Internet Radio Show: 21st Century Entrepreneur | How to Write and Publish a Book in Order To Make Money And Promote Your Business | Aired Friday, February 27, 2015 at 12 NOON
This Friday February 27 we will be airing another episode of “21st Century Entrepreneur” which is an Internet radio program aimed towards educating business owners and their advisors on how to make their businesses more successful and profitable. It is a show hosted by JC Maldonado who is the CEO of BizGro Partners, a Business Development Firm that helps small and midsize companies grow, expand, and transition. This week we will discuss how to write and publish a book in order to promote your business and establish yourself as a leader in your field. Our guest will be Judy Katz who is an owner of a company called Ghostbooksters. Judy is a ghost writer who has written and helped publish 35 books. She mainly works with people who have an interesting story to tell but does not have the time or the skill to write or publish a book. Many of her past and present clients are entrepreneurs who simply want to promote themselves as leaders in their field. Further, the book publishing industry is still a dynamic industry with tons of opportunity due to the advent of the Internet and social media.
Below is a blog discussing an entrepreneur’s leadership challenge: “Creating a business that is not dependent on him or her.” Finally, we have recently been covering the importance of leadership on our last 3 episodes. To hear recorded versions of these shows, click on 21st Century Entrepreneur Archives.
The Number One Enterprise Value Killer
Studies have shown that 3.6% of all businesses in the U.S produce $1MM+ in sales. These studies also show that .06% of all businesses in the U.S. produce more than $5MM in sales. Based on this study, the jump from $1MM to $5MM appears to be easier than the jump from 0 to $1MM. Normally, businesses that produce under $1MM in revenue do not possess enterprise value because the business has not established enough earnings outside the owner’s salary to justify any value. At this level, the business owner(s) does not really own a business; rather, he/she owns a job. If an owner was to sell the business, the most they would get for the business is a payout over time from a larger, more established entity who would want the owner to work in some sort of sales or customer service capacity. Conversely, sometimes owners that produce between $1MM and $5MM attempt to sell their businesses or begin to think about what kind of value they would receive if they were to sell. Today’s blog will discuss the number one enterprise value killer for those $1MM to $5MM companies as well as for companies that produce more than $5MM in revenue, which is the business’s dependency on the owner.
During an earlier session we discussed the two major components of enterprise value, a formula that trumps any sophisticated business valuation formula. That formula is Earnings + Goodwill Transferability = Enterprise Value. We have defined Earnings as the profit of the business which includes net profit plus depreciation-real costs associated with maintaining equipment, amortization, non-recurring expenses, owner perks, and the difference between owner’s salary and cost of hiring a president to run the company. Typically a business will trade for a price equal to a multiple of these Earnings. This multiple can range from 1x to 4x Earnings. Very rarely does a company that produces under $2MM in Earnings trade for more than 4x Earnings. This results from the limited marketplace of buyers for these businesses as well as restraints on how much capital is available to complete deals in this space. Further, the size of the company places limits on how much debt can be placed on the business or how much return the company can give an equity investor. In some regards, it is easier to raise money for a $50MM deal than a $3MM deal.
The second part of the formula is Goodwill Transferability which is simply the ease of which the Earnings of the business can be transferred to a 3rd party buyer. Typically transaction risks such as declining sales, concentrated sales with one or two key customers, concentrated sales with one product or one supplier, salesperson concentration, industry upheaval, and new government regulations that can impact profits can hurt a selling company’s ability to fully transfer the Earnings they have enjoyed over the years to a 3rd party buyer. In this case, the buyer will negotiate terms that place the seller in a position where he/she has to take risk on the value that will be received in the transaction. These terms can place an entrepreneur in a dubious position where he may not receive value for his business if marketplace conditions do not fall in his favor.
Therefore, little to no Earnings as well as a business’s overall makeup which can affect the potential transfer of Earnings to a 3rd party can hurt Enterprise Value. Nevertheless, dependency on the owner is the real killer if you further analyze all impactful variables.
Why is the business’s dependency on the owner so hurtful? The answer is simple. It is almost impossible to replace the founding owner. Although every potential acquirer would love to think they can do a better job running a company, the founding owner normally has insight, risk, skills, relationships, and ability to juggle multiple responsibilities that is unique. It typically takes hiring multiple people to replace an owner who is a true operator which is an expense that can impact the Earnings that will eventually be transferred. Further, customers and key employees and relationships can simply leave once the owner is out of the picture; there is no way of telling whether this can transpire or not. Therefore, it will always be a perceived risk that a 3rd party buyer will have to face, real or imagined. If key relationships cannot be transferred, a buyer will pay less for the business or structure much of the purchase price on a full transfer of relationships. Oftentimes, a buyer will retain the owner as a permanent employee, salesperson, consultant, or minority shareholder so that the transfer of key relationships can be assured. However, there is a cost to making the owner stay in the form of salary compensation or a share of the profits. This cost will cut into transferable Earnings and the price an owner receives for the business; typically, it is the owner who will pay the price by receiving less of a purchase price or flexible terms featuring monies that is not guaranteed to be received.
So what is the answer to reducing a business’s dependency on an owner? The answer is a management team along with systems and processes to run the business without the owner’s day to day involvement.
If you have any questions with regard to business enterprise value and how to value a business, feel free to call 201-496-6931 or email us at AskBGP@bizgropartners.com.