Getting into Business – buy versus build

Both can be very challenging.

1. Know what you aim to achieve in the business (are you trying to change the world, are you out for lifestyle or determined to build a fast growth business, do you need total control or would you be interested in an MBO where you and a few other managers own a smaller but potentially very valuable stake, do you want to own it for life or exit in 5 years, etc.)
2. Know your personal objectives and make sure they fit with your business objectives (for example, its hard to run for council or other political office if you want to buy or build a fast growth business)

This is not exhaustive but they are extremely important in forming your decision.

Buying is probably going to cost you more upfront and there are risks such as losing key customers as pointed out by Scott.  Another key risk is the potential loss of key staff.  Is your style going to be the same as the prior owner?  If not, customers and staff may walk.

If you buy another company, you need to be careful to get appropriate representations and warranties about the business (and that they vendor can actually pay the damages if you sue for them – if they can’t, reps and warranties insurance is possible.

You will want to buy the business and its assets so you don’t get stuck with any legacy liabilities of the company (tax issues, legal, PI claims, etc.)

In summary, buying a business means careful due diligence upfront and careful planning to retain clients and staff and so forth after the acquisition.

Today, with private equity, its possible to buy very large businesses with the support of private equity sponsors.  If you are doing it alone on a smaller scale, make sure you don’t over pay, try to pay in instalments with some based on subsequent post-acquisition performance of the biz.

Building has its own set of difficulties.  You are starting from scratch.  No customers, no products/services.  It also takes funding but that is somewhat spreadout over time.  Of course it can be awhile until the first signs of revenue.  Cash flow forecasting will be key, as well a careful analysis of the customers and markets.  Get into their world.  Read what they read, do what they do, network where they network.

My number one tip for starting from scratch is “customer first, then product/service” – find the pain/need, then solve/fill it, fast!
Cheers
Tom

Food & Oil – what’s happening?

We can expect food prices to continue to rise sharply over the next decade.   Why?  Developing countries are seeing growth in urbanization and affluence and of course population growth.  With that comes changing diets and, you’ve got it, greater consumption of Western foods.  Also driving up food prices is the high cost of oil (think transport and fertilizers) and demand from biofuel producers. 

As for oil, speculators are buying oil at today’s prices in antipation of continued price rises so they can sell it back to the market for profit in the future.  This is a significant driver of today’s oil price rises.  Also, despite nearly a 60% increase in oil prices, exports have fallen.  This is partly due to the increasing domestic needs seen in oil producing regions (just look at the growth in places like Dubai and Russia – they need more of the black gold for their own domestic economies). 

Demand for oil in China and India is also going to continue to grow. 

In the OECD, we benefit from low priced goods from the developing nations but their rapid development will continue to place demand pressures on food and oil.  Hopefully that will spur increased production and supply to keep price rises somewhat in check.

To read more, go to:

http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html

http://online.wsj.com/article/SB121200725158327151.html

Cheers

Tom

Forecasting Sales & Revenue

I strongly recommend building your revenue projections from the bottom up.

By this I mean estimating unit volumes and unit price to arrive at total sales by product/service line.

Forecasting at this grass roots level will enable you to perform rapid sanity checks on your assumptions against the market as a whole and against competitors.

Forecasting in this way also enables you to compute more accurately the resources and people required to deliver those sales so that you can make cost assumptions (operating expenses, capital expenditures, working capital needs, etc.).

If you are analyzing an investment opportunity, you should take the same approach.  Analyze the company’s projected units, unit prices and total sales and the trends relative to the history of the company and the market.

cheers

Tom

Sustaining Competitive Advantage

A few key tips to build and sustain competitive advantage:

Move early

Build unique, protected IP

Differentiate and support it with continual innovation

Capture market share quickly

Keep your costs low – the low cost producer can survive in down markets

Invest in R&D to stay ahead of the curve

Stay very close to your customers and their needs!

Cheers

Tom

Should You Get an NDA from Prospective Investors?

You should certainly try but many investors (particularly VC’s) won’t give them. It partly limits their ability to do business and there is a major administration burden – some VC’s see thousands of business plans per year. That is a lot of NDA’s to keep track of and takes thousands of hours of time to read them, sign them, file them, track them, etc.

To access investors with millions of dollars, you will have to take some risks and that NDA or no-NDA decision will probably be an early judgement call for you.

With big name investors, your ideas are generally safe. Its in the VC’s best interests not to abuse the info they get – if a firm got a reputation for stealing ideas, they probably wouldn’t have many entrepreneurs knocking on their door.

With private individuals and lesser known investors, I’d try hard to get the NDA.

One interesting point is that while many investors won’t sign, once they are invested in the company, they will want you to have a policy of obtaining an NDA from other outside parties!!

So you could try to turn that around on them – “if you invested in our business, surely you’d want confidence that our info has not been provided to large numbers of others without any protection? So its a double standard not to sign ours now.”

Hopefully this is some useful guidance for you and gives you some material to have an intelligent discussion with investors about NDA’s when you are trying to persuade them to sign!

More Asset Write Downs Coming?

I was just reading a UBS research report on European companies.

For some pretty big name companies, more than 50% of their assets are intangible (goodwill, trademarks, mastheads, etc.). 

With the international accounting standands, some companies may be at risk of large write downs of these assets if the economic problems in the US and elsewhere start to impact their profits.  While intangibles are given an indefinite life, companies need to review the carrying value of intangibles periodically. That’s where the risk lies.

Danone had 62% of its assets in intangibles. Cadbury Schwepes 56% and Vodafone 55%.

For Danone, most of the goodwill was added during 2007 due to M&A transactions.

There are also a number of European companies with intangibles larger than their market cap! Telecom Italia, RBS Group & Deutsche Telekom are examples.

Vodafone’s intangibles are 83% of its market cap.

Its widely recognized that intangible assets / factors are extremely important to the competitive advantage of a business.  Goodwill forms a very large % of the intangible assets of these firms.

I have not looked at intangibles as a % of listed companies in other countries but I suspect there will be similar household names with similar %’s.

This isn’t a bad thing but with accounting standards today there might be some big write down’s of intangible assets. 

This post is just an observation.  I knew intangibles are now a huge part of many balance sheets but its worth watching your investments in companies with substantial intangibles in the balance sheet.  They will need to keep delivering cash flow and profit growth to avoid the risk of potential write downs of their goodwill and other intangibles.

Cheers

Tom

Wrist-watch mobile phones!

Dick Tracy has come to life.

These devices have been around for a while and they are pretty cool. 

They range from very expensive (Tag Heuer) designer versions costing thousands of dollars to cheaper versions out of China (AUD200 or so).

They are pretty cool.  You put your cell phone chip in the watch and off you go.  They come with blue tooth so you can have a wireless ear piece.

I am a ‘less is more’ person and if I can carry one less device, its definitely of interest.

Definitely worth considering, even if you just use when you are out for a walk, run, bike ride or something where you just don’t want to lug around even the smallest lightest mobile phone.

What’s your experience or view on these devices?

How to sustain competitive advantage

Move early

Build unique, protected IP

Differentiate and support it with continual innovation

Capture market share quickly

Keep your costs low – the low cost producer can survive in down markets

Invest in R&D to stay ahead of the curve

Stay very close to your customers and their needs

Turning your website into a selling machine!

Its very worth while to undertake Seach Engine Optimization and some search engine marketing.

The best way is to get some help – hopefully one of your own personal contacts can recommend on that has had great results.

Here is one in Australia but with the web, it does not really matter where you are!

I am going to use Chris soon because he has done amazing work with a client of mine. Chris Thomas , Search Engine Optimisation / Search Engine Marketing reseo – we’ll get you there. www.reseo.com Studio 2a, 108 Moor St p: +61 3 9415 2383 Fitzroy VIC, 3065 f: +61 3 9415 2399 Australia Ethical growth through ethical work. e: christ@reseo.com Reseo Blog: The light and dark side of SEO – a must read for the absolute cutting edge in online traffic building techniques, in easy to understand language http://blogs.reseo.com

Best ways to fund your start up business

Start ups must have capital from the founder(s).

The amount varies but it needs to be a significant portion of the founder(s) personal networth.

That’s called hurt money and if the founder doesn’t believe in it enough to bet the farm, no one else will back it.

Angel Camps – probably worth while. Anywhere you can go to learn from other people who have done it before will help you.

Bootstrapping is a great way to make a start. I know an entrepreneur here in Australia who did consulting for many years to fund the development of his software product. He also utilized government grants very well.

Returns – VC’s and angels that I know want 5 to 10 times there money back when the exit event takes place, usually 3 to 7 years after the initial investment.

That may sound like a lot but returns are all tied to risk levels and start ups have very high risk.

How much – take as much as you can get. It usually takes several times more money and several times longer than you think to build a business.

How big – VC’s and angels want to back businesses that can generate $50m to $100m in turnover (or more). That means you need a very large addressable market.

Its rare to get more than 20% market share and its rare to grow share by more than a few percent per year.

Generally you need a market of $500m but many will tell you its got to be a potential market of $1Bn+.

Read the book Enterprise and Venture Capital by Christopher Golis. I am currently co-authoring the 5th Edition of this book. Cheers Tom