Lessons I Learned Today 6/30/09 – Getting to Know You; Science Lab 101

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

 

*A Practical Guide to CEO Succession Planning by Clarke Murphy

“Clarke Murphy and the CEO/Board Services Practice discuss the specific elements and timeline of a successful CEO succession plan, as well as the steps necessary to ensure a smooth transition.”

1. Begin intensive knowledge sharing.

2. Communicate with stakeholders.

3. Develop a written transition plan.

4. Share the transition plan.

5. Strengthen relationships with the board.

The article contains an example of a grid showing the personal average of each candidate based upon the following criteria:

  • Vision and Strategy;
  • Ensuring Tactical Success;
  • Relationships and Communication;
  • Motivation; Business;
  • Fit to Situation

Competitive Benchmarking with four tiers:

tier 1 – Best candidate available in the market for this position

tier 2 – Would present as candidate without reservations

tier 3 – Would be presented as a candidate with reservations

tier 4 – Would definitely not be presented as a candidate for the position

“Managing the CEO succession process is a board’s ultimate responsibility. A regularly reviewed and closely followed succession plan is essential to successfully exercise that responsibility. The costs of shortchanging this process are easy to see when companies are caught off guard by events; the payoff is reflected in the company’s momentum as it moves from one leader to the next. In addition, ongoing succession planning helps the board to be better informed and aligns the development of the senior management team with the strategic needs of the company. Beyond its usefulness in risk mitigation, CEO succession planning contributes to the successful governance and management of the firm long before a successor is needed.”

 

*The ABCs of Buying a Business by Tim Berry

“Buying an existing business is an excellent option that is often overlooked by entrepreneurs, but it does have advantages. You will have an established name, existing customers and an immediate revenue stream. However, searching for a business to buy can be difficult, and finding the right one to buy is tougher yet.”

“To provide some ‘structure’ to this very complex decision, the following process-oriented steps may serve as a checklist to help you go through the process.”

“Based on what you know about yourself and why you are interested in this business, you must constantly assess if the concept and the business is right for you. Does it fit with your interests and your resources? Cash, credibility, skills and contacts: do yours match what this business will demand?”

“Access to the “real numbers” behind the business is crucial.”

“You will want to retain a Certified Public Accountant and an attorney who is knowledgeable in business acquisitions. A CPA will to help guide you through the financial analysis process, and you may benefit from legal counsel as agreements are drafted and signed. Their expertise and the emotional separation from the process can make the costs for their services your wisest investments in the entire process.”

“Ultimately, negotiations will lead to a business valuation to determine what the business is actually worth. There are several ways to estimate the value of a company, such as the value of the company’s assets, how much debt does it hold, and from what sources are the company’s current revenues and profits? All of these are going to have a different impact on the value of the business. Other factors to consider in the valuation process include:

  • Level of risk
  • Competition
  • Growth
  • Organizational stability
  • Management team
  • Overall desirability

“Based on a valuation that you find acceptable, the specific arrangements of the financial transaction may determine if this is a “go” or something to walk away from and feel good about.”

“Determine if you are going to be able to add value to the business or if your goal is simply to keep “the machine” running. Once you have purchased the business, what are your objectives? Are you planning on owning the business for the next twenty years, or growing it over the next five years and then looking for the opportunity to sell? This will impact the intangible assessment of what the business may be worth to you and help assess the potential challenges ahead. Beginning your business plan will help to clarify your objectives and the business potential ahead.”

The bottom line:

  • Take your time.
  • Be methodical about gathering all the information you can.
  • Pay attention to the details.
  • Get help when needed and leverage available resources.
  • Continue to “test” to see if the business and its demands fit who you are and what you want your business to be.
  • If the deal doesn’t feel right, keep looking

 

*Questions to Ask When Buying a Business by Stephen Windhaus

“There are so many questions to ask when considering the purchase of an existing business. Let me give you a few examples that relate to financial, marketing, ownership and operations:”

  • Why is the seller selling?
  • Have you asked to review the certified financial statements of income, cash flow and balance sheets for the last three years?
  • Have you asked to see the company’s IRS returns for the last three years?
  • Have you asked for a copy of all documents of all outstanding indebtedness?
  • Has there been any significant turnover of employees?
  • Is there a close relationship between company and customers?
  • Do vendors display preferred, regular or irregular relations with the company?
  • Are there any members to a management team for this company?
  • What are the actual conditions of existing fixed assets like office equipment, machinery, vehicles and the like?

“This is a brief list designed to give you a starting point from which to begin the investigation of the venture in which you are about to invest.”

 

*Buying a Business? Know What You Are Getting! by Tim Berry

“When buying or investing in a business you need to evaluate that business carefully. One tool is the Investment Analysis.”

There are many valuation formulas:

  • The Book Value formula calculates valuation as Assets less Liabilities, just the same as Net Worth.
  • The Liquidation Value formula says the business is worth the liquidation value of its Assets, less Liabilities.
  • The Replacement Value formula says the business is worth what it costs to replace it.
  • The Times Sales formula is one where the business is worth the Sales Multiple shown as the Calculated Sales-based Valuation.
  • The Times Earnings formula is another of the two most common.
  • Market comparisons look at actual transactions of similar businesses of similar size.

“The valuation of a business depends not just on simple formulas and multiples, but also general market conditions, specific economics of the business, its location, its branding, its management team, its balance sheet, its customer base, the negotiating skills of the parties, and other factors.”

“For privately held companies, valuation of a business is theoretical until there is a transaction. When the transaction happens, the business is worth whatever the buyers pay for it. As a buyer and or seller of a business you don’t necessarily get what you deserve; you get what you negotiate; or what you settle for.”

 

*How Does Innovation Fit into a Business Plan? by Tim Berry

“Innovation changes a business plan pretty much as a reflection of how it changes a business. It adds risk, uncertainty, and interest too.”

“Risk has two sides to it: up and down. The upside risk in innovation is of course the benefits to a business when innovation leads to a more desirable offering: better product, suitable for a larger market, differentiated from competition, easier to build, and so forth. The downside risk the business that depends on innovation usually positions itself on innovation and loses big time when somebody else comes up with the next new bigger, faster, and better. ”

“Interest comes with innovation too. Market makers are interested. Opinion leaders are interested. Competitors are interested. And investors are interested. To the investor, innovation means defensibility and market advantage.”

“Innovation is part of your company’s identity, we would hope one of its strengths, and certainly a key element in business offering. It directly affects the market, both in the higher degree of guessing required (educated guessing, we hope) and in how it affects target market and message. And it affects strategy focus, too, because it turns a company towards it like plants growing towards the sun.”

 

*To Franchise or Not to Franchise by Tim Berry

“When you are trying to decide whether to buy into a franchise there are several factors to consider. Make sure you are looking at a solid and effective franchise that offers real value. There are hundreds of good ones, but lots of bad ones too.

You are paying an up-front franchise fee and a percentage of sales to get two main benefits:

  • A formula you can follow, a proven formula that guides you through the process, avoiding expensive mistakes.
  • National marketing to enhance your business with a brand name, television advertising, etc.

“I would want to know about training costs, needs, quality and availability. I would also want to know from other owners how well the parent company meets franchisees’ needs regarding product and system-wide marketing. I’d want to know also whether their marketing actually works and how much supplemental marketing you need to do. Do they supply signage? Do you have any choice about signage, etc.?”

“I’d talk to at least 10 other franchisees before I spent my money on somebody’s franchise formula business. I’d also find an attorney with experience in this area, and go through with him or her some of the questions you should be asking. For example, is the franchisor going to protect your territory or sell another franchise across the street? How can you tell for sure? What guarantees does the franchisor make about national advertising, etc.?”

 

* Social Media Will Change Your Business by Stephen Baker and Heather Green

“There are some 9 million blogs out there, with 40,000 new ones popping up each day. Any dolt with a working computer and an Internet connection can become a blog publisher in the 10 minutes it takes to sign up.”

“The divide between the publishers and the public is collapsing. This turns mass media upside down. It creates media of the masses.”

“Companies have to learn to track what blogs are talking about, pinpoint influential bloggers, and figure out how to buttonhole them, privately and publicly.”

“The dot-com era was powered by companies—complete with programmers, marketing budgets, Aeron chairs, and burn rates. The masses of bloggers, by contrast, are normal folks with computers: no budget, no business plan, no burn rate, and—that’s right—no bubble.”

“The role of the blog startups is to build tools for this grassroots uprising.”

“The Web we’ve come to know is mostly a collection of documents. A library. These documents don’t change much. Blogs are different. They evolve with every posting, each one tied to a moment. So if a company can track millions of blogs simultaneously, it gets a heat map of what a growing part of the world is thinking about, minute by minute. E-mail has carried on billions of conversations over the past decade. But those exchanges were private. Most blogs are open to the world. As the bloggers read each other, comment, and link from one page to the next, they create a global conversation.”

“In time, aggregators could turn the Web on its head. Why? They discourage surfing as users increasingly just wait for interesting items to drop onto their page or e-mailbox. Internet advertising, which traditionally counts on page views and clicks, could be thrown for a loop. Already Yahoo is packaging ads on the feeds. Google is testing the waters.”

“Mainstream media companies will master blogs as an advertising tool and take over vast commercial stretches of the blogosphere. Over the next five years, this could well divide winners and losers in media. And in the process, mainstream media will start to look more and more like—you guessed it—blogs. Clay Shirky, a Web expert at New York University, calls it ‘an absorption process where the thing doing the absorbing changes.'”

“Blogs can land sponsorship deals for as much as $25,000 per month, say consultants. O.K. money for an entrepreneur, but a rounding error in the ad industry. Blog power simply doesn’t translate yet into big bucks. For now, it’s running mostly on people’s passion to communicate—especially in developing markets.”

 

* Social Media SWOT Analysis by Peter Hollier

“It only makes sense to use SWOT analysis within the Social Media realm to determine the strengths, weaknesses, opportunities and threats that business has or will encounter upon initiation of a Social Media program. Without a SWOT analysis it will be impossible to develop an effective Social Media Marketing Strategic Plan, develop company guidelines and effectively initiate the Social Media Program.”

The following questions are a starting point to what should be asked about your company’s SWOT”

  • Does your company have the creative people required to develop meaningful high quality content and communication on a regular basis?
  • Does your business understand the keywords customers and prospects use to find your Social Media content?
  • Does your business have strong change management skills?
  • Does the company feel comfortable with empowering company employees to interact with customers using Social Media?
  • Are you customers using Social Media for personal or business reasons?
  • Have you identified and evaluated the efforts if any of your competitor’s Social Media presence?

“This by no means a comprehensive list of questions which need to be answered to complete a SWOT for your business’s Social Media program however, it is an indication of the types of questions you should be considering about your business’s capability to thrive in a Social Media environment.”

 

What I Think

I think all of the articles posted on this date center on change and change management of one sort or another. I also think the common thread is “getting to know you.”

Clarke Murphy’s article, A Practical Guide to CEO Succession Planning, deals with the specific elements and timeline of a successful CEO succession plan. Boiled down to the basics, this is simply a system in which criteria are developed to compare and contrast various factors to reach a decision on which of several options is the best fit for a particular situation. It is a way to “get to know” and understand several options and pick the best one.

The articles by Tim Berry and Stephen Windhaus on buying a business, when boiled down to the basics, are also stories of how one can create a series of criteria to use to compare various options. One option is to buy a business. One option is to not buy a business. You can take this up a notch, and compare various, somewhat dissimilar opportunities and bring them down to your own personal set of “final criteria.”

The screening used to compare various franchise opportunities presents one set of criteria. The screening to compare opportunities to buy several non-franchise opportunities presents other criteria to compare and contrast. Once the best candidate from each “column” is selected, the winners can be compared and contrasted using a narrower set of criteria, and that in turn can be compared to the advantages or disadvantages of taking no action. What a concept!

As they say, the devil is in the details. Knowing what formulas or criteria to use can be as much of an art as a science. Giving appropriate weight to the various criteria or factors is also critical to ending up with a selection, which will make you happy. These are things, fortunately, which can be accomplished by the proverbial “trained professional.” Selecting which “trained professional” to use and when to use them is, likewise, a process in which you can develop criteria relevant to your situation, such as education, experience, price, availability, etc.

Even the social media SWOT analysis article by Peter Hollier presents a similar analysis. Distilled down to the basic concept, this is a process of a company getting to know itself and how it will be able to manage a change when dealing with various options. In this case, it is a matter of developing relevant criteria to determine if it can achieve reasonable ROI from engaging in a social media campaign.

Isn’t this the same sort of thing our high school teachers tried to us in science lab? This is the scientific method applied to business opportunities. According to Science Buddy. Com, a popular Web site for kids learning the scientific method in school:

 The scientific method is a way to ask and answer scientific questions by making observations and doing experiments. The steps of the scientific method are to:

  • Ask a Question
  • Do Background Research
  • Construct a Hypothesis
  • Test Your Hypothesis by Doing an Experiment
  • Analyze Your Data and Draw a Conclusion
  • Communicate Your Results

Notwithstanding the Art of the Deal, is business really this simple? Does it just come to putting things on a grid and selecting the option with the best numbers. Not really, but it seems like that could certainly help.

Look at a relatively simple personal transaction, such as buying a house. There are lots of factors to consider, but for some people who move frequently, the process is just not that hard. Through multiple experiences, they have learned to identify the important things they want in any house, such as price, condition, location (ex. proximity to where they work, or to good schools), number of bedrooms, etc. Others, involved in exactly the same process for the first time, are probably much more likely to see the decision as extremely complex, to make a significant mistake, and be unsatisfied with the results, because they didn’t factor in something important to them.

In residential real estate, “curb appeal” is very important. In business, not so much. Given the wealth of material available online and from “trained professionals,” why would a business owner rely on curb appeal in an significant situation? “Getting to know you” can be an art, but not all of us are artists. If you want to play the odds, my money is on the science. 

 

 

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If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

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Posted in Applied Entrepreneurship, Buying a business, entrepreneur, Social networking & media

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