Tuesday, October 16, 2012

Branding and Infrastructure

       A question that often comes from business owners as we discuss other matters is: What is my business worth? With any luck most business owners derive a regular paycheck. However, many entrepreneurs want their efforts and their dreams to be realized in some measure of monetary value. After all, we do read the business journals of fortunate business owners who ultimately sell their  businesses for profit and go on to drink Coronas on some distant beach with the ocean waves lapping at their feet. Truth be told, there is no simple answer to what a business is worth, that I could cover in this snippet. And there are also many ways in which to value a business.

       Many, perhaps the majority of small businesses are leveraged from operating revenue. This is to say that the value of the company is based on its ability to continue operations and earn a profit from revenues. Which also suggests that if you stop generating revenues, or if you remove the revenues from the business, it is potentially worth little more, if not less than, the actual book value of a company. Of course there are many exceptions beyond what I can write here. However, for illustrative purposes we will stick to that theory.

      So what if you want to sell that business in the next few years. How can you sweeten the deal, make it more attractive to a potential buyer? So much so that they would be willing to pay a premium to buy your business. Two thoughts come to mind. (a) Branding and (b) Infrastructure. Not surprising that every medium and large business in this country, if not the world, spend collectively billions of dollars a year improving these two areas.

     Branding, generally increases sales. This potentially creates a higher value by itself as many operating leveraged companies sell for multiples of revenues. Secondly, because branding essentially is a label that inherently stands for "value". Like, if you want to buy my business, I will require a premium price.  In simple terms branding is, stand for something, be recognized, or an offer of value.

      Infrastructure allows you to operate at higher efficiency. Again, potentially  higher profits and a higher value. It could also mean that you are geared for higher business volume which you have not achieved but your potential buyer knows he can. Infrastructure, gives you a competitive advantage to other competitors because it is an investment that can at times be a barrier to similar businesses who have not made the required investments. Hence, they are less able to compete in a given market, less able to increase revenues and be able to support those revenues by means of performance. Less able to deal with management and growth issues than competitors. This means your potential for additional revenues and profit is a matter of marketing. Infrastructure comes from, management information and accounting systems. Customer relations and order taking systems. Investments in machinery, equipment and perhaps vehicles. It can be hiring the right professionals. It can also come from integration of functional areas of your business model. Perhaps the development of distribution channels. In this area there are indeed countless possibilities. Simply put infrastructure refers to the business machinery required to operate.

So what have you and your accountant talked about lately?

The Art of Analytics and Listening for Leadership

          One look at any book store shelf and you can find endless books on leadership. Thinking back on my profession, I have read and studied numerous cases and books that discuss leadership, decision making and on how to be a good manager. I have to say that collectively, the reading list has helped. But truth be told, in the practical world how one goes about making business decisions is very different than how one would do a case study of business problems. Why? There are many reasons but, perhaps the most apparent explanation is that in a case study or in reading a book you have 20/20 vision.  You can do Monday morning quarterbacking. You also have time to think and analyze, and you are already primed for the fact that there is a problem in the first place. Secondly, we all have to deal with office politics. You have to pick your battles, you have to be politically correct. In some cases there literally is no way to win. No practical means to solve the problem. Your choices may be limited to simply surviving.

            Perhaps the most important thing one can take away from reading business cases and in reading leadership books is to develop your sense of analytics. It is one of the weakest areas many business managers have. I should add even great managers have trouble in this area. Developing an analytical skill set is key to being a great manager, a great leader. Understanding cause and effects, relationships in business processes, financial and logistical variables. In the end it is about how well you can connect the dots that lead you to better decisions. It's also about the ability to put yourself in someone else's shoes.

            This brings me to perhaps the most important thing I use in any leadership role: "Listening". Years ago I learned a key lesson. It really does not matter what you know or how smart you think you are in business or what you think. Sometimes, it's not even important that you know how to gauge the big problems from the small ones. If you want to solve the most problems in the shortest amount of time; "listen". In particular listen to your employees, as well as your customers. A testament to this is how often I have worked with dysfunctional companies where there was little to no system at all and yet the employees got the job done. Simply because the owner or bosses listened to the employees and the employees listened to their bosses and most importantly the employees listened to one another. Despite poor accounting, poor management systems, poor internal control, poor documentation and even poor profits the company had a large client base and there were few complaints from customers. Listening and addressing the issues together with doing "whatever it takes" compensated for everything else that was wrong in the company. Perhaps Jeff Haden in this article published in Inc. magazine on Sept 4th, 2012 demonstrates one way of listening for leadership. "Do-you-pass-this-key-leadership-test"

         To end this piece I would like to repeat something a very good boss once told me; "Don't listen to the words he is saying, listen to what he is trying to tell you". Just goes to show how much psychology there is in business, this is the very same exact line I have heard marriage counselors use in trying to get spouses to understand one another. I guess this is a case of art imitating life!

Can't wait to hear your side of the story.

Thursday, July 19, 2012

Earning The Carrot

A development for many companies in a rather challenging economy is how to keep your operating expenses low yet, still provide compensation to employees that both keep them motivated and compensated for their efforts.

            The "Carrot" in front of performing employees has been a staple of many business models. But, in a bad economy it has become even more important. Many companies need to hit their profit numbers even during hard economic times. All the while, management needs to be kept motivated and focused on managing the company. Companies also need to provide for a reward system that compensates good managers for creative efforts that trickle down to bottom line profitability. We all know business profits flow from the top of the "profit and loss" statement in terms of sales revenues but, in hard times when sales are flat, profit can also flow down from trimming operating costs and by creating greater efficiency.

            One effective measure of performance I have had the opportunity to work with is  the concept of EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.  In theory it is a profit and loss statement that is the representation of everything management can be held responsible for. Typically, in many companies middle management does not have any control over interest, taxes, depreciation and amortization. But in theory everything else they do control. Once EBITDA is determined, then a percentage profit sharing plan can be calculated and distributed to eligible management if, they achieve target percentages.

            Depending on the company, the calculation of EBITDA can be adjusted for various factors that would negatively impact the comparability of EBITDA from period to period.  Thereby, making profit share calculations more stable. For example a company that is forced to make significant investments in repairs and maintenance to operating equipment could exclude those expenses as  part of their EBITDA in order to truly show management efforts.  At one client I had the EBITDA calculation changed from quarter to quarter depending on circumstances.  Both management and the owners handled the calculation with fairness and bonuses were routinely paid.

            One very important factor to note is each company that contemplates using EBITDA needs to have a good base line financial reporting system. You need to determine that point of reference from which to begin tracking management efforts and you need to establish clear cut and obtainable goals.

Accountant or Bookkeeper?

By definition bookkeeping is the recording of transactions into books and records held by some entity. Typically a business but, it could be any activity that involves tracking of money, quantities etc. Bookkeeping is actually a component of accounting. Accounting is a much broader term that may include financial reporting, analyzing financial information, verification of financial information, tax reporting just to name a few of the areas under accounting. To some degree a bookkeeper is to an accountant what a law clerk is to an attorney. Or perhaps what a nurse would be to a doctor.

            Unaware of this huge difference many people, even successful business people, unknowingly insult their accountants by referring to them as bookkeepers. Of course this could also go the other way where business people think their bookkeepers are accountants.  All of this is rather intriguing because when someone faints and drops to the floor like cold salami , rarely does one say; is there a nurse in the house? You don't here people say, I am going to have my law clerk sue you!  So why is it that when people have financial and accounting problems they think they need to get a better bookkeeper?

            A look at the financial statements of any publicly traded company will show the name of the Certified Public Accountants who prepared the reports and are attesting that management has carried out their responsibility in a fair presentation of the financial statements to the public.  Accountants employ rules that are commonly called "Generally Accepted Accounting Principles" or GAAP as the guidelines of how transactions should be accounted for and reported. In addition accountants employ " Generally Accepted Auditing Standards", or GAAS to make sure that audits are performed according to professional standards.

            Accountants play a very important role in giving financial statement users more reliable financial information from which to make business decisions. Decisions on how to invest, whether to make a loan or simply how well management does what is says it will do. In our capital markets money is allocated to businesses were management performs. It allows banks to make loans to companies that can repay their loans. In small businesses accountants also play a very important role. They help management make better business decisions based on information provided by their accountants.  Accountants, help in the compliance of loan covenants, tax laws, the payment of taxes just to name a few areas of importance.  Another perhaps, more widely known role accountants play is the role of trusted advisor.  A position earned after years of training, experience and demonstrated honesty and integrity.

Wednesday, June 20, 2012

Redlining with Appraisals

Having been in the real estate industry for many years I am no stranger to the relationship of a real estate appraisal and how much a bank would be willing to lend on real estate. In today's lending environment banks are concerned more than ever about the "Loan to Value" or LTV they are lending on.

            In years past, banks were lending on appraised values that everyone knew were over inflated. And yet lend they did by the billions. It made no sense whatsoever and anyone who really understood real estate watched in disbelief, if not in shock at the loans made. Of course we now know that everyone is paying the price for taking an appraisal at face value even when good judgment tells you otherwise. Have the banks learned from this? Judging from recent experiences, NO!

            A few loans I have been involved with only show banks have simply reversed the pendulum.  Just as they relied exclusively in the past on appraisals for LTV, they continue to do so today except, towards the other extreme. The problem is that the appraisals are being made based on market values for a given type of real estate in a given area. That sounds logical but is it real?

            In a market where foreclosures and short sales are common place, is it really fair to value a piece of real estate in comparison to another sold entirely in distress? My answer would be, not always! The banks claim; why shouldn't they rely on the appraisal if another buyer can buy very similar real estate at a much lower price? Although that may be true of a "purchase", in cases were a "refinance" is being made, the situation is different.  Is the borrower in distress? Is the cash flow and ability to repay good? Does the borrower have a good credit rating? Does the debt to income ratio fall in line with lending policy?

             When the bank has a refinance that is all positive and there is a slight difference between appraised value and the amount of the outstanding loan the bank should commit to renewing the loan even if the LTV is slightly off. Why? Because it is good business and economic sense.  There is no doubt in my mind banks have an important role to play in stabilizing real estate values. Latitude in this area truly improves overall real estate values and it rewards consumers who have been responsible and simply have been caught in what everyone knows will be a temporary market fluctuation.

            Instead banks lend a blind eye to circumstances, force existing borrowers to fork-over additional cash to bring the LTV into the banks guidelines. This leaves a bad taste in the consumers mouth, slows economic recovery and continues the decline in real estate values in a given market.

            The current climate in bank lending really is a form of economic "redlining". It is a policy that says, we know you are a good borrower, you have the cash, the repayment ability but, since other people in your neighborhood were less frugal, took big risks and overleveraged themselves we refuse to lend to you based on the fact your neighbors don't have the right financial color.

            Are these the same banks that took our tax dollars? Is this legal? Are the appraisals rigged to recapitalize banks? Who's looking at this? 

The Business of Change

The Business of Change
Throughout my business career I have had the opportunity to make significant contributions towards changing the overall operating plan if not the culture of a few business ventures. This change always came from an executive management level but in the end relied heavily on the abilities of the general operating staff.

The general industry term for people who are brought on to make operating changes is "Change Agent". Historically, change agents are hired consultants or at times in-house management appointed with special responsibilities and authority to make changes happen. Successful change agents are a breed of operational managers that are unique.  Assuming someone with an MBA and years of business experience is a change agent is like assuming a vet would be a good pediatrician.

I can tell you from experience that being a change agent is incredibly hard work. Not only do you spend a great deal of time understanding the business,  you also spend a lot of time practicing business psychology convincing people that new will be better, to give up the old ways and to look towards a brighter future. This is not an easy task, even when you have true believers. I guess this is because, part of change is that you have to deal with uncertainty, perhaps some pain and in the end most people have difficulty in being able to create reality out of a mere vision. To add to this state of anxiety, change usually occurs over time and not overnight. It is a challenge over time.

So what are some of the basic needs of creating change in business? It really varies from company to company and what type of change you are trying to implement. Nonetheless, there are some bare basic principles.

Start with a vision of what you want to accomplish.
This can be general at first but then you really have to do your homework. Get to all the details of what needs to happen. Then contemplate what will go wrong, how you will get trumped up and how you plan to recover from the inevitable plan that goes wrong. Then start again and rework the details until you know that you can accomplish the vision.

Evaluate the company. 
Again really do your homework. What is the ability of the overall staff. Sometimes you need to bring in new employees with new skills, sometimes you can train. Sometimes you need some temporary help to get it all done. Very important is to assess the ability of top management to tolerate change and the eventual chaos that sometimes emerges. Do they all understand the challenges, the risks, the rewards. Sometimes you have to campaign and get people to sign on before you can contemplate change. I can not stress this part enough because in this process not only do you get people to buy into change but they also provide great insight and help make for a better plan. It also forms a channel of communication that may never have existed before. Make sure you understand what the company is good at and what it does poorly. Be honest not just with yourself but with those who asked you to perform.

Do you have all the tools to make the changes.
Again really do your homework. What will the changes affect. For example a new computer system may require upgrades of computers, faster internet speeds, more workstations. A new marketing plan may require a better telephone system or a CRM (Customer Relationship Management ) system, or new delivery mediums. Think of work flows and everything it takes to complete the business mission.

Establish clear communications with all levels and in all departments.
Here we are in the information age, high tech everything. Emails, texts, walkie talkie telephones, cell phones, smart phones, PDA's, internets, intranets, voicemail, Skype and video conferencing. You can't even go to the bathroom in peace anymore. And yet.......the left hand does not know what the right is doing. Communicate with your people. Know how to talk to all levels of the workforce and be patient. Remember that communication requires "more listening" and very "specific language" to get the messages flowing in "both" directions. Sometimes it's repetition, illustration and explanation of causes and effects as well as confirmation of "message received". Be a teacher and a student. I have learned the neatest tricks from low level staff and taught the big bosses new tricks that make their work life better. 

Give praise, thanks and be humble.
I started out by saying being a change agent is really hard work. It can also be a lot of fun that is extremely rewarding. I have found that it is especially important to recognize people who make it all work. Give them thanks for trying, especially when things don't go quite as planned. If the plan was well conceived then a recovery should be possible from most mishaps. Remember that team work is very important and helping people accomplish tasks and learn is very rewarding. Pay attention to what people are doing and recognize their efforts and contributions, no matter how small or trivial.  Laugh, crack those jokes and know that no matter how successful your plan may be you could not get it done if not for the management and all the people who make it possible. Don't ever take credit for their effort.

Still contemplating the business makeover? Have a lot of questions? I might be available for a long lunch.