Why Sell Your Business?
Bill Warner Thursday, May 14, 2009
This is a real bad time to sell your business. Valuations are falling as you can read about in Mike Handelsman’s article in Entrepreneur.com and the gruesome details at www.bizbuysell.com.
The Sales Decision Dilemma
This might not be intuitive at all. There’s a good chance your revenue growth has declined in the last couple of quarters. Your profits might be a lot smaller as a result. Your credit may be declining as banks reassess their risk. We are reading all this bad news every day. The dilemma is in deciding if you should sell now before the economy worsens, or ride it out and get a much better valuation when the economy recovers.
Should You Sell Your Business?
It seems to me that if your business has been strong then you have a good chance of pulling through this mess. Continue to manage your business with heightened discipline and come out of the economic decline even stronger. You then can sell your business at the much higher valuation it deserves. You have worked too hard to sell your business at bargain basement prices.
If your business has been weak, then it will not be an attractive purchase opportunity for any buyer. If your business is weak because there is no viable market for your products and services then you do not have a company worth buying by anyone. If your market is attractive but you are not managing your business well, you need to fix the business before you sell it. Your mismanagement will reveal itself in due diligence and you will get an even lower valuation as a result. This is because the buyer is taking much greater risk and is going to have to fix the business after the purchase. You should fix it yourself.
A Reason To Sell Your Business
The only reason to sell your business now is for personal reasons. You may just want out of the business at any price because you have lost the passion for it. You may have a dire personal situation that prevents you from paying attention to the business. You don’t have the energy or know-how to save your business from eminent failure and want to get anything you can for it.
But, if you still have the passion and the energy, keep going and weather this storm. Be one of those people that get going with the going gets tough.
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Venture Capital Pillars Are On Weak Ground
Bill Warner Thursday, April 30, 2009
At its recent annual meeting, the National Venture Capital Association (NVCA) introduced the four pillars of success for reinvigorating the venture capital markets. The trouble with many of their ideas is that they are built on assumptions that the government law makers, regulators and administration are going to make massive changes in order to save the small cap venture investing market. Given the current government posture, these changes in the near term are terribly unlikely.
Boutique investment bankers
The idea of finding new partnerships with the smaller investment banking firms is a step in the right direction. However, these firms are still going to have to make money at this. Their deals are going to have to be attractive enough while investing in companies whose post-IPO value is between $100M and $400M, the segment of the market below the “Big 4” investment banks.
This seems like a long stretch in that none of the problems that this segment faces are being solved. The burdensome regulations are still there. The tax implications are still not favorable. This pillar of success seems more like a possible outcome when the basic capital market infrastructure changes are made.
New paths to liquidity
Having new and faster paths to liquidity certainly could make a big difference. The NVCA presentation doesn’t explain how this is actually going to happen in a way that works for investors and sellers. However, this does seem like a necessary element for stream lining the investment process for boutique investment banks. But, without fundamental governmental changes, this too will run into a brick wall.
Taxation changes – not for quite awhile
In the face of a socialist administration, coupled with a far left wing dominated congress, the likelihood of getting any changes that would provide tax incentives for businesses, let alone helping those capitalistic venture capital firms and investment banks, is not in the cards. With an administration and congress that is fundamentally anti-business, the only think we have to look ahead to for awhile are tax increases.
Reduced regulation – not likely
For the same reasons we won’t see tax incentives, we will only see more stifling regulation on businesses and increased government oversight in the private sector. Sarbanes Oxley is not going to change anytime soon and volatile markets are playing into the liberal’s hands in that it gives them a reason to get more involved in the private sector. None of them is looking to really help Wall Street.
Stay with the basics
It’s not the end of the world if IPO’s remain stagnant. The goal here is not to save venture capital. It’s to save small business. Whatever we can do as business owners and financial institutions to work with the hand we are dealt is all we can expect right now. Mergers and acquisitions will continue to be the primary form of exit. Investors are going to have to accept that limitation and structure their deals accordingly. We can expect no meaningful help from the administration or congress for the foreseeable future. Most of these people don’t really understand what they have done to small business anyway.
For entrepreneurs, build high valued businesses by executing well. Be experts at the basics of growing high growth and profitable businesses. For investment institutions, build your portfolio based on smaller valuations and oriented to faster exits, without relying on IPO’s to save the day.
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Entrepreneurship Remains Strong
Bill Warner Thursday, April 23, 2009
The first full day of CED’s Venture Conference was well attended by enthusiastic entrepreneurs and investors seriously looking for good companies. We had a full plate of great companies who made their presentations to packed rooms.
Wells Fargo introduced to North Carolina
The day was started by John Stumph, President & CEO of Wells Fargo, who gave a sincere presentation about how much he is impressed with North Carolina. Believe it or not, this was his first trip here. He has met with many community leaders, including current and past governors as well as senators and congressmen.
He assured everyone that their Wachovia accounts are safe and that the transition will be carefully done to protect its Wachovia customers. Stumph gave a compelling history of Wells Fargo and related the strong culture of his organization that truly cares about its people, customers and communities in which it resides.
As for the financial crisis, he quite precisely described the fundamental causes for the crisis, but quite frankly had no crystal ball telling him when the recovery will occur. He was bullish about the fact that Wells is lending money now and is actively looking for new loans to make. The company is in a very strong cash position.
All in all, Stumph said that he would not “bet against America.” We have been through difficult times in the last few decades. He is confident that we will pull through this one too, explaining that this is what Americans are good at.
Entrepreneurs are at the heart of the recovery
Erskine Bowles, President of the University of North Carolina, started his presentation with a humorous discussion about what a lousy politician he is and now how happy he is taking on the challenges at UNC.
He too gave us a dose of reality concerning the challenges that face the education system today. Last year’s $50M budget cut is near trivial compared to this year’s $175M cut with a potential cut of another $200M next year. This will cut to the bone of classes, people and potentially education quality.
Bowles noted that we are in a rapidly changing world. What we prepare our students for today will probably be obsolete in 10 years or less. He knows that the “old NC manufacturing jobs” will never come back as we move more and more to a knowledge-based economy. He said that we have to accept that we will continue to lose jobs to foreign countries that can provide many of them at much lower costs.
He pointed to the entrepreneur as being one of the major contributors to our return to a strong economy. He cited the need for increasing innovation and the support infrastructure that fosters it as being essential to our ultimate recovery.
North Carolina University is making substantial changes in its culture, technology transfer practices and accountability for academic results. Bowles stated that we have to focus on producing students that can think, communicate, be innovative and get things done in this new economy.
GreenTech – The next industrial revolution
To close out the day, John Denniston, Partner at Kleiner Perkins Caufield & Byers, made the proposition that we are on the verge of the next industrial revolution driven by the energy crisis. The revolution will be based on new energy sources driven by green technology.
Although an exciting premise, it was a disappointing presentation void of specific descriptions of innovations and technologies that would drive this kind of change. Quite frankly, this slow moving and elementary presentation addressed the audience as if we were eighth graders and couldn’t possibly have understood the basis for the industrial revolution of the early 1800’s or even understand who Thomas Edison and Henry Ford were. Nobody likes being talked down to.
Denniston cited the crisis as first being driven by man-made climate change as unanimously verified by United Nations organized scientists. Boy that sure isn’t very biased at all, from an organization that wants to transfer our wealth throughout the world through green house gas taxation. Secondly, and more compelling was his concern about energy security in that we are far too dependent on foreign sources of energy from countries that hate us. And finally he explained the alarming advances that are being made in innovation in other countries like China, asserting that America is losing competitiveness to them.
He then made sweeping analogies based on Moore’s law, claiming that similar improvements will be made in alternate energy source technologies using 1995 data to illustrate his point. He compared the sum total of all of earth’s natural energy sources to those of the sun, concluding that we need to tap into solar energy for that reason. The presentation continued to a merciful end without much substance about today’s green technology innovation.
Kleiner Perkins is the world’s leading venture capital firm, but this presentation feel far short of showing their expertise in green technology innovation and what it will mean to the future of our economy.
Entrepreneurs and investors enthusiastic
The entire conference was buzzing with enthusiasm and positive attitudes about what we need to do to recover from this economic downturn. New innovations are abundant. Investors are interested and engaged. Just rubbing shoulders with them all was a major pickup for me.
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Inflation Proof Your Business
Bill Warner Tuesday, April 21, 2009
I am certainly no economist or master of the US financial system, but when I see how much money is being poured into the economy by the Treasury, red flags of inflation flash in my face.
Take a look at the trends. What I think this data says is that by early 2008, the money supply had reached $4 trillion, by the 4th quarter of 2008, it had reached $5 trillion and it is being reported as over $8 trillion. Recent news reports add another trillion in March. By the beginning of 2008, the money supply had doubled since 2002. In one year, it has more than doubled again, with $4 trillion being added in the last few months. I don’t know about you, but that is frightening to me. Yes, we are in a recession, but I am worried that in short order the devalued dollar is going to leap into the forefront as an issue causing price increases and higher interest rates, the key elements of inflation. This recession might snap like a rubber band into a period of rapid inflation.
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Entrepreneurs Can Lead The Way To Recovery
Bill Warner Sunday, April 05, 2009
In a recent article in the Wall Street Journal, Carl Schramm, the CEO of the Kauffman Foundation, gives a no nonsense interview on the importance of entrepreneurship in America.
*How awful is awful*
You all have read and heard on the news how awful it would be if the banks failed or if the auto industry failed, but nobody ever really explains what awful means and to whom it would be awful. Either it is really so awful that none of us could stand it if we heard the truth, or it is really not so awful and our system of capitalism would correct for the failure and we would build something in their places.
Mr. Schramm seems to come from the latter point of view. He has a beautiful line in the interview where he says their failures would give us a “moment when 1,000 flowers can bloom.” After all, that is how the natural selection process of capitalism kind of works. When companies cannot adapt to changing customer demand or keep up with their competition, then they will be punished by the market for their failure and other more resilient companies will take their places.
*We have seen awful before*
Certainly these failures have resulted from poor management decisions, an overabundance of harmful government regulation, an incompetence of legislative oversight, and greedy demands from unions. The solution now should be to have government step back from these institutions and let the chips fall where they may. The government is certainly not capable of running any business entity and where substantially involved in getting us to the failure point we are at today. An orderly bankruptcy restructuring would clean up a lot of the mess and put many of these businesses back in play. Coupled with a retraction of costly government regulations and an oversight function that was competent, we probably would be out of this slump a lot faster than trying to borrow trillions of dollars to bail our way out while creating a multi-trillion dollar debt and risking rampant inflation by printing trillions of dollars we don’t currently have.
*The entrepreneur can save the day one more time*
At the heart of every economic recovery we have had in recent years is the entrepreneur. It’s the innovative entrepreneur whose ideas, passion and dedication, create new companies in new industries, requiring new skills, that foster the economic growth and new jobs that turn the situation around. Our government should be totally dedicating itself to providing the incentives, tools, resources, education and seed financing for new business growth; not hanging onto failing business models that are proving themselves to not be viable. We should be creating more energy, including the drilling for our own oil, which will fuel economic growth through lower energy costs. Costly regulations that hinder entrepreneurship should be rolled back, including such things as Sarbanes Oxley, silly environmental protection regulation, and taxation schemes under the guise of global warming. These and many others stand in the way of the natural progression of economic growth that has served us so well. To curb the greed that has led us to this recession, we do not need more government regulation; instead we need more competent oversight.
*Take a look at FastTrac*
Mr. Schramm refers to FastTrac, a Kauffman Foundation developed program that helps entrepreneurs create a plan for their businesses. FastTrac is taking many forms throughout America as it helps thousands of bright entrepreneurs as well as reaching out to university and community college students, people in devastated communities, and underprivileged people. This program is important in that it gives entrepreneurs in their learning years a solid understanding of how to create a business. FastTrac entrepreneurs learn how to evaluate their market opportunities, assess possible competition and identify their value proposition. Then, on that basis, they learn how to build a business that will successfully pursue that opportunity, including how to get it financed. All entrepreneurs should go to the FastTrac website and look at the program locator for a program in your area.
You too can be one of the 1,000 flowers that will bloom.
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Surviving the Coming Inflation
Bill Warner Wednesday, February 18, 2009
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The Four Phases of Building a Successful Business
Bill Warner Thursday, January 22, 2009
Entrepreneurs create profitable high impact companies that span the full spectrum of types of businesses. Their businesses:
- Exist in all industries, technology and non-technology.
- Are high growth companies as well as high impact lifestyle companies.
- Are financed by all sources of available funds including grants, loans, friends and family, angels, strategic partners and institutional investors.
Entrepreneurs at any phase of business maturity need help in preparing their companies for the next phase of maturity. Overall, these phases of business maturity define the kind of help they need in order to progress further. The four phases are:
- Ideation – Describing the commercial merit of their business idea.
- Research – Researching the commercial value of their business idea.
- Start up – Assessing whether they have a viable business proposition.
- Expansion – Determining how to grow further into new markets or succeed in their current markets.
Entrepreneurs need to manage the transition through each of these phases as their business ideas mature. There are programs available in your community that may be of assistance to you as well; for example the Council for Entrepreneurial Development’s (CED) FastTrac® program. You can find out about more resources by clicking through to the entire article.
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The Stress in Venture Capital Firms
Bill Warner Wednesday, January 07, 2009
I have brought in a blog post from The Funded website entitled The Limited Partner Shuffle: It Affects You. This is one of the most enlightening and easily understood explanations I have seen about what is happening to venture capital. You can see how this will effect any venture backed company and any company that is hoping to get venture money. For the start-up entrepreneur, you have to also realize that this puts a lot of pressure on angel investor organizations too. Private angels have been affected the same way as institutions have by the market downturn. Since the availability of venture money is drying up fast, angel groups need to reserve more money for their portfolio companies, resulting in less money being available for investments in new companies.
Investors in venture funds, called limited partners, are pulling out or selling their commitments to provide essential capital to the venture model, causing the “Limited Partner Shuffle.” Some experts are quoted as saying as much as 10% of all private equity positions will change hands this year in hasty transactions to generate liquidity, including premium positions by top-tier institutions like Harvard. What does this mean and why is it relevant to entrepreneurs? A quick overview of venture capital will help to answer these questions.
Venture firms raise money to invest from limited partners (LPs), who are normally endowments, pension funds, insurance companies, and other institutions that manage large amounts of capital. An investment in venture capital is considered a high risk asset class with the potential for high returns. The professional consulting firms that publish guidelines for how limited partners should allocate money across asset classes generally recommend that a small portion go into venture capital, sometimes less than 1%. This small percentage still amounts to many billions of dollars per year being entrusted to venture firms by limited partners, who control trillions of dollars.
Generally speaking, a commitment to invest in a venture fund does not require the limited partner to transfer money until the venture firm makes an investment in a portfolio company. So, a $100 MM venture fund does not have $100 MM sitting in the bank. Instead, as venture firms make successive investments, they collect money from their limited partners and distribute that money to portfolio companies in rounds. To cover operating expenses, the venture firms separately collect approximately 2% of the invested capital as a management fee.
In order to ensure that each limited partner honors their obligation to provide money when needed, which is referred to as a capital call, venture funds implement onerous terms for forfeit or default. The most common default protection is to wipe out any returns from all previous invested capital. This encourages an active secondary market for limited partner positions, since it makes more sense to sell a commitment than to lose the value of the money invested to date.
Fast forward to Q4 2008, and you have the perfect storm of venture capital destruction. First, a relatively large number of limited partners, such as AIG and Lehman Brothers, are facing solvency issues, and they can no longer honor any capital calls to venture capital funds. The large scale dissolution of limited partners is something new.
Second, as the equity and debt markets have collapsed, the allocation of limited partners to venture capital has increased as a percentage. If an LP has $1 billion under management and 1%, or $10 MM, committed to venture capital and if that $1 billion suddenly becomes $500 MM, the allocation schedule of 1% stipulates that the LP now only invest $5 MM into venture capital. Many LPs have charters that strictly govern these percentages, forcing the LP to sell commitments in the secondary market to comply.
Third, many potential buyers in the secondary market have liquidity issues of their own. The purchase of a commitment requires resources to buy the asset, resources to pay for future capital calls, and resources to cover management fees at a time where the future is uncertain. The lack of liquidity and uncertainty has caused a collapse in the secondary market values, with many commitments selling for $.50 on the invested dollar or less. This in turn has encouraged limited partners that might otherwise commit to new positions in venture funds to consider purchasing discounted positions in existing funds.
Lastly, venture capital returns have been hard hit by the downturn, reducing or eliminating the ability of certain funds to get back any of the original invested capital. Portfolio company acquisitions are on hold, and the IPO market is frozen. For many limited partners, investing more money into certain venture firms is literally throwing good money after bad when cash is king.
Most venture firms worldwide are facing problems as a result of this “Limited Partner Shuffle.” The best firms are distracted by helping limited partners transfer commitments. Other firms will cease making investments for some period of time, possibly forever. Still other firms will not be able to collect their management fees and go under in the next fews months. Nearly everyone will be fundraising and spending a lot less time with their portfolio companies.
Many entrepreneurs are now pitching firms without a future, wasting invaluable time. These “Walking Dead Funds” are going through the motions until the other shoe drops, forcing them out of business. Other entrepreneurs are counting on investments or participation from funds that have no ability to deliver any capital. Lastly, there are entrepreneurs with soon-to-be-insolvent firms that hold controlling preferred equity positions and Board seats, leaving a potentially deadly vacancy in governance and voting control. How do you sell when your primary shareholder is no longer around to grant approval?
As an entrepreneur in today’s market, you need to understand the relative health of the investors that you deal with. Start by asking them directly about their financial resources and the state of their limited partners. Don’t hesitate to ask other entrepreneurs and other funds as well. You future may depend on having good information about the solvency of investors that you deal with.
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Start a Company in 2009
Bill Warner Saturday, January 03, 2009
I have been getting a lot of heat lately about writing about stuff that is extremely depressing. They ask me if I could write about some things that are more uplifting. Interestingly enough, bad economic times sometimes makes us think about things in new ways. I have concluded that starting a company in 2009 is a great idea. That’s uplifting, right. Here’s why.
Who needs venture capital and angels anyway
It is certainly true that getting venture funding will be really hard in 2009. But, for a start-up, who cares? Venture capital essentially left the start-up world with the dot.com bust, and only moderately returned around 2005, but not at the level it was in 2000. Venture capital firms are substantially focused on companies with revenue traction, not start-ups. When we come out of this economic mess, venture capital may never finance start-ups again.
Also, it will be hard, but not impossible, to raise money from angel investors in 2009. Entrepreneurs will have to have really well thought out business plans and offer a great investment opportunity. However, having a well thought out business is a good thing. An entrepreneur shouldn’t get financing if they really don’t have a solid business model.
In addition, hardware technology is cheaper thanks to the continuation of Moore’s Law. Open source has accelerated product development. More effective development tools have become available, reducing the number programmers needed to develop products. All of these things drive down the costs of starting a company.
I bet that there will not be a decline in the number of companies that start in 2009. There should be a substantial increase as unemployed workers start businesses instead of seeking new employment, recognizing that it costs less to start a company today.
Reaching potential customers costs less
But wait a minute. This is 2008, not 2000. We have come a long way with internet technology and now know a lot about how to market products and services on the internet. It doesn’t cost as much today to put an effective marketing program in place and the know-how to reach customers via the internet is quite wide-spread. In 2000, marketing required a staff of people and a bevy of consultants to create marketing collateral and a website presence. What is available to the entrepreneur is much different today.
- Search engine marketing has become quite practical and is pervasive.
- Website design techniques have improved the chances of getting visitors.
- Email marketing has become an effective tool.
- Social networks bring more referrals to businesses.
- Increased use of easy-to-use collaboration techniques makes it easier to reach potential customers.
- Increased communications to relevant audiences through blogs and social networks makes it easier to reach potential customers with effective marketing messages.
Selling and support costs less too
We also know how to sell and support products and services over the internet without an army of direct sales people.
- The use of tools like Net Meeting and VOIP makes sales calls much less costly.
- Internet technologies make it very effective to demonstrate product capabilities on the company’s website.
- Products can be delivered and paid for online.
- Customers can be supported by lots of online techniques (email, chat, texting, VOIP).
All of these techniques cost far less than creating organizations to provide sales and support services.
Bootstrap your business now
All said and done, entrepreneurs don’t need as much money to start companies today. The online infrastructure can be deployed easily, faster, effectively and for far less money than ever before. Getting to a cash flow positive position can also come a lot faster than ever before, with enough money to basically pay the salaries of the few employees you need to manage an online business.
So make your New Year’s resolution now to consider starting a company in 2009, using the internet tools and techniques that make that a much more viable and real possibility.
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Internet Commerce - Weathering the Storm
Bill Warner Saturday, November 29, 2008
At the recent Internet Summit in Research Triangle Park, the kick-off presentation was a sobering look at the business status of internet commerce given by comScore, a global Internet information provider to which leading companies turn for consumer behavior insight that drives their marketing, sales and trading strategies. comScore maintains massive proprietary databases that provide a continuous, real-time measurement of the myriad ways in which the Internet is used and the wide variety of activities that are occurring online, giving them a comprehensive view of consumer behavior. In other words, this is company that is watching your every mouse click and key stroke.
Intuition would tell you that internet commerce is suffering just as much as the rest of the industry in this market downturn. However, your intuition might not tell you the deeper insights that you need to know. Through the 3rd quarter 2008, ecommerce is up 10 percent over 2007. That is less than half the annual growth that has occurred since 2002, but nevertheless is growing. This can be broken down by consumer income segment, observing that spending by people whose income is less than $100,000 per year is actually declining, while those above $100,000 is increasing 14% over 2007. Clearly, the economic downturn is affecting the lower income group the most.
This can mostly be attributed to higher prices, led by the over 30 percent increase in motor fuel, all of which has significantly squeezed discretionary spending. But, fuel prices over the last several weeks has fallen to less than $2.00 per gallon and food prices are starting to drop as well. One might think that ecommerce is going resume its 20 plus percentage growth again, but that is not what is going to happen. When asked what their major issue is now, the concern about rising prices of consumers whose income is greater than $100,000 is being replaced by a significant concern about the financial markets. For consumers whose income is less than $100,000, their concern is about inflation; including prices, jobs and financial markets.
When asked what they thought their spending for the holiday season would be, about 60 percent of consumers whose income is less than $100,000 said they would be spending less than last year, while 43 percent of those greater than $100,000 said the same.
comScore can only tell us what has occurred, not what will occur. So they have no crystal ball. They did ask about the effect of the presidential election showing that over one third of the consumers are either not sure or have less confidence in making near-term expenditures. The Obama effect is a big unknown and the markets are hanging on every word he says or doesn’t say as well as what the administration says about the various bail-outs that are being proposed.
We certainly have not seen the end of the trend setting for consumer spending as the situation is still very volatile with more shoes to fall with the change in administration.
