Tag Archives: private equity

What Entrepreneurs Should NOT Do

When entrepreneurs start businesses, they are susceptible to making mistakes that others have made before them, climbing an unnecessarily steep learning curve, and burning through dollars and emotional energy. Without the help of an experienced mentor and some principles of start-up management, it is no wonder that many start-ups are not in existence 5 years later. Yes–success stories abound–mainly because few want to read or write about businesses that didn’t make it!

David Bakke is a writer for Money Crashers, and was featured on Brazen Life, a Brazen Careerist site recently with the list below of mistakes an entrepreneur should seek to avoid (& can with mentoring and education): http://ow.ly/ataho

1. Starting a business in a new field

Trying to launch a business in an industry or area where you don’t have any prior experience can quickly lead to failure. Before you make the leap into starting a business, make sure you focus on your talents, passion and experience to pinpoint the right business for you. Combine your enthusiasm, experience and knowledge with a solid, organized business plan if you really want to succeed.

2. Trying to start your business on your own

Trying to go it alone will only hamper your efforts to grow and expand your business. Initially it makes sense to cut costs by working alone, but soon enough you’ll need to make intelligent, calculated decisions about working with like-minded individuals to help your business grow.

3. Not adapting to changing business conditions

Learn to adapt as you grow your business. Don’t be afraid to change your target market or scrap unsatisfactory marketing initiatives. Recognize the fluidity of your small business, focus on what positively and negatively affects your business plan, and adjust your growth model accordingly.

4. Being deathly afraid of making mistakes

You engage in a great deal of risk when you launch a small business, and most of it involves your personal finances. Learn to quickly identify errors in judgment, determine why they occurred, and make immediate adjustments so they don’t happen again.

5. Avoiding risk

Continue to take risks as your business evolves. If you encounter an idea to expand your business that feels “risky,” research the pros and cons of the concept. If the idea still seems viable after your analysis, go for it!

6. Quitting if you run out of cash

No successful entrepreneur ever let money stand in the way of achieving business goals. If you have a great business plan, a passion for the concept, and you’re willing to work hard, you can always find ways to fund your business proposition. Cut costs in your everyday life to free up capital, apply for an SBA loan, approach angel investors, or even approach friends and family after you’ve bootstrapped as much as you can.

If you can’t find funding, you don’t have to give up on the business idea altogether. Timing also plays a role in business success. It might make sense to start more slowly, and to put off aggressive expansion efforts and attempts to find additional funding until your business begins to show a steady profit.

http://www.Entredot.org is one approach to what entrepreneurs SHOULD do–come check it out!

 

Successful Business Plans: 5 More Keys


EntreDot Executive Director Bill Warner wrote a blog post this week for the Raleigh Emerging Designers Innovation Incubator website about business plans. In it, he shares keys to success.  Yesterday’s post here dealt with 5 keys; 5 more are offered below:

“Have a compelling value proposition.”

  • Solve a truly important problem with an attractive return on investment.
  • Make sure it fits into your buyer’s priorities.

The Challenge: You must fit within your buyer’s priority list for planned purchases. The benefit of your product has to be at the forefront of your customer’s needs. The best way to express the value of your product or service is to present a return on investment (ROI) analysis. You should be providing either higher revenue or lower cost/expense, and it should take less than a year to pay the investment back. Anything else is probably a “nice to have,” and is unlikely to win in a market where buyers are only purchasing “must have” solutions.

“Have a targeted marketing plan.”

  • Know how to reach your buyer to gain awareness
  • Establish a cost effective lead generation plan

The Challenge: Select the right way to deliver your message to your potential buyer: advertising, trade articles, mail or email campaigns, telemarketing, distributors, value added remarkets, dealers or direct sales force. Many companies are over-reliant on franchises as offering a silver bullet strategy for support and getting started. They don’t sufficiently analyze what the franchiser brings to the table that you can’t do for yourself. Franchisees sometimes over-estimate the value of the support from the franchiser; in that, is it worth the franchising fee and the royalty payment? Can those costs be made up by efficiencies offered by the franchiser? Can those costs be passed on to your customer? If not, the franchisee is at a competitive disadvantage. Those with a “brand” that can bring customers in the door on “day one” and provide active business operation assistance, rather than arms length promises, are particularly worth looking into. Once you have generated qualified leads, manage them through the entire sales process.

“Create the most efficient sales channel and excellent customer support.”

  • Ensure the sales approach is affordable
  • Build satisfied customers

The Challenge: Establish a sales forecast. Hoping for sales is not planning. Sales forecasts are based on understanding the buyer in your selected market segment and on the experience of others in it. Many new companies underestimate the time it takes to build a business to the point where it is profitable. As a result, many new businesses are under-financed and have insufficient working capital to sustain themselves in the initial growth period or during seasonal downturns. Being new and small is no excuse for cutting corners in dealing with customers. Would you go into a shop in the mall with cheap looking furnishings and lighting? Don’t try to save money there. Your sales and support efforts should be guided to create a satisfied customer who is willing to be a reference to other potential customers and give you repeat business as well.

“Understand your entire financial model.”

  • Establish realistic sales, cost, capital and expense plans
  • Understand cash flow and profit dynamics

The Challenge: Establish a solid financial plan. Many new companies are unplanned or under-planned. Planning cannot deal with all the surprises in the real world, but why be surprised by things you can anticipate and deal with beforehand? Planning requires a highly detailed and kinetic vision of the future of the business that reduces that vision to the language of business, dollars and cents. A financial plan is required to raise money from banks and investors in addition to helping you set financial objectives. Many new companies try to save money by avoiding the costs of lawyers, accountants and insurance agents. One mistake can cost you many times the small cost of relying on experts. Operationally, the most important financial dynamic to understand is cash flow. Know how money comes into and goes out of your company and when the transactions occur. The penalty for not managing your financials well is running out of money and probably losing your business.

“Ensure you have a winning team.”

  • They should have the passion for success
  • Attract the best experience and know-how

The Challenge: Pick the best people for your company. Many new businesses reach too far in a single step; for example, starting a trucking business without any prior experience. Take it “step-by-step”. Often the first step is to get a job in a business similar to the one you want to start. Learn the business from the inside out. Then start your own business.  With the right experience under your belt, build your team with people that fill out the strengths that you need to run your business. Pick only the best people that can get the job done. Avoid hiring friends and family.

Better Mousetraps Require Divergent Thinking!

One of the people I follow in leadership blogs is Dan Rockwell, aka Leadership Freak. His post this morning cautions against working hard versus working smart:

It doesn’t matter how hard you work if you’re working on the wrong things.

He goes on to discuss how doing business without thinking strategically can be harmful to your business and personal health. While it’s needful to get work out the door (think lawyers focusing on billable work, carpenters hammering nails), to only do so is to lose sight of the bigger, value adding activities that distinguish great businesses from ordinary ones. Your efforts are not as productive as they could be because you are displacing the benefits of your focus and inertia that could be applied to thinking about what would make you more successful and pursuing those activities that promise reward for another day–not just the current one!

Some of the activities that suffer when you are not working on your business include:

  • Planning
  • Goal-setting
  • Brainstorming
  • Delegating
  • Organizing
  • Dreaming
  • Alliance building
  • Networking

When our attention is shifted to “working on the business” (thanks Michael Gerber for the E-Myth insights), we are thinking innovatively. Our efforts are building something that will stand the test of time. Net worth/business value soars as we are refining the business model instead of just trying to work harder. Think about franchise systems. The value is in the documented processes and controls. Even if you never plan to sell through a franchise agreement, you would do well to consider the genius behind the movement. Instead of being the person who only makes money off the sweat of his or her brow, you find a way to make money off others’ labors.

Rockwell suggests the following to help you get unstuck and more productive in creating a business with greater value:

  1. Create a weekly “working on” appointment with yourself. Identify and take a next step.
  2. Make small adjustments. You’ll never shift toward working on your business in one giant leap.
  3. Find new eyes. Discuss systems, strategies, and vision with experts outside your field.
  4. Listen. Many leaders and business owners have too many answers and too few questions.
  5. Try something. Waiting for stunning success prevents progress.
  6. Delegate more even if it takes longer at first.
  7. Follow-up and follow-through. Frustrations inspire conversations regarding improvements but follow-through changes things. Perhaps some form of accountability would help?

For entrepreneurs, mentors can be extremely valuable in holding one accountable to a process like the one commended.  Going it alone, without the benefit of outside advice and counsel, makes us technicians without hope of escaping the rat race.  You can change your future today–be daring to do so!

Using EQ to Plan Management Succession

How to go about preparing a privately owned business for management succession… 

GDF Professional Services had been a successful company for over 10 years in the business of providing organizational development consulting. Located in the Research Triangle area of North Carolina, the firm had capitalized on the local economic growth and availability of talented human capital. Over the past few years, the platform included leadership, change management & organizational psychology services for local companies. While most clients had 30-100 employees, some were smaller, and others were considered “middle market.”

The two primary owners, “G” & “D”, had determined that they desired to cut back on their hours at work and aimed to eventually hand the business over to a strong management team. However, management group members, while strong in their individual disciplines, had not coalesced into a cohesive team and were unprepared to succeed the founders in running the company on a daily basis.

The challenge was to help the managers prepare to take over and prepare the owners to begin to step aside. To do so would require innovation in the business model, systems, processes, and offerings of the Firm. In order to introduce innovation, a baseline needed to be established and performance measured. One of the best predictors of decision-making habits among managers is a behavioral assessment that measures one’s Emotional Quotient (EQ). Scheduling mentoring sessions to discuss competencies followed the administration of the EQ assessment.

     As the management team members began to share not just facts, but heartfelt emotions, dreams, and recommendations, it was necessary to have a process to capture and assimilate all the content. Each mentee meeting, each owner meeting, each team meeting was captured in detailed notes. Additionally, consultative questions in the individual sessions regarding assigned EQ worksheet exercises yielded additional insights. The information was culled weekly for follow-up items on the individual and team level, as well as combed for items to take up within strategy sessions with the owners. A rudimentary knowledge management system was put in place for this purpose.

Nearing the six month mark, the group was becoming anxious as to what was to follow. Someone suggested that the EQ mentoring continue at the staff level so that staff members could benefit from the same body of knowledge and practice that the leadership team had. Simultaneously, the owners agreed to undergo EQ mentoring themselves in order to enhance credibility with their key reports.

The other signs of progress were:

  • The weekly management team meetings were supplemented with weekly departmental meetings that did not require the presence of the owners
  • The weekly individual mentoring sessions were replaced with monthly sessions, but weekly exercises continued
  • The weekly group educational sessions were replaced with bi-weekly ones
  • The owners agreed to hold a year-end retreat to discuss drafting a succession plan

More work needed to be done in terms of clarifying roles and responsibilities, the funding source for the succession plan, selecting a leader from within the management team or from the outside, and insisting that the owners go on record as to what they will hand off when and to whom. However, all were very encouraged at the likelihood of success based on the transformation of the culture experienced during the process.

Un-Madoff Your SMB

Even if a business has strong financials, talent is not enough – integrity is needed. Master investor Warren Buffett’s position on business performance has been: “In looking for people to hire, you should look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.”  Given his track record, good corporate governance seems to be an essential part of long-term business success. Whether we go back to Michael Milken and his securities fraud, or more recently to Enron and Bernie Madoff, we have a wealth of examples of how poor checks and balances led people with intelligence and energy to behave in ways that clearly lacked integrity and cost many other people millions of dollars.

A 2003 joint Harvard and Wharton study entitled Corporate Governance and Equity Prices found that companies with good corporate governance generated superior future returns and higher profits and sales growth. The study created a “Governance Index” (G-Index) for each company based on the number of these 24 anti-shareholder provisions the company possessed. The higher the index score, the worse the company’s stock performed. Using data from 1990-1999, the study found find that companies with a low G-index score (i.e., a “democracy” portfolio) outperformed companies with a high G-index score (i.e., a “dictatorship” portfolio) by a statistically significant 8.5 percent every year. By 1999, a one-point difference in a company’s G-index score was associated with an 11.4 percent drop in a stock’s market value. Further, firms with weak shareholder rights were less profitable and suffered lower sales growth than comparable firms in the industry.

A 2009 joint Yale-Harvard study finds that the outperformance effect has waned in recent years as investors have learned about the importance of good corporate governance and adjusted the stock prices of good and bad companies accordingly.

In other words, bad corporate governance is now discounted in stock prices. Small-cap stocks and privately held businesses, where data is less available, seem to dodge the scrutiny of the large-cap stocks and purchasers of their stocks can take a “ding” on the regular.

 

 

How can we change the pattern in small to medium businesses?

  1. Better corporate governance measures in privately held businesses should include a progression towards true, independent boards.
  2. The boards should be evaluated on an annual basis (check out the Center for Board Excellence.)
  3. Matters such as compensation, family members in the business, succession plans, etc. need to be discussed in board meetings and action plans developed.
  4. Organizational development principles should lead to better talent management and the assignment of shared decision-making outside the CEO’s office.
  5. Internal controls need to be examined and improved to mimic best practices of a public company in a Sarbanes-Oxley environment.
These are a start–what would you recommend?