Chapter 19 Sizing up competition and share of market

'My clients hate to do two things: do competitive research and develop business plans," says Bill Elias, one of our experienced SCORE mentors.

"Clients underestimate the importance of truly understanding the marketplace in which they compete. It is very difficult for a company to position itself and establish a unique or differentiating advantage unless one is aware of the competition and the nature of the market."

Before explaining competitive market analysis, we need to define competition. Anyone who is trying to get a dollar that could be spent with you is a competitor. Online or offline, brick and mortar or virtual store, it doesn't matter.

Let's face it -- almost everyone has competition. Whether you have a new business or an on- going concern, someone is competing with your business for customers and their money.

This is not very different from playing a competitive sport or a game that you are trying to win.

There can be more than one winner, but you don't want to be a loser in this game. A loser is a company that cannot sustain its profitability and hence probably will not, and should not, continue to exist.

Back to the market analysis.

Let's use an example that is relatively transparent. Assume you publish a monthly magazine. Here is how to do a competitive market analysis.

Step 1: Gather competitive data -- collect every competing publication you can find.

Step 2: Count -- add up the advertising pages in each publication.

Step 3: Rates -- find out what they charge. In this example, obtain competitors' rate cards and other information on their products, perhaps an editorial calendar.

Step 4: Total -- multiply the rates charged times the number of advertising pages to see what their approximate revenue is for that issue. As periodical advertising varies issue to issue, do this with at least three issues. Then multiply the three-month total by four to get an annualized amount of estimated revenue.

Step 5: Segment -- separate each publication's advertising into categories, such as real estate and restaurants. Compare each advertising segment with your publication and see how you fare against each competitor in these categories.

Step 6: Grand totals -- add the totals in each category of all competitors and also get a grand total of all competitive advertising.

Step 7: Market share -- compute the total advertising you have compared to all dollars spent in all of the competing publications. This represents your overall market share, expressed as a percentage. Now do the same for each market segment.

Step 8: Distribution -- how and where is each publication distributed? What are the demographics and psychographics of their audience and customers? How does your magazine align with these figures?

The rest are more generic steps that apply to any business:

Step 9: Market trends -- is your overall market expanding or contracting? Are there specific categories (product lines) that are growing faster than others? Are there unmet needs that you might be able to fulfill?

Step 10: Internet and social media -- companies are increasingly using social media such as Facebook, Linked-In and Twitter, and their own company websites, blogs and newsletters. There is much you can learn from these sources.

Step 11: Review sites -- look at review sites if applicable and catch the buzz, news, and announcements portrayed.

Analysis

Select a few of the larger target accounts and do everything possible to gain their business.

Are your competitors solvent? In this transparent industry we selected, it is not that difficult to do an estimated P&L (profit and loss) for your competition.

For example, a magazine issue is 100 pages, with 45 advertising pages and 55 editorial pages, and is distributed to 12,000 locations or subscriptions, generating an estimated $X revenue. It is relatively easy to learn what it costs to print this issue using this quality paper and amount of color. The magazine staff is generally found in the first few pages, so you can see how large a staff they have and estimate payroll and freelance fees. Since they are in the same business you are in, use your own data to compute their data.

This may sound very involved and difficult -- it isn't.

But it is critical that you know where you stand in relationship to your competition. Know what your market share is and devise strategic plans to increase it.

These basics can be applied to most businesses, although some businesses are more transparent than others. Happy research!

Chapter 20

A few ways to find out what you don't know

Published: Monday, July 14, 2014 at 11:28 a.m.

The Socratic Paradox states, "I know that I know nothing," or "I know one thing: that I know nothing."

In collaboration with Bonnie Seitzinger, a Manasota SCORE mentor, CPA and author of the Lean Into Success program, I set out to understand this paradox. Bonnie and I developed a methodology and presentation based on learning "How to know what you don't know."

All organizations have problems that often lay beneath the surface and are hidden from view. It is important to ensure that these problems do not remain undisclosed.

Andrew Grove, former Intel chairman and CEO, said, "Only the paranoid survive."

So what can you do and where should you start?

Prevent Problems: One strategy in growing a business is to prevent problems before they happen. We need to learn as much as we can about what it is we do not know, so we can prevent problems. We can't know everything with absolute certainty, but we can feel confident about specific things.

In some situations businesses fail because owners think they know more than they do. They may not be open to learning what they do not know.

There's a learning model developed in the 1970s that describes the stages of learning, going from incompetence to competence. The first stage, unconscious competence, is not knowing what you don't know. The next stage is conscious competence, which is knowing you have a deficit and knowing the value of developing skills to address that deficit. We want to focus on the not knowing as well as developing the skills to be in the know. Both are invaluable skills.

Seek-out internal and external feedback to learn what you don't know.

The well-known entrepreneur Steve Jobs talked about the best ideas coming to him when he allowed his mind to become quiet for periods of time each day.

Try asking yourself two simple questions for a week and see what insight it provides to you. The Morning Question: What Good shall I do today? The Evening Question: What Good have I done today?

Take a contemplative minute by closing the door after each meeting or each lengthy phone call to give yourself a creative pause. Over time, daily contemplation practice can change the way you think. The results will come to you in the form of knowing what you don't know.

Developing and nurturing your own internal feedback system creates awareness, and awareness brings answers. These answers lead to new choices.

One of the best success principles, which sounds so simple, is to ask, ask, ask! This can be done in several ways. A healthy dialogue several times a year, one-on-one with employees, can be extremely revealing. You must have the ability to express your questions to employees and then to fully listen to their responses. Some entrepreneurs have an open-door policy and a culture of feedback and suggestion sessions. It's important to avoid complaint sessions. The goal is to have a positive culture of continuous improvement.

Have strategic planning sessions, using a SWOT analysis to assess your business' strengths, weaknesses, opportunities and threats. Great ideas and learning what you don't know come forth with SWOT analysis.

Some businesses conduct focus groups with an outside facilitator to generate ideas and get their creative juices flowing. Include both inside and outside sources, employees and customers.

It's important to take time for long-term planning, which leads to learning about what you don't know. It also improves short-term decision making.

Gather actionable information from your customers. The restaurant industry does this very well with brief customer surveys.

Join a CEO Roundtable group. Goals are discussed and the group has a sense of accountability to each other. These roundtables help you "think outside the box" and explore possibilities with a divergent focus.

Another source of information about what you don't know might be trade associations and trade publications. These will help you "think inside the box" and explore possibilities with a convergent focus.

Develop a dream team of experts. Include your attorney, CPA, banker, insurance agent and perhaps a trusted supplier. Prepare in advance and ask, ask, ask those questions.

Minor problems can become disasters unless they are discovered and solved as quickly as possible.

Stay curious. It's what keeps business owners on top of their game. Recognize your deficits. Be open to the value of the new skill of learning what you don't know. I bet you didn't know all of this.

IN CHINESE PHILOSOPHY, yin and yang are concepts used to describe how apparently opposite or contrary forces are actually complementary, interconnected and interdependent in the world.

Yin and yang also illustrate how these apparent opposites give rise to each other as they relate to one another.

Many tangible dualities are thought of as physical manifestations of the duality of yin and yang -- such as light and dark, high and low, hot and cold, fire and water, male and female, and life and death.

In business, every yin should have its yang -- just as McCartney had Lennon! (Wait! What did he just say?)

Generally, an entrepreneur will have certain strengths and weaknesses. The entrepreneur will most likely be gung-ho, full of enthusiasm in launching his passion. But he probably will lack professional management experience.

For illustrative purposes, let's call the strengths of the entrepreneur the yin, and the potential of professional management the yang.

Balance is essential. Just as balance is central to yoga -- and life -- it is a critical factor in the success of a business. An entrepreneur might have attributes and talents such as determination and passion, enthusiasm and creativity, discipline and dedication and single-minded focus to succeed at all costs. The entrepreneur is willing to take a calculated risk with his money and bet on his ability to take an idea to fruition as a successful product or service.

The odds greatly improve with more research and homework.

Successful deployment of experienced mentors, consultants, professionals, trusted advisers and knowledgeable friends will further enhance the success rate. Having expertise in the same industry also will greatly improve those odds.

But entrepreneurs often want to be successful in spite of themselves. The execution of their business plans, perhaps the most important component, is often overlooked. Chances are they don't have a well thought-out business plan. You will often hear them say, "It's in my head -- I haven't written it down yet."

If I had $1 for every great idea, my wealth would rival Bill Gates. Having a great idea is indeed a starting point, but that's all it really is. The ability to convince the right people to come on board and help execute the idea is where leadership begins.

In the early days, when entrepreneurs are getting their businesses off the ground, the have to be totally committed to the success of their projects. They must wear at least a dozen hats: direct the marketing, make the sales, manage the employees and handle all operations.

As the businesses take hold, intuitive entrepreneurs will eventually realize they are providing the yin and they need someone to provide the yang to succeed over the long haul.

A professional manager is the order of the day. Someone who is organized and can systematize the business is needed -- a traffic cop who can make sure all the lanes are moving at top speed and potholes in the road are promptly fixed.

This personality type is rarely the same as the founder's. It is this introspective realization that will help the business rise to the next sustainable level. A professional manager should direct and coordinate the operations and the human and financial capital necessary to stabilize and safely grow the business.

The entrepreneur will want to grow, grow, grow, and the professional manager will want to know, know, know.

The better the balance of this yin-yang relationship, the better chance this business will have to succeed.

There may be a tendency to venture into new markets and new products or services. Caution will be the word of the day. Make sure that you have that strategic plan in place, pivot as needed, and don't outstrip your cash flow.

As a business consultant, one of the most critical and rewarding services is to help balance this yin-yang within a business to develop a team that can achieve optimum growth. A careful, detailed, in-depth analysis is necessary to reach this balance.

Business owners must be open to all possibilities and see that they can improve their company's balance and their balance sheets simultaneously. This will have a direct correlation to long-term profits. Balance brings efficiency and results in a more effectively run business.

A good example is the NBA's San Antonio Spurs, who demonstrated this balance to upset the defending world champion Miami Heat last month.

LeBron James and Dwyane Wade are better individual players than any two teammates from the Spurs. But the Spurs' Tim Duncan, Tony Parker and Emanuel "Manu" Ginóbili proved to be the better-balanced team.

Ask yourself if your business is optimizing efficiencies and its bottom line. Does your business have a solid yin-yang balance?

WHEN YOU COME TO the realization that you want to get out of your business, the how and when include several options and variables to consider. Here are six strategies to consider for your exit: Strategy No. 1 -- We gotta get out of this place! You hate the business you are in and want out yesterday.

Putting a good deal together usually takes a great deal of planning and time (perhaps a year or more). If you just want out, your business is losing money or your health has deteriorated, and you don't care about potential equity you have built up, you can shutter the business immediately, lock the door, take the cash, collect receivables, pay payables, pay off leases, offer severance, sell assets, and put an end to your misery ASAP.

This might be the quickest way out, but it's certainly not the most lucrative. In most cases it is the worst way to exit. Strategy No. 2 -- Sell to a third party. This strategy may take the longest time to implement, but it may provide the best return for the owner of a profitable business. You must gather current and historical financial information and statements. Profit & Loss, Balance Sheet, Statements of Cash Flow, Aged Receivables, Accounts Payable, and other schedules will need to be in order.

You and your accountant, or a business intermediary, will need to recast the financial information to help determine the true value of the business, including owner benefits. Be sure to list any personal items that will not be included in the sale. You'll need to look at industry multiples and come up with a reasonable asking price. Hopefully, your broker will produce an interested party.

Assuming you strike a deal and agree on price and terms, you will go through a due diligence process confirming the information represented to the buyer.

Ideally, you will sell for the millions you think your business is worth and buy a condo on the beach! Strategy No. 3 -- Sell to your business partner(s). The good news is that your partner should already be familiar with the business. The bad news may be that your partner is familiar with the business. Depending on why you want to get out, you may be able to work out a fair deal for you and your partner. If the cash flow of the business is thin, you may get a smaller amount down and finance a good portion of the balance.

Your comfort level will vary based on your relationship with your partner and how viable the business is and is likely to remain for the term of your payout. Strategy No. 4 -- Sell to a competitor. Do you really want to sell to your competitor? A plus is that the buyer should be very familiar with your business and certainly your industry. A big minus is if the deal doesn't go through, you just opened your kimono to your competition.

A big plus for the buyer, depending on the type of business, may be the realization of economies of scale making his existing business more profitable (1+1=3). In this instance, and if you are a good negotiator, you may get a very good deal. Be wary of the buyer who wants to purchase your company with your own (money) receivables.

If buyers are scarce, this tactic could provide good incentive adding to deal appeal. Strategy No. 5 -- Sell to employees. This may make sense if there is a strong first or second person in charge, or if a management team is operating the business successfully.

An ESOP (Employee Stock Option Plan) may already be in place to financially execute this plan. This strategy can be fraught with many issues, including a lack of financial capability of your employees to consummate a deal. Strategy No. 6 -- Sell to a family member(s). Does your son really want to take over the business? Has your family member been working in the business? If more than one person is involved, do they get along with each other? Do you need to receive money from selling to a family member? Are you planning to stay on in a reduced role or consulting capacity?

Think twice about this strategy and make sure the family member really wants to be in this business. Other factors: Regardless of the strategy you choose, you will have to enter into a "covenant not to compete" for a period of time in a limited geographical area, unless you choose option No. 1.

You will need to carefully consider price and terms, vet the buyer and bet the farm that you will be paid for the sale of your baby. And, in the end, if you're not retiring and are a true entrepreneur, you may want to do this all over again. Exit stage left -- and re-enter stage right!

Chapter 23

Selling the company for maximum value

Published: Monday, August 4, 2014 at 1:26 a.m.

OKAY, YOU MADE THE decision to sell your business and no one has put a gun to your head. You want to maximize your equity upon sale. What should you do? And just as important, what shouldn't you do?

Norman Silverstein's primary expertise has been assisting buyers and sellers of small to mid-sized businesses. Norm has owned his own business brokerage company for over 10 years, merging it with another company in 2006. Having completed hundreds of business sales transactions, Norm is experienced in mergers and acquisitions, business valuations, performing due diligence, determining the real cash flow of a business, and everything that it takes to bring buyers and sellers to the closing table. Norm has been a SCORE certified mentor since 2012.

From last week's column, "Six strategies you can use to EXIT your business" we will use strategy #2: Sell to a 3rd party to maximize your equity. Here is some advice from Norm on doing that.

Prepare your business for sale. Do come up with a purchase price. Placing a market value on a business will be the most important and perhaps the most difficult part of the selling process.

Don't overprice your business. Business owners often have misconceptions concerning the value of their business, believing that it is worth more than the market value. Owners tend to be too emotionally involved in their business, having spent a great deal of time developing it.

Do prepare a business presentation package. Prospective buyers will make the decision to purchase a business based on the potential future upside. They will establish a price based on past and current performance.

Regardless of formulas and multiples to arrive at a price, one important fact remains true: A business is worth what a seller is willing to accept from a buyer.

Do have accurate current and historical financial information available (at least three years). This financial information should be recast to show the true profitability of the business, including owner benefits.

Do account for any cash in your business. Unless you can prove your receipts, don't expect to get paid for them. If the selling multiple is three that means every $1 you cannot prove receipt of will cost you $3 in equitable value.

Market your business Consider hiring an intermediary (business broker), rather than selling your business yourself. Use a business intermediary that already has contacts within your industry.

Don't advertise on websites that specialize in businesses for sale.

Maintain confidentiality. Don't tell your employees, suppliers, creditors, landlord or customers until you have a signed contract and need to tell them.

Show the business Show the business after hours, and make sure all employees are out of the facility. Do not introduce the potential buyer to your employees.

You need to make a good first impression. Make sure the office or workspace is clean and well organized, and that the facility has good curb appeal. If necessary: paint walls, replace carpet and furniture. Make sure the parking lot is clean, your business signs look new, and your warehouse or storage room shelves are numbered, neatly laid out, and well organized. Make sure all desks are neat and orderly, and list personal effects that will be retained by the seller.

Evaluate the offer(s)

Vet the buyer. Obtain a credit report and personal financial statement, especially if financing is included.

Get an appraisal, if requested by the buyer, for furniture, fixtures and equipment.

Be able to defend your asking price and know how it was derived.

You may decide to sell at a later date. If so, the following will help increase the value of your business.

Make any improvements needed to make a good first impression when you show the business.

Increase your sales annually. Develop a strong sales force (if applicable), and diversify your customer base by size, quantity and geography. Avoid an erosion clause that would lower your price if an important key customer leaves.

Replace family members, and let go of unproductive employees.

Develop an organizational chart, a strong management team and learn to delegate. Don't become too dependent on any one employee.

Have written procedures for operations (employee manuals).

Report all cash received by the business.

Sell off unnecessary assets and reduce unnecessary large purchases.

Keep your account receivables higher (shoot for 2x or more if possible) than your account payables, and don't have account receivables higher than 30-60 days.

Remove yourself from the business, and reduce the amount of owner perks.

Develop and/or improve the company's website, keeping your technology up to date.