Small Business Insights Newsletter

August 2021

What We Have Been Up To

We both are teaching online classes this semester again.  I am facilitating an OntarioLearn Intro to a Business course which is part of several Business or Entrepreneur programs at colleges in Ontario through Mohawk College. It is so great to see so many great ideas that students have for starting a business and so many new potential Entrepreneurs. Rudy is teaching a Business Case Ecommerce course through an International Business Program at Fanshawe College. I will be facilitating the same course for Fall in addition to another course through Algonquin College focused on helping those in the Trades with how to set up and run a business. Rudy will be teaching another course in the International Business Program at Fanshawe College on Management Principals.

We have used the time stuck in lockdown on home renovations that we hadn't had time for in the past, including woodworking projects for our house and friends and family.  We both are fully vaccinated now so are looking forward to getting out more and getting back to some semi-normal activities. It will be nice to get out and meet with customers again hopefully in the near future instead of just through Zoom.

Business Issues First Half of 2021

With many businesses getting back to work, not all were able to take advantage of all of the Federal and Provincial programs, or they found the amounts were just not enough for them and are looking for additional funding. The majority of our work in the last year has been on Business Plans or Feasibility studies which are being used to obtain lending or investment.  We are also finding several are actually selling their businesses and hanging it up after the rough last year as well, so we have been working through the process with them of getting their business ready to sell and performing business valuations. 

In the last few weeks, we have been starting to get calls about strategic planning and coaching now that most businesses are operational again after our extensive lockdowns in Ontario the last year.

We offer a free 30-minute consultation to any Canadian business owner or those wanting to start a business in Canada and find many young entrepreneurs are working on ideas to start a business.  We sent many off to the Small Business Enterprise, Innovation, and Incubator Centres to help get them started with programs they offer which will help turn their ideas into businesses. We hope this will help them in getting their business idea off the ground and thereby generating a new business to help the economy.

USING METRICS TO TRACK SUCCESS IN YOUR BUSINESS

This is a cautionary tale for start-up businesses who have not performed their own due diligence on their new "idea", determined if there is a market and thought through how they plan to implement their "idea".  It is best to understand before investing time what is required and who a lender or investor expects to carry the risk. 

A few years back, we were approached by a company looking to come to Canada who needed help to set up their business in the Canadian market. The owners were manufacturers of an offshore product that has done well in Europe but had no real presence in Canada. They wanted help with all of their marketing for the Canadian market, and they were looking for us to set up a distribution channel and manage it. When it got to contract negotiations, it became abundantly clear that they wanted us to do this for "free" and for us to take a risk in their business in the hopes that the product will sell here in Canada. The idea was for us to give four days (8 days for both) each of our time a week for their business to help it get set-up and running.  

They said once we met all their obligations, they would pay us when the distributors were in place and had sold the forecast the owners had set for year one. All of this in a country, they had not performed any market research themselves. If you think it is uncommon, it is not, and a big mistake new business owners sometimes make. They believe they created the next most incredible idea and that everyone should believe in it as they do and would want to jump on board. In turn, they wanted "free" help without putting any skin in the game themselves. This example is extreme, but this business situation did happen. Usually, they want to provide equity in a business that has 0 revenue.

In most circumstances, we find this situation happens with start-up businesses who are looking for 100% financing or investment, as they plan to not contribute any of their own funds. You can have the best idea, but if you cannot implement the actual business or put in any of your own money in and believe in the business, it is only an idea.  In extreme cases, you might find an investor who will pay you for the idea only, but that would be a one-time payment, and you would most likely not be involved in the business.

Many times when we are contacted to develop a business plan for a start-up, we find  that they have not ironed-out the business model and think this is the role of the one writing their business plan. They may for example want to open a restaurant because they like food or cooking but do not know the first thing about what it takes to run the restaurant's business side. We have also worked with software engineers who have created a product that they think will take off to find out there is not a real market for the product. They could find no one to sign up for the "free" beta. You can have the best idea, but if there isn't a market or can generate revenue, this is not really a business.

An idea or a product is not worth anything if there is not a market, or the owner cannot execute or implement and generate revenue. Whether you are looking for others with skills that you do not possess or an investor for your business, you cannot expect others to risk their business in your idea, when you are not taking any risk yourself. If I had a nickel for every start-up who wanted to provide us equity for work that they could not perform on their own, or wanted us to find investors for them when they had not invested any of their own money in the business; I would be a millionaire today. The funniest part of this is they usually want to maintain 90% of the company, and they only have the "idea," and everyone has the skill and the money. One of the key ingredients to a successful business is the team you put together, but it is essential that if you ask others to invest their time or funds in your business, you can genuinely look yourself in the mirror and say you have done the same. 

If someone came to you and said I have this idea worth millions, but to make it a reality, I need your money and skills to pay for a business plan, a patent lawyer, people to go out and market and sell the product, and a supply chain, and they offer you only 10% of the profits, what would you think? Would you think this is a reasonable request if they wanted sweat equity and you find they had not invested any money in the business idea. The answer is no, so before you want others to believe in you and your idea, you need to be realistic about what your idea or product is worth without help or funding from others. 

Before you ask other people with skills and money to work for "free" or take all of your business risks, ask yourself if the shoe was on the other foot what you would do. There is also the old saying - you pay nothing - you get nothing. The manufacturer in the example above told us that they were doing this because they had been burned in the past by salespeople. They now wanted others to take the risk. What this says is they did not know how to hire the right salespeople or vet them. They hired untrained professionals at a low rate and then wondered why they did not get the sales they needed. They then determined they needed help with setting up everything in another country, approaching people with years' experience and then want them to take the risk for their prior mistakes again without any risk to themselves.  

If you start a business and lack all of the skills or funding to get it going, look for people who can act as business advisors or choose them to sit on your board or directors. There are also non-profit organizations funded by local or provincial governments that provide free or discounted services that can help provide you with help and a reality check. These include the Small Business Enterprise Centres, Innovation Centres, and even Incubators within Colleges and Universities in Ontario. Similar organizations exist in other provinces and within other countries as well. These organizations will not have you present to investors until you have what is needed in place and can provide free and discounted services and guidance.

Before investors or lenders usually talk to you, the idea must be real and depending on the business type, this could include:

• Business Plan and a Pitch Deck
• If a product, a prototype / proof of concept
• If there are patents, they should be filed and underway
• Sales or signed contracts
• Proof of your own investment 
• Skills in place that are needed to execute 
   

To get to this point, you will not get there by getting inexperienced people to work for free, as you will not find experienced people who will. If you do not have the skills to execute, you need to be ready to either pay for the service or give up a larger piece of your business. Having a 100% of nothing is nothing - having 10% of $1M is $100,000.

According to Investopedia, "An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The process of setting up a business is known as entrepreneurship. The entrepreneur is commonly seen as an innovator, a source of new ideas, goods, services, and business/or procedures." There is no better reward than starting a business and seeing it succeed, but with the reward are the risks that the owners, not others, need to assume. 

FINANCIAL PERFORMANCE - NOT ONLY WAY TO VALUE A BUSINESS

If you ask most business owners what drives the value of the business, most will tell you first and foremost is financial performance. Financial performance is important but is only one of several variables that affect the value of your business. When it comes time to sell your business down the road, there is much more to it than just having steady revenue and a good profit margin.

Most businesses worry about the value of their business when they are ready to sell their business. Unfortunately, at that point, it is way too late to make any changes. Instead, if you focus on the areas that drive your business value early on in your business, you have a better chance of receiving the value and earnings multiples you want for your business down the road.

Other factors will affect your business value and the multiplier of what you will eventually receive for your business that many business owners do not consider. To change any of these, it will take time, so you must look at them early on within your business, so you are running your business so that if you had to sell it tomorrow, you would receive the value you deserve.

Dependence on the Business Owner

We always ask business owners how involved they are in the everyday running of the business, including sales with clients. In some cases, the business owner will smile and tell us how they know their clients by name and ask for them. In addition, they will tell us how the clients will come to them anytime they have a problem. Then there are business owners who tell you how they really can't afford to take a vacation, as the business would not continue to run.

Unfortunately, both of these are a problem because if the business revolves around the business owner, this dramatically reduces your business's value. The company is not worth anything without you in it. Owner over-involvement also decreases the chances of someone down the road buying the business. In most cases where the business owner is too ingrained in the business, there are no documented processes and procedures, so the business cannot manage without them. In most cases, everything usually resides in the business owner's head, so it is not a business that could easily transition. This affects the value and is why most service-driven businesses do not obtain the same value and have a lower earnings multiplier versus product-driven businesses.

Dependence on One or Two Key Customers

It is wonderful to have large customers, but it is a problem when your business relies on one or two key customers to make up more than 30% of your revenue. Nothing is a sure thing, and if something happens, one of those clients leaving could put you out of business if you cannot replace them quickly. Sometimes with a large corporation, they could move their business elsewhere without giving you much notice, or it could be as simple as the contact that brought you in, leaving the company.

It is important to make sure that if you find yourself in this situation, you look at reducing your dependence on them. Options are selling to additional customers, looking at new geographies, or even adding other products and services that you can sell as add-ons to other customers or new customers. These take time and may involve hiring sales reps or even looking for other products & services to develop or resell. Recovery from this is not something you can change overnight, so it is important not to wait until you want to sell your business, as this will greatly impact the value you receive as this is a very high risk to the buyer. If the buyer sees a high dependence on those clients, it will lower your value as it increases risk.

Dependence in One Supplier

When we all start out, we try to find that one supplier can fulfill as much as possible for the best price without realizing how risky this is. There is nothing wrong with using that supplier, but you will want one or two backups that you might occasionally buy from if there is an issue. We had a client where their main supplier went out of business, and they were scrambling to find another supplier of their raw materials, as they had not researched this prior. Another client had their main supplier who in the past had been lenient on payment, stop supplying products until their outstanding balance was paid off, and became a catch 22. They couldn't make products to sell without the materials the supplier provided, and they needed the materials to earn money to pay off the bill.

When you look to sell your business, this is yet another element that the buyer will look at to determine risk. The increased risk lowers the value of your business.

Dependence on One or Two Employees

There is a similar situation when your business is reliant on one or two key employees. If today you only have one sales rep, and they make all of the sales for your business and others in the business are not involved with customers, this can be a potential issue. What would happen if something happened to this individual or they left tomorrow - ask yourself - would your business still survive? Do you have your customer list and contact information, or did that walk out the door with the sales rep? Reliance on any one person can have an impact on the value of your business as well. A question you need to ask yourself for each of your employees is if they quit tomorrow, would your business be impacted.

Summary

Dependence on the owner, customers, suppliers and employees are other factors that will impact the value of your business outside financial performance. Still, as you can see by the examples, none of these items are things that you can change in your business overnight. It doesn't even really matter if you never plan to sell your business, as your business is exposed to risk if any of the instances occur and should be part of your strategic plan to address.

We work with clients to increase their overall business performance and decrease risk, which includes looking at all areas that will affect the value of your business. It is important to work on your business before you decide you want to sell instead of getting a business valuation and finding out you are not going to get the value that you expected.

We offer a FREE business performance assessment which includes a 30-minute session with one of our partners along with a summary report outlining key areas for improvement. This assessment looks at 8 areas of a business and is based on best practices and areas of risk for a business: Business Strategy & Planning, Finance & Accounting, Risk Management, Human Resources, Marketing & Lead Generation, Sales & Sales Management, Leadership / Management / Communication, and Operations. 

If you would like to get a FREE Business Performance Assessment and report click the button below.  The assessment will take approximately 15 minutes to take and you will receive your report within 48 business hours.  It is up to you after that if you would like to speak with one of our partners for the Free Session. We also offer an assessment for Start-ups and for Marketing & Sales Only.

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Additional Blog Articles Since the Last Newsletter

• Learning How to Optimize Your Web Pages
• Increase Your Productivity Using Scheduling Tools
• Risk and Reward With a Business Lies with the Owner
• Tips to Increase Traffic on Your Website - Keywords
• The Case Study of the Business Plan and the Business Owner
• How to Retain Employees By Keeping them Engaged
• Ensuring You Hire the Right Employees for Your Business