A very encouraging article if just from the standpoint that our government sees the problems! They actually correctly listed the major problems with our economy which are high unemployment, heavy reliance on government support, and commercial real estate. WOW! Not bad. They did forget the HUGE US deficit and the business lending environment but I’ll let them slide since at least they seem to have their collective eyes on the ball.

Not sure how to gauge this administration with others because I am really now old enough, experienced enough, and interested enough to be following it. It do like what I see. They are working hard. They are trying things. They aren’t sitting on their hands. They are making mistakes. So what. At least they are working hard at the problems.

Interesting video on unemployment for college degreed and management professionals.

See my post yesterday. I think stages of “recovery” have to take place before there is any improved sentiment among Americans. Yes, things are not getting worse. “Not getting worse” is different than “getting better.” “Not getting worse” is good news. It has to take place before “getting better” can happen.

I recently had lunch with a leading valuation expert and author on business valuation. She said their firm just had it’s second round of layoffs. Theirs, who once considered audits a necessary part of doing business, have cut back.

I think once the second wave of layoffs is over, “not getting worse” will be less frequent and “getting better” will become more frequent.

I put these terms in quotes because, to one person, it means one thing. To another person it means something entirely different. I was fortunate enough to stay with 12 homeless men last night. To them, these terms are a daily challenge.

This has got to be good news for unemployment. I’ve created a 16 step process to hiring new employees. I believe many small and large businesses are between steps 3 and 9. Step 16 might be farther away than most of us like but this article is a step in the right direction.

1. Economy starts to fall

2. Company profits and sales go down.

3. Company make layoffs.

4. Company tries to survive by having fewer employees do more.

5. Company stabilizes, gets acquired, sold, or goes out of business.

6. Company might decide to make additional layoffs. Usually its more than necessary but management  wants to be conservative…just in case things get worse. Laying off employees is no fun for anyone.

7. Fewer employees are asked to keep working harder.

8. Company shows improved financials and more revenue per employee.

9. Productivity goes up.

10. Sales start to recover and employees have a harder time doing all the work.

11. Management finds ways to be even more productive by making processes more efficient.

12. Company/Management invests in technology and time savers.

13. Some employees leave for opportunities elsewhere.

14. Combination of lost employees, layoffs, and increased workload makes company consider hiring more employees.

15. Company hires new employees.

16. Economy recovers and unemployment goes down.

Maybe, just maybe, we are starting to see things loosen up. Small business lending has showed signs of life and means small businesses owners might start to invest again soon. We’ll see.

CAUTION: AS A BUYER YOU SHOULD NOT SIMPLY TRY TO MULTIPLY A BUSINESS BY AN AVERAGE MULTIPLE! Business valuation is as much art as it is science. There are certain industry standards that can be applied but there are many “non-cash” factors that go into determining the true value of a small business.

The reason for this article, however, is to think about a company from the buyer’s perspective. If you are going to buy a small business, what should you pay for it? What makes is valued at 1.5 times. What about 3.5 times? There is a simple way to determine fair value.

First establish an asking price. Then subtract the anticipated down payment of 50%. This will give you the amount financed. Then, subtract annual debt service (amount financed), a reasonable owner salary, capital reinvestment needed annually, and annual taxes from the total SDE (sellers discretionary earnings).  This will give you the net cash return. If this number is negative, the seller may be asking to much for the business. If it is zero, it’s considered neutral. If it’s positive, then it can be considered positive for the buyer. Then, add the down payment and working capital required. This will give you the total investment required. Divide the net cash return by the total investment required. Multiply by 100 for the annual return cash on cash for the investment/purchase of the business. Again, if it’s positive, it’s considered good for the buyer. If it’s zero, it’s neutral. If it’s negative, it’s considered good for the seller. But, this calculation is only as good as the numbers you put into it. If the owner salary is unfairly skewed one way of the other, the numbers may be unrealistic.

At the end of the day, 30% of businesses sell. Of the 30%, there are still some within the 30% who really overpaid for the business. The goal is not simply to be one of the 30%. The goal, in my opinion, should be to be one of the 30% AND have the business continue on. The only way everyone wins, and continues on, is if the business is fairly priced.

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Peer Business Group
“Helping our Peer Buy and Sell Businesses”

For business owners, this is a brilliant way to shelter income and add to your owner compensation. The money is put in pre-tax and grows tax free. You do pay taxes when you take the money out for retirement.

There are tons of benefits to owning your own business but this is one of the really good ones.

Bob

By the way, Bob has asked me to be more educational in the posts I do. I hope this one fits his standards. Apparently Bob woke up on the wrong side of the bed or he’s mad his Bills are terrible. My Tennessee Titans stink too but I’m not out there yelling at people for it!

Maybe Bob should take his frustrations out at FireDickJauron.com.

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Peer Business Group
“We Educate and Connect Business Buyers and Sellers”
http://www.peerbusinessgroup.com

Also, we can only withstand so long. We can’t continue to just hold on, use savings, and survive. There’s got to be a point where the 90% of us who still have jobs decide to start living our lives again. Let’s hope its soon.