BEA says it's Not a Recession Yet...

...but with GDP showing a 0.6% annualized real growth rate in the first quarter, it's pretty slow out there...

Business Valuation, Do it Before You Have To

Business Week has a "small business" area on their website, though it's not usually the best location for comprehensive vs. glossy knowledge. However, a recent article on business valuation by Jeremy Quittner (dated April 16) is quite good and comprehensive in describing the best ways to value your business. I leave it to you to hit the link so you can read it for yourself.

My beef is that folks usually wait for a crisis to hit before performing a valuation, i.e. when a sale is to occur, a partner is leaving, etc. From a value maximization perspective, the time to do so it is not right before you want to sell it, rather it's after you've had a chance to address the issues and clean up the cash flows. You generally fix up your house before putting it on the market, no?

The article mentions CPA's, business appraisers, and business brokers as possible valuation experts. Appraisers have the best tools and knowledge for the job, I would endorse them over the other two.

But It's My Baby!

Making money is not always the top focus of an entrepreneur. As described by Ann Meyer in the Chicago Tribune today, founders often fail to make the transition from startup with full control to a successful growing entity.

According to Harvard research cited by Meyer, only one in four founders are still holding the reins when a company goes public. This indicates that successful startups manage to overcome the founders grip most of the time. This is not surprising given the multiple levels of capital needed to get to the public realm. Usually a startup must go through several rounds of outside financing to build the prototype, establish production, setup template installments, and the many additional fazes of launching a business. These successful launches, the ones that go public, are greatly outweighed by companies that involve private takeouts (including acquistion) and the failed companies. The failed companies you don't hear about are the ones that suffer from founder fatigue and often implode from personnel departures.

An early offset to a strong founder is having a solid financial person in place to display and bolster the cash flow side of the business, as well as to foster good relationships with financial market partners. Your banker and accountant, along with outside investors can provide solid backing and support and help lead a recalcitrant founder down the correct financing path.

Remember, 10% of millions is a lot better than 100% of zero.

Pricing a New Product

My book of the month is Predicatably Irrational, by Dan Ariely. It's a good read. For small companies there are some interesting results from this book.

A primary point is made that our expectations are made (and set in stone) the first time a customer sees a new product. Example, the first time you went into a Starbucks. Now the prices were set higher than most coffee places, what did you think about that? Well, his reasoning goes, with a different atmosphere, much better coffee, and nice aromas in the stores, sure I'll pay $2 for a cup a joe! Now that first experience set a new level of expectation for you to compare to any other coffee store. Ariely shows that that expectation is far more important than traditional supply and demand theory! Your first price becomes your benchmark.

This is important for companies bringing out a new product. If you can show that your product is wholly new experience for your customers, then you can set the price you please (within reason of course), not too low because as we know it's harder to go up than down (again the first experience influence). But you may be able to get a better margin on this new product because you are setting the benchmark. So be careful, you will get what want if you do it right.

Equity Might Be Out There For You

In my Angel discussion last week, I discussed the slow-down in angel investing in 2007, presaging if not anticipating the slow-down in the financial markets this year. Apparently, while following more cautious principles than in the internet hay-days, the professional investing markets are looking forward, and making investments in selected sectors. As discussed in James Flanigan's Entrepreneurial Edge article today, equity capital is available for the right story.

One sector discussed is mobile communication devices and related software. This is clearly a growing industry in the US and something that will need continued investment. It promises solid returns for early investors, and the professional investment firms, including private equity and venture capitalists are focusing here. Likewise, "green" technologies are getting favorable attention.

So it does seem that it's harder to raise debt these days, ergo , if you have a candidate do seek out the professionals (as long as you have a technology or "green" startup, that is)!

A New Hope for Small Business Health Care

In the push/pull for more affordable health care, the forces of the status quo (read insurers) are fighting to keep their money flowing. Meanwhile, health care premium costs have soared for small businesses. A recent study by the Kauffmann-Rand Institute found that health-care costs had nearly doubled between 2000 and 2005 for businesses with fewer than 25 employees. For these companies health care costs now exceed 10% of total payroll costs. Now a bi-partisan group led by Senators Durbin and Snow are trying to break the log jam.

The Small Business Health Options Program (or SHOP Act) would enable small businesses to set up health-care insurance pools and seeks to establish a nationwide pool by 2011. It also offers tax credits of more than $2,000 per family covered for employers that provide health-care to workers under this program. The national pooling feature has been fought by insurers as well as health advocacy groups (like the American Cancer Society) which do not want to see state regulations overturned. This bill addresses those concerns and as a result may have a better chance of passing. It is supported by the National Federation of Independent Businesses, the country's largest small business advocacy group.

No easy remedies have been proposed to address the overall ballooning of costs and inefficiency of our health care system. Short of a full overhaul, this bi-partisan program is a good start for small companies. Let's see if it gets through the Congressional battles, it is there where we'll see which entrenched money maker of the current system opposes it.

Recession is Coming - Get Needed Funds While You Can

From the National Federation of Independent Businesses website - "NFIB's mission is to promote and protect the right of our members to own, operate and grow their businesses." Only now the growing part is not happening. Take heed and adjust your lookout and pursuit of funding accordingly.

The NFIB's Small Business Economics Trends April edition states quite clearly that it's leading indicators show a recession is coming. The Index of Small Business Optimism fell 3.3 points in March to 89.6
(1986=100), the lowest monthly reading since the monthly surveys began
in 1986 and the lowest reading since the second quarter of 1980 (a recession year) when it was 80.1.

The good news is that the credit crunch on Wall Street doesn't seem to be affecting "Main Street", as cost and availability of borrowing is not a problem.

Takeaway - If you are in a strong position to borrow, now is the time to do so to ride out the slowdown coming up.

Angels Spread Risk as well as Wings

Angel investors have become more conservative over the past couple of years, as reflected by the survey released recently by the Center for Venture Research at the University of New Hampshire's Whittemore School of Business and Economics. The survey reveals several concerns reflected in the data based on 2007 numbers. Potential borrowers should be aware of these trends.

The Center notes several figures of concern.

• Total investments made reached $26.0 billion, a mere 1.8% increase over 2006.
• Entrepreneurial firms receiving funding grew 12%, and the number of active investors increased 10.3%, indicating a smaller average deal size - probably an indication that investors were seeking to spread their risk further.
• Software, Healthcare, and Biotech netted 58% of total dollars invested.
• The Yield Rate, that is the number of proposals that were funded by angels, declined from 23% in 2005 to 14% in 2007, further reflecting a tightening market.

If you are considering approaching the angel market for funding, keep these trends in mind and have a full read of this study for more information.

Disintermediation - Watch Out for it in Your Business

Disintermediation - this is what is happening to the traditional music labels as they fight the changing market. The change has come about because of the proliferation of digital downloads of various types. Selling music on CD's and other physical media is declining fast. Learn some lessons from this kind of trouble, it could be you.

Middle men everywhere are in trouble. In the music business that includes the Labels, who come between the artists and the public. Their primary business is to market and distribute the music. Now artists can easily distribute themselves via the internet. The labels spend enormous money on finding and marketing bands, then make up for it with ridiculous distribution charges (the marginal cost of making a CD is less than a quarter). But if they don't distribute - all their money is gone, eh?

So although distribution has changed drastically, marketing is still needed by all but a few bands. After all, it is still a very competitive market - witness the great number and variety of acts at the recent South by Southwest festival. The labels have to find a method to get paid for their marketing prowess, that is all they have left. They may have found a solution with the recent agreement to work with Myspace.

Lesson - if you do several things well, and something or someone takes away one of your markets, you must decide to continue with what you do best, and get paid a premium for it, or find another business.

A Good Time to Review Your Real Estate Needs

Common knowledge says that commercial real estate follows the home or retail market by 12-18 months. That is, if home prices start tanking (like they have now or probably started last April) then commercial will follow. For commercial renters, this portends a good time to start negotiating for more flexible terms and/or cheaper space.

As Tery Pristin writes in the Square Feet column of the New York Times today, landlords have started to respond more quickly to smaller renters looking for space. It might not be cheaper, but you can find shorter leases and/or better options.

If your footprint needs are changing and you seek more or a different type of commercial space, now is the time to keep a close eye on your local market for good deals which should become more plentiful over the next year or so.