivating those employees to want to increase results. They would "want to" when they began to believe in her leadership. And the first step in enlisting that belief was for her to give a number of leadership talks to the employees.
One of her first talks that she planned was to the department employees in the company's auditorium. She told me, "I want them to know that I appreciate the work they are doing and that I believe that they can get the results I'm asking of them. I want them to feel good about themselves."
"Believing is not enough," I said. "Feeling good is not enough. Motivation must take place. Physical action must take place. Don't give the talk until you know what precise action you are going to have happen."
She got the idea of having the CEO come into the room after the talk, shake each employee's hand, and tell each how much he appreciated their hard work — physical action. She didn't stop there. After the CEO left, she challenged each employee to write down on a piece of paper three specific things that they needed from her to help them get the increases in results and then hand those pieces of paper to her personally — physical action.
Mind you, that leadership talk wasn't magic dust sprinkled on the employees to instantly motivate them. (To turn the department around so that it began achieving sizable increases in results, she had to give many leadership talks in the weeks and months ahead.) But it was a beginning. Most importantly, it was the right beginning.
2. Motivation is driven by emotion. Emotion and motion come from the same Latin root meaning "to move". When you want to move people to take action, engage their emotions. An act of motivation is an act of emotion. In any strategic management endeavor, you must make sure that the people have a strong emotional commitment to realizing it.
When I explained this to the chief marketing officer of a worldwide services company, he said, "Now I know why we're not growing! We senior leaders developed our marketing strategy in a bunker! He showed me his "strategy" document. It was some 40 pages long, single-spaced. The points it made were logical, consistent, and comprehensive. It made perfect sense. That was the trouble. It made perfect, intellectual sense to the senior leaders. But it did not make experiential sense to middle management who had to carry it out. They had about as much in-put into the strategy as the window washers at corporate headquarters. So they sabotaged it in many innovative ways. Only when the middle managers were motivated — were emotionally committed to carrying out the strategy — did that strategy have a real chance to succeed.
3. Motivation is not what we do to others. It is what others do to themselves. The English language does not accurately depict the psychological truth of motivation. The truth is that we cannot motivate anybody to do anything. The people we want to motivate can only motivate themselves. The motivator and the motivatee are always the same person. We as leaders communicate, they motivate. So our "motivating" others to get results really entails our creating an environment in which they motivate themselves to get those results.
For example: a commercial division leader almost faced a mutiny on his staff when in a planning session, he put next year's goals, numbers much higher than the previous year's, on the overhead. The staff all but had to be scrapped off the ceiling after they went ballistic. "We busted our tails to get these numbers last year. Now you want us to get much higher numbers? No way!" He told me. "We can hit those numbers. I just have to get people motivated!"
I gave him my "motivator-and-motivatee-are-the-same-person!" pitch. I suggested that he create an environment in which they could motivate themselves. So he had them assess what activities got results and what didn't. They discovered that they spent more than 60 percent of their time on work that had nothing to do with getting results. He then had them develop a plan to eliminate the unnecessary work. Put in charge of their own destiny, they got motivated! They developed a great plan and started to get great results. Over the long run, your career success does not depend on what schools you went to and what degrees you have. That success depends instead on your ability to motivate individuals and teams to get results. Motivation is like a hig voltage cable lying at your feet. Use it the wrong way, and you'll get a serious shock. But apply motivation the right way by understanding and using the three factors, plug the cable in, as it were, and it will serve you well in many powerful ways throughout your career.
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