When you're finished, make sure you have something to show for your efforts. In Work Toward Reward, Chia-Li Chien, Succession Strategist at Value Growth Institute and award-winning author of Show Me the Money, presents the results of her Business Value Drivers Study. This two-year study reveals challenges business owners face and the Mission Critical Activities crucial to building a business in value. Chia-Li invited business owners to participate in the study, answering questions such as: $ Why are you in business? $ What have you created from your business (job, lifestyle, 3x to 5x value)? $ What gets you going in the morning? $ What keeps you up at night? $ What are the most common problems in your industry? Using examples of business owners she interviewed in the study, she illustrates the successes and challenges of their businesses to inspire and motivate us to focus on value creation through Mission Critical Activities-and how those activities can transform not only a business, but communities and even our world as well. Work Toward Reward helps you start building your business in value, and when you are ready, cash out with the reward you deserve after the risks you've taken and the years you've spent! (In praise of Show Me the Money) "With empowering advice for understanding true business value, attaining financial independence and knowing when to quit. Show Me the Money is a fine guide to making a profit" John Burroughs, Midwest Book Review, Oregon, WI
WORK toward REWARD
Building Business Value Today for a Well-Deserved FutureBy Chia-Li ChieniUniverse, Inc.
Copyright © 2012 Chien Associates LLC
All right reserved.ISBN: 978-1-4759-4903-2Contents
Acknowledgements..................................................................................ixThe Research......................................................................................xiBusiness Value Drivers Study......................................................................xiWhat Makes the BVD Study Valuable to You?.........................................................xvChapter 1: Risk vs. Reward........................................................................1Chapter 2: What impacts business value from an investor or buyer perspective?.....................4Chapter 3: BVD study Mission Critical Activities..................................................8Chapter 4: Selected Interviews from the BVD Study.................................................16Chapter 5: BVD Study Conclusion...................................................................47Appendix 1: BVD Study Results.....................................................................53Appendix 2: About The Study Participants..........................................................60Appendix 3: Demographics of the participants......................................................63Appendix 4: How The Study Is Conducted............................................................65Appendix 5: How The Interview Is Conducted........................................................68Appendix 6: Transfer Methods......................................................................71Bibliography......................................................................................81About Chia-Li Chien...............................................................................85Other Books by Chia-Li Chien......................................................................87Index.............................................................................................89
Chapter One
Risk vs. Reward
I have found, without exception, that entrepreneurs are risk takers. And I suppose I'm one of them. I went on my first whitewater rafting trip in 2011. But there was a huge risk for me in making this trip.
To minimize my risk, I wanted to sit closest to the guide. In addition, just to double-check my safety, I asked my daughter (you can see her in the front of the raft) to go on the trip with me. She's a Girl Scout and certified in these types of extreme outdoor sports. She was my additional safety net.
We were on Nantahala River, the coldest river in the Appalachian gorge in North Carolina. The entire run was two hours on the water, through many heart-pounding rapids, extreme moments of excitement, getting splashed and soaking wet, along with much laughter. I even sustained a hard hit from a hanging tree branch along the riverbank. Lee (our guide) tried to warn me with a "Watch out!" just two seconds before I saw it, but it was too late. Luckily I did not get knocked out of the raft.
The objective of the trip was to navigate to our destination of the 9-foot Nantahala Falls, stay in the boat and enjoy the trip.
There were many boats on the river that day, some without a Lee to guide their raft, and many of those rafts got stuck on the riverbank or hopelessly stranded on the rocks sticking out of the river. I asked Lee why these boats didn't have a rafting guide like him.
"People want to save money and go down this river on their own. Unfortunately, only the experienced guides know the river well enough to maneuver and navigate toward the finish line successfully," answered Lee.
Although a business exit can be triggered by different factors, the value varies depending on the exit methods. You must make sure all factors are working in your favor when cashing out—just like when Facebook made their IPO.
Even if you cash out due to the need for capital to expand your business you still must a have right guide. Why? Just like my whitewater rafting trip, with the right guide, I successfully reached my destination safely and claimed my reward for the day—in this case, FUN.
Yes, think of exiting your business as claiming your reward. Claim that reward and compensate yourself for the risk you took in creating and running your business. Don't wait too long or you could be faced with the triggers that might potentially decrease the value of your business.
Perhaps you don't want to or need to be a Mark Zuckerberg, CEO of Facebook. But doesn't it make sense to plan ahead for the wellbeing of your business,you and your family?Think about it—what does your end game look like in terms of an exit strategy?
In my BVD study report, there are specific value creation methods that help owners gain insights on how to avoid unfavorable exit triggers and proactively and intentionally build their business in value. Let's first look at what investors and buyers are looking for. Then, I'll illustrate how you can build your business in value to create a win-win situation for all parties.
Do yourself a favor—set a goal to be able to sell anytime! Profitably! Make it a win-win for you and your buyers/investors.
Chapter Two
What impacts business value from an investor or buyer perspective?
I'll answer that question with another question—what are the three major factors impacting real estate value, marketability and desirability?
LOCATION
LOCATION
LOCATION
That's right, and I'm sure everyone has heard this before. However, let's ask ourselves now—
What are the three major factors impacting privately-held businesses?
The first type of timing is Personal Timing; mostly triggered by health problems, emotional and physical fatigue and feeling of being drained from owning the business. You may be bored, have no fire in your belly or simply can't muster enough strength to face another economic cycle. A family situation, such as spousal pressure to retire, divorce, children who want to take ownership or employees who think you aren't as forward thinking, progressive, etc. as you should be can add to the pressure.
Secondly, you must consider Business Timing. Is your business mature enough to have the VALUE to create and ensure your financial independence?
Third, consider Economic Timing. What economic cycle are you currently in? In the other words—when is the right time to cash out profitably?
Do yourself a favor—set a goal to be able to sell anytime! Profitably! Make it a win-win for you and your buyers/investors.
For the past twenty years, investment banker Rob Slee has studied the privately-held business buy and sell cycle. He revealed the following pattern in Midas Marketing published in 2009:
Historic Business Value 10-Yr-Cycle Chart
This cycle correlates with the U.S. economic cycle. According to Slee, investment bankers will typically buy companies in distress around the third or fourth years in business and sell them about the eighth year or so. Accordingly, if we as business owners can predict the prime time to cash out for maximum value, why not plan in conjunction with this cycle?
The goal is to be able to sell at any time! Profitably!
This requires your business to have fundamental value for acquisition. As a value strategist, as long as my clients know their goals, I always plan "backward" for them, first uncovering what their investors or buyers will be looking for. The goal for you, the business owner, is simple—provide whatever the buyers or investors WANT! Build your business toward what they are seeking! Then it becomes a win-win for both parties.
Then what impacts business value? What impacts how you will make more money as a business owner than you would have otherwise? From an investor and buyer perspective, it's not only about, say, your technology or market position.
It's about ROI! Plain and simple!
Here's the question again. What makes a business valuable from investors' or buyers' perspectives? There are three major categories that impact business value:
1. Increase recast EBITDA
2. Reduce risk
3. Employ high-yield capital
I call the above actions Business Financial Behaviors. These three major categories of business financial behaviors are matched with the BVD study Mission Critical Activities as follows:
Chapter Three
BVD study Mission Critical Activities
A Closer Look at What Impacts Business Value
Remember, there are three major categories that impact business value:
1. Increase recast EBITDA
2. Reduce risk
3. Employ high-yield capital.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It's an accounting term and used commonly in business transactions. If your annual business revenue is more than $5MM, then EBITDA times multiples are commonly used. In anything less than $5MM, cash flow is often considered instead of EBITDA.
Multiples are determined by the current market condition. The multiples reflect U.S. economic conditions as well as the volume of transactions in privately-held businesses buy/sell activities.
Increase Recast EBITDA
The Value Drivers to increase recast EBITDA include:
1. Increase sales
2. Lower cost of goods sold
3. Control operating expenses
The BVD Study reveals the top three mission critical activities of each business in the value goals category worth a closer look from all business owners.
What are ways you can increase sales, ultimately increasing business value and the chance to cash out with financial independence? One of the most practical strategies to increase sales is to enter a niche market.
Karen's real estate company is a New York-based office rental agency. They opened in 2007, right before the real estate crisis began in 2008. They decided to locate in a co-working space, which had been established for many years, dominated by big real estate companies such as Regis and franchised companies like OfficeSuite. To compete and increase their sales, Karen entered a niche in which her office space could function as both a community for women business owners ripe with learning opportunities and a physical co-working space where women could come to work meet and learn. By 2010, they expanded to an additional floor to accommodate increasing demand.
Have you ever heard the saying, "Niche is rich?" As you reevaluate your business and its value, check out your competitors and see if you are niched well enough to continue to increase sales regardless of economic conditions.
But let's get to the question that is really bothering you—"What are the risks in working toward increasing my business value?"
Reduce Risk
The BVD Study indicated three top mission critical activities in each business value goals category that make it worth changing tasks or that can simply raising the bar.
1. Reduce business risk
2. Reduce cost of capital
3. Reduce customer concentration
4. Have a key management team
What are ways to reduce business risk? One practical strategy to reduce business risk is to benchmark higher than your competitors.
Mary's company had been in the Top 50 Fastest Growing Companies in the U.S. for two years in a row. In late 2008, when so many commercial banks were calling in their lines of credit business (since the banks too wanted to reduce their risk), Mary was one of many small businesses that lost that type of financial lifeline. She was in a panic and anxious to find anyone who could provide her a line of credit. She went to several commercial banks, but no one was even willing to take her application, except for one local community bank. Let's name this community bank ABC.
Mary needed to maintain her $1MM line of credit in order to continue to fill her orders. Bank ABC required Mary to deposit $2MM cash as collateral before she could obtain the line of credit. (We're all scratching our heads at this point, because WE understand that if Mary had $2MM cash, she wouldn't need the $1MM line of credit.) She ended up with a type of alternative financing from a non-bank financial institution. After several months and heavy fees from this non-bank (let's name them XYZ),XYZ told Mary that due to her high customer concentration that exceeded the industry benchmark by 50%, they could only provide $500K line of credit instead of $1MM.
In the end, Mary finally re-established her line of credit and continued to fill orders and grow her business. Sadly, she continues to be below the industry benchmark when it comes to the most critical financial ratio that every financial institution, investor or buyer is looking for. Despite continued success in revenue growth, unless she works on what's important in her company, she just won't have the value investors or buyers are looking for when she is ready to exit and cash out.
Employ High-Yield Capital
Value Drivers to employ additional high-yield capital include:
1. Improve investment decisions
2. Decrease capital base
What are ways to decrease capital base? One of the practical strategies to decrease capital base is to disengage under-performing business, product lines or customers.
Cindy has a company that primarily provides commercial renovation services. Over the years, she saw opportunities decline, and prior to the 2008 financial crisis, she decided to shed declining and underperforming sales and product lines.
Then, she decided to enter LEED Projects and LEED Waste Management as a provider. As most commercial real estate business came to a halt nationwide, the impact on her company was no different than that of other companies. No different except for the fact that all her competitors went out of business, and she continued to slowly absorb the market share as one of the few LEED companies certified to do the type of work her company does. To my knowledge, she is one of the very few highly specialized (niched) firms in her state and continues to have secure footing in her market place.
Chapter Four
Selected Interviews from the BVD Study
I've selected seven worthwhile businesses that I believe all business owners can learn from. These businesses are not only in the top 3% of all small businesses, but also worthy of duplication if you're in the same industries.
Building Emotional Capital in Your Business
Why you should and how it can lead to business success.
"I can do better!" thought Victor Zhang, while an engineer at FoxConn (global computer, communication and consumer-electronics leaders) at age 24. He saw the massive market opportunities in electronic connectors, especially in the molding business, and launched his business TSP Industrial Co., Ltd. (aka TSP) in 1999. Today, Mr. Zhang employs well over 600 employees globally and has three manufacturing plants in China.
Their products sustain the precision to tolerance of 0.001mm and very likely no end-users such as you or I will ever see them. Yet what they build plays a crucial part in the success of final products in consumer electronics, automobile electronics, aerospace, computer manufacturing, medical electronics and even home appliances. "We are in the people business," says Mr. Zhang. "Building and maintaining a TRUST relationship is in everything we do. My employees are my family," he emphasizes, passionate about motivating his team to self-actualization or to realizing their full potential. "Work or business is just a platform that allows my family/team to reach their full potential in life," Mr. Zhang says enthusiastically. Although he initially started his company to gain financial freedom, over time his vision and passion acted as a solid guide toward becoming the successful business it is today.
Such a successful business in the vibrant Chinese market also comes with challenges. Mr. Zhang and his team proactively provide solutions to their market and industry. But there are three particular challenges Mr. Zhang faces today:
1. Talent Shortages
I naively always want to think China has abundant resources—especially people! It's interesting to hear Mr. Zhang contradict this belief. The U.S. faces the same talent shortages in technology areas. Skilled talent is hard to come by wherever you are, and these employees make up 60% of Mr. Zhang's workforce. Although there is no shortcut in addressing the need for talent as a resource, Mr. Zhang deploys intensive internal training as well as external talent scouting such as name your class.
Mr. Zhang strategically partnered with two local community colleges in 2011, each with an average of 45 students majoring in mechanical or molding engineering. It's not just an internship; these groups of students get to go through his company's culture training too.
These students, who are also potential employees, receive first-hand knowledge and how to apply it in the company's culture as part of their internship experience. When they receive their degree, they are ready to enter the TSP workforce with raw learned technical skills as well as carefully designed soft skills from TSP. What a brilliant program Mr. Zhang has implemented! (We all understand that soft skills are not something you can go to school for. Real life environments—especially at a younger age that give you a head start—make a whole world of difference.) This future talent base can leverage Mr. Zhang's platform and as a result find better career choices and lifestyles.
2. Global Expansion
Through carefully planned global expansion, today Mr. Zhang has sales offices in Japan, the USA and Europe. Global opportunities sometime mean gaps in the way his team can communicate with prospects or new customers. Communication gaps include language, culture (Western vs. Chinese) and interpersonal interactions. The localization of their sales force in Japan, the USA and Europe paves the way for Mr. Zhang's team to greatly reduce these gaps over time.
3. Timeless Sustainability Legacy
Through a self-discovery process, Mr. Zhang converted to Buddhism in 2004. Buddhism in China and the rest of Asia essentially encompasses religion, Tao philosophy, Chinese traditions, beliefs, and practices. In the practice of Zen, Mr. Zhang systematically duplicates himself in his management teams and sees himself as a business architect in order to create his business platform. A platform enables his workforce to realize their potential in life and subsequently create a better community.
(Continues...)
Excerpted from WORK toward REWARDby Chia-Li Chien Copyright © 2012 by Chien Associates LLC. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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