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Wednesday, June 8, 2011

Innovation and Entrepreneurs for Sustainable Business





Are you a time waster or a time saver?
What time management techniques do you use?
How can you better manage your time?
A professor at the University of Calgary in a study that was published in 2007 concluded that, “In 1978, only about 5 percent of the American public thought of themselves as chronic procrastinators. Now it's 26 percent.”[1] Dr. Piers Steel authored the report. He noted that, in addition to the higher numbers of American’s procrastinating, those that are chronic procrastinators “tend to be less healthy, less wealthy and less happy," Steel said Wednesday. "You can reduce it, but I don't think you can eliminate it.”[2] Overall, “more than a quarter of Americans say they procrastinate. Men are worse than women (about 54 out of 100 chronic procrastinators are men) and the young are more like to procrastinate than the old,” Steel said.[3] While a measure of procrastination is probably healthy, clearly the United States – and Canada as well – have a problem with ‘excessive’ procrastination. It is important to keep in mind that the inverse to excessive procrastination is overwork. This can be just as destructive. Many of us throughout our lives will be victim to both procrastination and overwork - myself included – what is important to keep in mind is the need for balance in all things.
Susan Ward has compiled a list of rules to be used for time management. In her article ‘5 Wats to Get More Time,’ Ms. Ward sets forth a series of rules that people – myself included – try to follow everyday. These rules are:


  • Time Management Technique #1: Recognize you can't do it all.
  • Time Management Technique #2: Prioritize.
  • Time Management Technique #3: Learn to say "Yes" and "No".
  • Time Management Technique #4: Unplug.
  • Time Management Technique #5: Take time off.[4]

Ms. Ward leaves us with this analogy for those of us who need to understand balance in our time management skills “if you want to learn golf and you spend eight hours a day seven days a week golfing but are holding the club wrong every time so that every ball you hit has a pronounced swing to the left, what happens to your golf game? It doesn't matter how much time you put into doing something if you're not doing it right.”[5]
For the over-worker – myself included – it seems best to remember to follow rules 4 and 5. The inverse is also true, I know many procrastinators that should remain vigilant in following rules 1 and 2.


There are many techniques for determining the worth of a firm. Hence there is no “right answer” for a company’s value. How should an entrepreneur proceed in determining an appropriate purchase price in the acquisition of an existing company?
While determining the price of an existing business is never clear cut from either the perspective of the buyer or seller, there are some methods developed for entrepreneurs to get a sense of a ‘fair price’. Entrepreneur.com has an article entitled ‘How to Buy a Business: Determining a Fair Price’. According to the writer, you can determine the value of a business using several different methods, including: Multipliers, Book Values, Return on Investment, and capitalized earnings.[6]


Multipliers:
“Some business owners determine their entity’s value by using a “multiplier of either the monthly gross sales, monthly gross sales plus inventory, or after-tax profits.”[7] The entrepreneur.com article goes on to say that “While the multiplier formula may seem complex and quite accurate to begin with, if you delve a little deeper and look at the components used to arrive at the stated value, there is actually very little to substantiate the arrived at price.”[8] Despite the complexity and perceived value of the calculations “most of the multipliers aren't based on fact…Of course, you can check the monthly sales figure by looking at the income statement, but is the multiplier an accurate number? After all, it has been determined arbitrarily. There usually hasn't been a formal survey performed and verified by an outside source to arrive at these multipliers.”[9] Because of these reasons, the multiplier method should be used as a tool, just like many of these provided here.


Book Values
The book value method can be a fairly accurate way to determine the price of a business. To arrive at the book value, all you have to do is “find out what the difference is between the assets and liabilities of a company to arrive at its net worth.”[10] Net worth has usually been calculated ahead of time and is available on the balance sheet. The net worth is then “multiplied by one or two to arrive at the book value.”[11] While the book value method may seem to be without flaw consider that, on the balance sheet, “fixed assets are usually listed by their depreciated value, not their replacement value. Therefore, there really isn't a true cost associated with the fixed assets. That can create very inconsistent values. If the assets have been depreciated over the years to a level of zero, there isn't anything on which to base a book value.”[12] In such a situation, there can often be disagreement over the ‘value’ of fixed assets.


Return on Investment
Another method is using the return on investment (ROI). ROI is calculated by “the amount of money the buyer will realize from the business in profit after debt service and taxes.”[13] It is not uncommon for a small business to return anywhere between “15 and 30 percent on investment. This is the average net in after-tax dollars. Depreciation, which is a device of tax planning and cash flow, should not be counted in the net because it should be set aside to replace equipment.”[14] Ultimately ‘the wisdom’ in purchasing a business lies in its “potential to earn money on the money you put into it. You determine the value of that business by evaluating how much money you are going to earn on your investment. The business should have the ability to pay for itself. If it can do this and give you a return on your cash investment of 15 percent or more, then you have a good business. This is what determines the price.”[15]


Capitalized Earnings
Similar to the return-on-investment method of assessment, capitalized earnings is different in that “normal earnings are used to estimate projected earnings, which are then divided by a standard capitalization rate... To determine the value of a business based on capitalized earnings, use the following formula: Projected Earnings x Capitalization Rate = Price”[16]
According to Entrepreneur.com, a good capitalization rate for buyouts ranges “between 20 to 40 percent.”[17] If the seller of the business is asking more than what you've determined the capitalized earnings to be, then – like all the other methods presented here - you will have to try and negotiate a lower price.[18]
Having reviewed some of the methods for determining value for a business, it is clear that there is no absolute way to gauge the value of an existing business, there are some useful methods of developing a price from which to start negotiations. The above mentioned methods are all good options for the entrepreneur to successfully create a foundation upon which they can find common ground with the prospective seller. Only the entrepreneurs themselves will be able to determine which is the most appropriate method in a given situation.

In a family owned and operated business, the question of succession becomes increasingly important as the founder ages and is no longer capable of running the business. How should the company proceed? What problems might occur?
According to Peter F. Drucker, in his article, ‘How to Save the Family Business’, there are two paramount rules that a family-managed business must stringently observe. They are:
§ “Family members working in the business must be at least as able and hard-working as any unrelated employee. In a family-managed company, relatives are always "top management," whatever their official job or title. On Saturday evenings they sit at the boss's dinner table and call him "Dad" or "Uncle." Mediocre or lazy family members are therefore--rightly--resented by non-family co-workers, and respect for top management and the business as a whole rapidly erodes. Capable non-family people will simply not stay, and the ones who do soon become courtiers and toadies. It is much cheaper to pay a lazy nephew not to come to work than to keep him on the payroll. DuPont, controlled and managed by family members from its founding in 1802 until professional management took over in the mid-1970s, grew into the world's largest chemical company. It prospered as a family business because it faced up to this problem. All male DuPonts were entitled to an entry-level job in the company, but five or six years later their performance was carefully reviewed by four or five family seniors. If this review concluded that the young family member was not likely to be top management material 10 years later, he was eased out.
§ Family-managed businesses, except perhaps for the smallest ones, increasingly need key staff positions with non-family professionals. The demands for knowledge and expertise--whether in manufacturing, marketing, finance, research, or human resource management--have become far too great to be satisfied by family members alone, no matter how competent they may be. Once hired, these non-family professionals have to have "full citizenship" in the firm. Otherwise they simply will not stay.”[19]
While Mr. Drucker’s words are indeed important testaments to be observed, there is another option that Mr. Drucker overlooks. Another option for a family-owned and operated business is for the business to succeed, entirely, to a non-related ‘family’ member. Sometimes it is not our families, but our friends – both personal and professional - that end up being the best options to hand over the family business to. Let’s assume that company X, started by Jane Smith, grew into a twenty million dollar company during its 20 years in business. Let us further assume that Jane Smith had one child. Child Y, while capable, is both spoiled and affected by chronic health issues that do not prevent her mental prowess do effect her ability to meet deadlines and be in the office on a regular basis. In such a situation where Jane Smith is faced with closing the company or hand it over to her daughter and not having the confidence that there won’t be oversight problems, a non-relative but close family friend may be the better bet. Within the option to have the company run by a non-relative Jane has another decision to make. Depending on the size of the company, the daughter can be a ‘figure head’ or have a position on the board that would allow her insight to still be heard but not lose creditability by putting her in a position where the reliability of the company could be brought into question. If the company is not public or sees child Y as more useful than as a figure head, then the company needs to formulate a position within the company where child Y can feel productive but have her position be flexible enough so that when she is unable to accomplish her tasks, there are safeguards in place to maintain flow and consistency.
Just like the discussion of determining value for business monetarily, there can be just as many difficulties when considering the transition of power within a family business. For example what if Jane Smith had had two children, or even twins? Assuming both are healthy, how does Jane determine who will become the CEO? All of these variances need to be carefully considered both to maintain family cohesion as well as business cohesion. Such qualities can be very important if not paramount in a smaller family business. Such transitions are the test of every foundation that the ‘family business’ was built on. Some of these transitions later result in these companies being huge MNC’s with office all over the world and some falter in this transition stage and go bankrupt.

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