This memorable line spoken by Clara Peller of Wendy’s fame came to our attention in January 1984. The campaign ended the following year. It referred to an imaginary competitor’s enormous looking hamburger. In fact, that bun only had a minuscule hamburger patty inside. The line even made its way into politics during the 1984 presidential election.

In today’s online, web-connected world, the line that marketers need to ask themselves is, “Where’s the content?”

This question is answered in an interesting article called The 10 Commandments of Content Marketing by Eric Anderson, VP of Marketing at White Horse, a digital marketing agency based in the Pacific Northwest. He contends that it is no longer enough to have just a web site. The idea that advertising and social media are mutually exclusive is no longer the case. A summary of these Commandments is outlined below:

#1 Content shall be shareable

Advertising is about creating something worth passing on. Broadcast advertisers that top the viral video charts week after week don't shout -- they amuse, entertain, and inspire.

#2 Content shall be malleable

How does the message fit the medium? Brands are built on trust. And trust is built on relevance. Good content is always relevant.

#3 Content shall be collaborative

Doritos let consumers create the brand's Super Bowl ads. These ads were the most-favored and most-recalled of the Super Bowl, and they were the most-shared (see #1).

#4 Content shall be measurable

When you put content out on social networks, on YouTube, on blogs, etc. -- you can measure the traffic that comes back.

#5 Content shall be fearless

Content concerns itself with an exchange of ideas, so it morphs and evolves as new ideas are added.

#6 Content shall invite comment

Most content produced for our customers will fail. This is a good thing; success depends on knowing when things fail, so we can try something else.

#7 Content shall start everywhere

The marketer's core expertise will no longer be knowing how to produce marketing content; it'll be knowing how to channel marketing content in ways that keeps the conversation going.

#8 Content shall go everywhere

Today’s consumers visit blogs, message boards, review sites, and social networks to get the real scoop on the brand. You need content in all of those places.

#9 Content shall be sponsored

It used to be that PR content went to PR outlets and advertising content went to advertising outlets. Not any longer, they go hand in hand.

#10 Content shall be forever

In the past, advertising only lasted as long as you paid for it. Content marketing lives well beyond a campaign because it shows up in archives, on sharing sites like SlideShare and Scribd, on blogs, in tweets, and in content aggregators like Digg and StumbleUpon.

Feel free to email me your thoughts at ebaloga@b2bcfo.com. Ed Baloga is a New York based partner and small business advisor with B2BCFO®.

So You Want To Sell Your Business

As the baby boomer generation approaches 60 more and more business owners will begin to look at the option of selling their business as a way to finance their retirement plans.  One critical aspect of this process is the valuation of the business from a market perspective versus the business owner who has a tendency to place a higher value on their business than the market will.  This in turn makes the closing process unduly tense and as often as not will lead to a non event when it is time to sign on the dotted line.  So what can be done to set the table for a completed transaction?

One must start with an understanding of how value is created in the business arena.  In many respects it is the same as buying a stock, which is investing in a public company.  An investor buying your business is investing in your company.  You start by looking at earnings, - is the company profitable and how are its key metrics in relation to the industry overall?  Is it better than its competitors, the same, or worse?  You then move to cash flow- specifically what is called Free Cash Flow.  Free Cash Flow is defined as net income plus depreciation & amortization minus working capital and minus capital investment needed to sustain the revenue stream.  Ultimately a business is valued as a multiple of income and or Free Cash Flow.

After the earnings and cash flow are determined, a risk factor is added that measures the sustainability of this cash flow.  The riskier the investment, the lower the price.  There are a number of things that go into the risk profile of the business.  Is there a strong management team in place that can function without the owner being present?  Is the market the business operates in a growing market or is it declining?  Are there new products in the pipeline?  What is the level of customer satisfaction with the business?  What is the quality of the products or service?  How strong is the corporate culture?  Is the compensation structure appropriate to the business and industry?

Each of these sections could have its own white paper written on it.  But in addition to the top level review of the business, looking under the hood must be clean as well.  Surprises will raise risk and lower the value of the business.  Are the financial statements accurate? Are there potential claims brewing that have not surfaced?  Is the business OSHA compliant?  Is the software, especially mission critical software, properly licensed or owned?  A buyer will ask to look at everything pertinent to understanding the business.  You, as the owner, need to be confident that everything is communicated accurately upfront.  At the end of the day, would you purchase this business for this price at this point in time, knowing what you know?

As a partner with B2B CFO® I am prepared to help you put your best foot forward when looking to sell your business.

The Danger Zone in business occurs when "the cash needs of the company greatly exceed cash availability." Although cash flow problems can occur at any point in the business cycle, there are predictable problems at each phase of the cycle which can slow the growth of a company. By anticipating some of these problems, corrective action can be taken to minimize their impact on the company. For example:

Business Development Cycle 

• Initialization Phase. This is usually the start-up phase of the business when the initial direction of the business is determined. Typically, business problems focus on survival, such as:
  • Running out of cash
  • Making a fatal mistake
  • Dealing with personal problems

Solutions to these problems often focus on operating procedures:

•  
  • Tracking cash flow before profits.
  • Staying within the budgetary limits.
  • Maintaining the operational control.
• Expansion Phase. This is the growth phase of the business when employees are trained to do the right things, at the right time, for the right reasons. Typically, business problems focus on managing resources, such as:
  • Spreading the Founder too thin.
  • Running out of cash.
    
  • Relying too heavily on debt.

Solutions to these problems focus on management experience:

•  
  • Track cash flow before profits.
  • Stay focused on the core values.
  • Strengthen flow of funds through the company.

• Stabilization Phase. This is the maintenance phase of the business when business decisions are made proactively rather than reactively. Typically, business problems focus on professional management, such as:
  • Lack of internal controls.
  • Failing to delegate responsibilities.
  • Accurate management information.

Solutions to these problems generally focus on profitability:

•  
  • Developing business partnerships.
  • Requiring “outside the box” thinking.
  • Strengthen the business organization.

The key to structuring the company for growth involves the entrepreneur staying within their core competencies and delegating business responsibilities to employees, associates and professional advisors. Companies that do not plan for growth, prepare for failure. 

I am working with several clients who are cash challenged at this time of year.  We are carefully reviewing the P&L on a regular basis to identify any opportunity to reduce costs and conserve cash.  

Cash management is so critical to the operation of any business.  The proper use of cash will provide a business owner with some real advantages in the marketplace.  It gives the businesses that manage cash well the opportunity to:

•         Survive unexpected loss

•         Adapt to unexpected change

•         Take advantage of unexpected opportunity

In managing cash flow I ask my clients to prepare 90 day cash forecast to determine the needs for borrowing and capital expenditure.  This forecast is based on a projection of the current income statement by month for the next three months.  Additions to the net income are for noncash expenses such as depreciation.  Common reductions in cash should be recognized for cash outlays used to purchase fixed assets, repay debt, pay dividends and reductions in vendors payable.

 Some questions your controller or CFO should be able to help you answer include:

•         Facilities.  Buy or lease?

•         Working capital.  How large & how do I manage it?

•         How much debt should my business have?

•         How much cash should my business have?

•         Am I meeting my financial goals?

A simple cash flow model is a necessary tool to help get you started in your business.

I’ve been spending some time lately analyzing gross profit $’s and margin %’s.  It’s interesting, because even if it’s trending in a relatively flat line, you may not be seeing the whole picture from 30,000 feet.  Whether you see your gross margin increasing, decreasing, or holding steady, you may want to do a little research to determine if the results are truly what they should be.  The issue is that there could be hidden risks or opportunities in there. 

If you’re selling 4 products, for example, you may find that one of them has been getting more expensive to produce while another has gotten more cost efficient.  And if you were to review them individually, you may opt to increase your pricing to your customers on the product that currently provides a lower individual return.

You may also find that you’re not selling as much of the more profitable product than you used to, because the pricing is no longer competitive.  Maybe your competitors have been tracking the improvements in cost to produce and passing a portion of the savings on to their customers.

What if you need to reconsider your product mix, and your marketing spend on each product line in order to achieve desired returns on your marketing dollars?  What if one of your vendors raised their unit prices without notifying you?

Without an understanding of the “numbers behind the numbers”, you’re operating your business in a bit of a dark room.

Taking the time to understand the financial statements supporting your business will equip you to make better decisions whether your goal is to grow your current company organically, or grow through acquisition.  It will help you to determine the best time to invest in new equipment, hire staff, request a loan from your bank, or reach out to investors for additional working capital.

Do you know where you make your money?  Do you know which of your products and services are most profitable and which are marginal or even lose money?  If you think you know this (and you should!), are you sure your data is accurate?  When was the last time you updated or reviewed your product cost information or your job routings and bills of material?  Are you making bad decisions because of faulty data?  Although some businesses may offer “loss leaders” for competitive reasons, this must be done consciously and not very often if you wish to stay in business.

I worked for a turnaround company that had a severely deteriorating gross margin, was hemorrhaging cash, and had been put into the workout group by their bank who was threatening to force them into bankruptcy.  We needed more gross margin quickly.  The first thing we did was to sample some of the higher volume products to ascertain the quality of the cost data.  We found some problems and fixed the costs as quickly as possible.  Next, we analyzed all the products and services the company offered, sorting the offerings by gross margin percent and gross margin dollars.  For goods and services below our gross margin target, we developed a “losers list.”  The losers list was comprised of those products and services with an insufficient margin and which were not “loss leaders,” consciously decided.  We agreed the losers had only three possible dispositions- increase the selling price, decrease the cost, or drop the product.  Utilizing this discipline, we were able to increase the earnings of the company nearly 400% in less than two years.  This increased profitability dramatically improved our bank relationship and allowed us to invest in new product development, further improving our competitive position.   

Although this is basic blocking and tackling, the number of companies not doing this is absolutely incredible.  Analyzing your losers list could result not only in increased profitability but should also lead to additional strategic opportunities.  If you cannot make a product profitably, perhaps you should de-emphasize or eliminate that product line.  Alternatively, if you have certain products that command a high margin in the marketplace, you should consider expansion into those areas.  What competitive advantages do you have that result in good margins and how might we further exploit those advantages and opportunities?

Do you believe your margins? 

Have you reviewed your losers lately? 

Transfer Options: Beyond the Outright Sale

It’s nice to have options.  Haven’t we all heard that before?  It’s something many business owners would probably say and sigh with relief when they realize that ‘selling’ a business isn’t the only way to exit that business. In this article, we’ll dispel this myth and talk about the many options available to exiting business owners.

Today, a large number of Baby Boomer business owners face the challenge of meeting their retirement needs with illiquid wealth tied to their privately-held businesses.  According to an NFO WorldGroup study performed in 2002, the number of business owners planning to retire was expected to increase from 50,000 per year in 2001 to 750,000 per year by 2009.  Now, more than ever, it is crucial for owners to become educated about their options.

There are primarily seven (7) different options by which a business owner can transfer the interests in a privately-held business:

·       Employees

·       Charity

·       Family

·       Co-Owners

·       Outsiders (owner retires)

·       Outsiders (owner stays)

·       Initial Public Offering

Employees & Family

Liquidity is the primary concern when considering a transfer of a business to employees or family.  One might naturally believe that these individuals don’t have the financial wherewithal to buy out the owner.  Whether or not this is the case, it doesn’t have to limit the succession planning process. Take a look at the following options:

ESOPs Provide Tax Benefits

An owner may transfer shares to employees, through an Employee Stock Ownership Plan (ESOP) without the employees ever contributing any money to the owner’s exit strategy.  Their liquidity simply isn’t a factor.  Furthermore, since 1974, Congress has supported ESOPs by way of tax incentives.  These incentives make an ESOP an attractive Exit Vehicle for an owner–even if the owner has no true desire to help their employees.

Estate Planning Within an Exit Strategy

Regardless of their liquidity, family members can in fact play a key role in an owner’s business exit.  If an owner has provided for his financial needs independent of the business, he can gift shares of the Company to family members.  Over a long enough period of time, these gifting programs can coordinate with an estate plan to manage estate taxation.  In addition, transfers to family members can occur in a fast growing business through a Grantor Retained Annuity Trust.  These powerful estate planning tools can provide significant tax savings to the exiting owner.

A Leveraged Buyout Option

Employees and Family Members can also utilize the existing assets of the Company to construct a Leveraged Buyout of the owner’s interest.  In this scenario, the Company takes on more debt and therefore more risk to accomplish the transfer.  If the employees and family members are willing to assume this risk, the owner can make out quite nicely.

Co-Owner Transfers

The existence of more than one owner creates yet another option.  This ownership structure often comes with a Shareholders agreement.  The Agreement dictates the terms by which one owner may purchase the interest(s) of the other owner(s).  These interests often have a pre-determined Value.  A co-owner transfer makes for a clear-cut transaction, as long as the pre-determined Value meets the exiting owner’s Goals. 

Outsiders

Outside Buyers will generally pay the highest price to an exiting business owner.  The higher up front Value takes into account all possible synergies of the deal (i.e. economies of scale provided by the Buyer, back office savings, cross-selling opportunities, etc.).  Most often in this scenario, the owner will sell to a competitor and leave the business entirely.

What about the owner who wants to sell to an outsider without completely leaving the business?  Good news—this owner has yet another option.  With the intention of using Capital and Management to improve the operation, a Private Equity Group can buy or invest in the Company. This is an attractive option for the owner who wants to keep a hand in the business since The Private Equity Group often asks the owner to ‘stay on’ and run the business.  Both cash and shares are offered to motivate the owner, thereby meeting his financial goals and allowing him to keep his ‘job’.  This option can present the best of all worlds.

IPO

Larger companies, those worth $100mm or more, can offer their shares in an Initial Public Offering.  This type of transaction allows the ‘general public’ to purchase ownership in the Company.  In turn, the Company accesses ‘public capital’ and its shares trade on a public exchange.  When considering this option, an owner must assess the public company costs.  The business will need to spend the time and money to report to its shareholders, which can sometimes lead to a short-term mindset.  Nonetheless, this option can provide the owner with a high level of liquidity.

Conclusion

Isn’t it nice to have options?  It isn’t necessary for a business owner to simply ‘sell’ the business and walk away cold turkey, unless of course, that’s what he wants.  After examining our brief discussion of transfer options, an owner can begin to ask questions that will lead to an Exit Strategy that meets his or her personal Goals.

According to the Association of Certified Fraud Examiners (ACFE), businesses lose an average of 6% of revenue each year to fraud, totaling some $3 trillion lost globally every year.  ACFE believes fraud could account for as much as one-third of the business failures in the United States.  Embezzlement is the number one financial crime and has been for the past thirty years, according to the FBI.  The average embezzlement lasts 18 months and results in a business loss of $160,000.  25% of all losses are for more than a million dollars.

As a business owner or CEO, you cannot afford to ignore fraud, it happens all the time to good people and otherwise astute business owners and operators.  Smaller companies are generally more vulnerable because they tend to have fewer internal controls.  Preventing fraud is much better and easier than detecting it.  Embezzlers are generally tough to catch; most are caught by accident or because of an anonymous tip from another employee or person.

There are certain actions you can take to prevent fraud.  First, this is a crime of opportunity. You need to have good internal controls in place to discourage fraud.  You should have well-designed internal controls to ensure segregation of asset custody and recordkeeping.  For example, if a person is responsible for cash deposits, they should not also be in charge of keeping your accounts receivable records.  Payroll check distribution, timekeeping, and employee master file maintenance should be done by different people.  You never want to put someone in a position where they can both perpetrate and conceal fraud.

 Common areas of fraud include paying fraudulent expenses, bid-rigging, kickbacks, false sales, false vendor invoices, accounts receivable “lapping”, and check tampering.

There are some things you should do to deter fraud: 

1.      Set the tone at the top.  Dishonesty should not be tolerated and you should have a zero tolerance policy about it.

2.      Develop the right controls and business practices and make sure they’re followed.

3.      Make sure different people are responsible for asset custody and recordkeeping.  Keep banking and cash separate from accounts receivable and keep procurement separate from accounts payable.  Have someone other than the check preparer sign and approve all disbursements.

4.      Insist everyone take vacations.  Many frauds are accidentally discovered when a perpetrator is away.  Consider periodic job rotations.

Know that a normal CPA audit or book review is not designed to detect fraud and the engagement letter will explicitly state that exclusion.  In any event, you should have a professional help evaluate your internal controls and business practices.  An ounce of prevention is worth pounds of cure!  Consider hiring a financial watchdog or make arrangements with a professional to come in periodically so potential thieves know someone is watching.

Your intuition is rarely wrong, take steps to protect yourself from fraud. 

Got fraud? You need to know!

What does a CFO do and how can a part-time CFO serve the needs of a business owner?

Many of the day-to-day responsibilities of a full-time CFO are executive management responsibilities that overlap with the other executives in the company.  Any great team has outstanding role players that can also fulfill the other roles as needed.  However, the specific financial discipline and skills a CFO brings to the table are specialized and can distract other executives from their roles in running a business.  Even a CEO or business owner that had been the CFO needs to have another financial executive assume the CFO role to keep the CEO or business owner focused on growing the business.

A listing of our firm's CFO Services is available elsewhere on our firm's website.  I will describe each of these services in subsequent entries, but want to summarize the services and our approach here.

The foundation for CFO services is timely and accurate financial statements.  Without this foundation, all other financial data and any business decisions made will be based on old or incorrect data.  Many business owners have a good sense of their business and make decisions based on their "gut," which is fine for their personal risk tolerance level.  However, once a company has a banking relationship, the owner's gut is generally not sufficient, although their other financial resources may be.  You will have a better relationship with your bank with good internal financial statements and they will be more likely to support your requests.

The financial skills a CFO may be best known for include Financial & Strategic Planning, Cash Flow Projections, Profit Improvement, Expense Reduction, Working Capital Improvement, and Gross Profit Optimization.  These skills and activities are crucial to the livelihood of any business.  A CFO fills the gap between the business owner and the Controller or Accountant that prepares the books and records.  A business owner often likes to work in the financial details to stay in touch with the financials, however this takes time away from growing the business or family activities, and the business can often begin to lose momentum which causes the owner to dive even further into the details to fix the problem.  This is the problem described in our firm's book The Danger Zone.  By keeping the CEO focused on "finding" activities instead of "minding" ones, the company can profitably Increase Sales.

Finally, every business owner will eventually leave their business.  The coming years will see many baby-boomers want to exit or sell their businesses and retire.  The current economic cycle has deferred many retirements.  When the market does recover, more businesses will come on the market to be sold, which will further depress prices for exiting business owners.  Our Finding The Exit program will help to define the goals, activities, and options for exiting the business, which may not necessarily mean selling the business.