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I have been observing more and more business owners who, although their businesses have survived the economic downturn, seem to be losing heart.

The stress and strain caused by these difficult times has worn on them. But doing business in today's economy requires a steady hand, a sharp eye and most of all -- a calm mind. There are four steps that can be taken to help to cope with the emotional toll of being an entrepreneur in difficult times.

First, adjust your expectations. The growth in revenues and profits that you experienced during the good times may not return for quite some time, if ever.

Don't burden your business with unrealistic profit goals. It is time to reset your personal budgets to reflect the new reality of what your business can generate for you in terms of income. Also, be patient and understand that it will probably take longer for you to get to retirement.

Creating wealth from your business will be a longer process that will take careful management and planning.

Second, celebrate each small step forward. Set short-term, realistic milestones for your business. What can you get done this week, this month, to make modest improvements in the performance of your business?

While you still may have big dreams for your business, take the time to enjoy the smaller accomplishments. For over time, it is those small victories that will lead to achieving your long-term goals.

Third, focus on the things that really matter. There is so much more to your life than your business. Work hard at being a good spouse. Strive to become a better parent.

Pay attention to your friends. Be a good citizen in your community. These are the things that ultimately define who you are as a person, not how big you can grow your business.

Finally, let go of the things outside your control. Even under the best of times, entrepreneurs who have been well trained in what it takes to start and grow a successful business still face about a 20 percent failure rate. Failure comes from many things that you cannot predict or plan for. Call it uncertainty, call it risk, or call it plain old bad luck.

The reality of 2010 is that entrepreneurs face much tougher odds. Nationally, the prolonged recession has led to skyrocketing business failure rates. And Nashville small-business owners face the added pressures created by the recent floods. For years, I have put a prayer on the syllabus for every entrepreneurship class I teach. It reads:

"God, grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference."

It is known by many as the "Serenity Prayer," but I like to call it the "Entrepreneur's Prayer" as it helps entrepreneurs remember that the best course is to focus on those things that they can control.

While times may be tough, it's still possible to truly enjoy the entrepreneurial journey.

(This post ran as a column this week in the Tennessean).

When starting a new business, entrepreneurs are often brimming with excitement about the possibilities a new venture may bring. If the entrepreneur has partners, there is a collective air of anticipation, like a team in the locker room getting ready for the big game.

The last thing these entrepreneurs are thinking about is what will happen when the partnership ends. Remember this: Although you and your partners get along great as you set up your business, things can change. Partners may need to part ways for any number of reasons: One partner wants to retire; another partner is just ready to go in a new direction; fundamental business disagreements flare up; or the company must deal with the death or disability of one of the partners.

Whatever the reason, the rules of a partnership breakup require a clear understanding of how and under what circumstances the partner can leave, and of what that departure will cost the remaining partners.

Clear buy-sell language needs to be a fundamental part of any partnership agreement because it sets up the rules for the inevitable departure of one or more of the key owners.

The best time to set up a partnership agreement is when you start up the business. At this point, there is little to squabble over. The business exists only on paper, so finding a fair way to deal with an exiting partner is much easier.

While it's never too late to set up a partnership agreement, the longer you wait the more complex and expensive it can get. Once there is real value in the business, it gets much harder to agree on how to structure the potential exit of one of the partners.

The best approach is to develop a framework everyone can agree on. It should include circumstances for a partner leaving (both voluntarily and involuntarily), mechanisms on how the exit will happen, a clear formula on how the business will be valued and plans for funding the buyout.

Do unto other partners ...

Think about how you'd want to be treated if you were the one to leave. Too many entrepreneurs assume that they will be the last one in the business, and they try to find ways to "stick it to the other partners" if they leave first. This is the classic situation in which you should "do unto others as you would have them do unto you."

Once the partners develop the structure of their agreement, get it formalized by an attorney. While partnership agreements cost money to create, it will cost you much more in legal fees to disentangle a business partnership that has no such agreement in place.

The death of a partner is best addressed using a buy-sell agreement funded with life insurance policies. This offers a pre-funded way of ensuring that the deceased partner's estate does not become the new partner by default. It also puts in place a mechanism to make sure the deceased partner's family is taken care of fairly.

These are difficult subjects to talk about, but the end of a partnership is one of the most important issues to plan for in a new business that has more than one owner.

(This post ran in today's Tennessean).

Jason Del Rey has a great interview with Josh James at Inc.com about his growth of Omniture and eventual sale to Adobe.  A very honest reflection -- well worth the read.

(Thanks to Belmont alum Bradley Martin for passing this along).

Just like in real estate, we are in a buyers market for the sale of existing businesses.

The demand for buying businesses has weakened as the recession has lingered, while the increasing number of distressed small businesses has created a surplus of owners ready to sell.

Even when the economy recovers, we can expect conditions to continue to favor business buyers as baby boomer entrepreneurs look to exit or cash out of their businesses to fund retirement.

Scott Hill, managing partner of Peer Business Group in Brentwood, offers five key steps, if you are in the market to purchase an existing business.

First, carefully evaluate the impact of owning a particular business on your family's lifestyle and finances. Evaluate the income and wealth risks by working through worst-case scenarios.

Hill suggests you ask questions such as, "What are my own and my family's lifestyle priorities, and how will the demands of the new business affect what we have been accustomed to?"

And "beyond the investment, down payment and debt obligations, how many months can I survive if the business cannot pay me for a period of time?"

Hill also recommends that you talk about the risks honestly and clearly with your family to make sure everyone is 100 percent behind buying the business.

Second, ask the owner detailed questions about his or her daily activities. Shadow him or her to get a true understanding of the actual role the owner plays in the business. Determine whether the duties of the owner are consistent with your own priorities, lifestyle and values.

Third, take a critical look at the business and try to uncover any red flags. Never evaluate a business from a perspective that simply reaffirms your desire to buy it.

Hill advises: "Some red flags are really no big deal. But some are deal killers." Make sure you uncover and discuss potential problems before you buy.

Fourth, make sure you have enough cash to support the business. "Ideally, you shouldn't buy a business unless you have at least an extra 10 percent set aside for working capital or as an emergency fund."

Statistics say the buyer can expect as much as a 15 percent reduction in sales after the purchase. The more cash you have, the better the cushion, Hill says.

Finally, make sure to work with experts when buying a business. That includes not only a buyer's broker, but also an attorney and certified public accountant who are experienced at business acquisitions.

A challenge you will face is that owners often place unrealistic values on their own businesses. Experts familiar with buying and selling can help determine a realistic valuation.

Scott Hill's firm has a buyers resources page filled with tools and information at this Web site: www.peerbusinessgroup.com/buyerresources.html.

(From my column this week in the Tennessean).

In my latest column for the Tennessean, I examine the opportunities and risks of selling a business during this recession:

There appears to be an increase in the number of entrepreneurs selling their businesses over the past few months. Financially strong companies and cash-rich investors looking for good acquisitions are starting to move into the market.

Just having assets such as buildings, land, equipment and even inventory is not what creates value. Those assets must have the ability to continue to earn profits for a new owner. It is the prospect of those future profits that gives a business its real value.

The simplest way to think about business value is this: People are buying your business's ability to generate future profits. Typically, the value is based on a multiple of profits. Historically, valuations have been about three to eight times annual operating cash profits (ignoring things like depreciation, corporate taxes and interest expenses) with the most typical multiplier being about four.

If a buyer offers a multiple of profits of four, and your business has operating cash profits of $100,000, you can expect a valuation of about $400,000.

Since it is a buyer's market right now, you need to set realistic expectations going into any discussions about a sale of your business. I am hearing that there has been about a one-point drop to a multiple of three times profits.

What does that mean? Just like home values, your business's value has dropped by about 25 percent, all things being equal.

But remember: The other part of the valuation equation is the profitability of the business.

How to prepare

Most entrepreneurs have reported a significant drop in their profit margins over the past year. So, that means that the drop in values could become much greater than 20 percent or 25 percent if profits are also down. My advice is as follows:

Understand what drives the value of a business. What multiple you are likely to get is based on your projected growth, the health of your industry, the strength of your customer base projected into the future, and specific strategic advantages that you may be able to offer the buyer.

Know your number. If you need a certain amount of money from your business to retire, have that number in mind going in. If the market is not supporting that value right now, you might want to wait until a later time. Use that time to improve your profitability so that when the economy picks up your operation will have an even greater value.

Seek expert advice. Work with your certified public accountant and an attorney who specializes in mergers and acquisitions to understand the process and to help set realistic expectations. This will be money well spent.

Realize that deals change. Once the buyer gets into due diligence, the price may drop. Once they learn more about the business, they may lower their projections for what they believe your business can earn for them in the future.

Be prepared for this, and know how much you are willing to go down ahead of time. Be ready to walk away if the price they are willing to pay drops too much.

Don't let your emotions lead you to take an overly discounted price -- buyers can smell desperation and will use that to their advantage by trying to drive down the price during due diligence.

The odds are that about one out of 50 inquiries about buying a business will lead to an actual sale. Keep a level head and don't even dream about how you'll spend all of that money until you get it in the bank.

I have been hearing of an increase in the number of people selling their businesses over the past few months.  Financially strong companies and cash rich investors looking for good acquisitions are starting to move in the market.

Since it is a buyers' market right now, you need to set realistic expectations going into any discussions on selling your business.  From CNNMoney.com:

Of course, if you want to sell your company right now, expect it to fetch a lower price.

"Investment bankers say that valuations have dipped from a year ago by multiples of one-half to one point," [John] Brown, [president of Business Enterprise Institute] says. "So if businesses were selling for six times EBITDA [earnings before interest, taxes, depreciation and amortization], today it's five or 5½ times."

What I am hearing is about the same drop in earnings multiples -- about a one point drop.  However, most of the deals I have been seeing are running 3-4 times EBITDA, down from 4-5 times EBITDA a couple of years ago.

What does that mean?  Just like your home value, your business value has dropped 20-25% all things being equal.

But remember -- the other part of the valuation equation is the profitability of the business measured by EBITDA.  Most entrepreneurs have reported a significant drop in their profit margins over the past year.  So that means that the drop in value could become much greater than 20-25% if profits are also down.

My advice:

1. Understand what drives the value of your business.  It is most often some multiple of EBITDA.  The most common range historically has been 3-8 times.  What multiple you are likely to get is based on your projected growth, the health of your industry, the strength of your customer base into the future, and specific strategic advantages that you may be able to offer the buyer.  Currently, most multiples are 2-5 times EBITDA.
2. Know your number.  If you need a certain amount of money from your business to retire, have that number in mind going in.  If the market is not supporting that value right now, you might want to wait until it does.  Use that time to improve your EBITDA so that when the economy picks up you will have an even greater value.
3. Seek expert advice.  Work with your CPA and an attorney who specializes in Mergers and Acquisitions to understand the process and to help set realistic expectations.  You will have to invest some money up front, but it is money well spent.
4. Realize that deals change.  Once the buyer gets into due diligence the price may drop.  Once they learn more about your business they may lower their projections for what your business can do in the future.  Be prepared for this, and know how much you are willing to go down ahead of time.  Be ready to walk away if the price they are willing to pay drops too much.  Don't let your emotions lead you to take an overly discounted price -- buyers can smell desperation and will use that to their advantage by trying to drive down the price during due diligence.

The odds are that about one out of fifty inquiries about buying a business will lead to an actual closing.  Keep that in mind right up until the deal is closed.  I have seen more than one deal collapse at the closing table.  Keep a level head and don't spend the money until you actually have it in hand.  In fact, I recommend that you should not even dream about how you'll spend it until you get it.

From my column in this week's Tennesean:

When we were in the process of selling our health- care business back in the 1990s, our attorney did a wonderful job of preparing us for much of what was ahead of us. One of the things he mentioned more than once was that we should be prepared for seller's remorse.

Seller's remorse is a feeling of second thoughts about selling a business. It can strike the entrepreneur at any time during the selling process -- before the sale, during the sale and especially after the sale.

When we were in the process of selling our business our attorney did a wonderful job of preparing us for much of what was ahead of us.  One of the things he mentioned more than once was that we should be prepared for seller's remorse. 

There are two types of seller's remorse.  One kind is the emotional feelings that you are doing the wrong thing.  It is not really rational, it is just that fear, insecurity, and/or uncertainty play tricks on your mind.  Think Brett Favre.  I would bet that rationally he knows it is time to move on from the Green Bay Packers (this is an American football metaphor for those of you outside the US).  But, all he knows is football and he probably had not spent much time planning for what comes after his career in the NFL.  I can empathize with him.  I had a lot of the same kind of pangs of doubt when we sold our company.

The other find of remorse is one that happens because the sale puts you into a situation that is no longer fun.  You are still in the company you created, but you no longer own it and now work for a boss.  From the NY Times:

"The person who became my boss was the man I was negotiating with when I was selling my company," said Mr. Asterino, 46. "You're trying to maximize the value of your company when you're selling it -- and then when the transaction closes, that individual is your boss. It was very difficult."

I knew I could not be happy with this type of exit, so planned carefully to craft an exit in which I not only monetarily exited, but physically exited, as well.  Not all entrepreneurs have this option, but if you do I would strongly suggest you take it.

(Thanks to Jennie Bowman for passing along the NY Times article).

 

 

There are certain lectures that stick out in my mind from my college days in the 1970s.  Some of them seem kind of random, which is always a reminder to me as a professor that you never know what will stick with your students. 

Any way, one lecture that has stayed with me was a lecture that an accounting professor gave us on sunk costs.  He told us that money already spent on something is like water over the dam -- it is gone and should not be considered when making a decision on whether to stay with a project or not.  We should only look forward in our analysis.  Sunk costs are -- well, sunk.

While this was not a revolutionary concept, for some reason it was very eye-opening to me as a 19 year old in an accounting class and in my memory I can still hear his lecture on this concept even today.  I always tried to remember this lesson in my business decisions.

For the entrepreneur there is the added element of emotion.  We get attached to our ideas and hang on too long.  We get our ego tied to a project and refuse to give up even though it is not logical to continue.

Sam Davidson wrote an essay at his blog on knowing when to quit that got me thinking about all of this.  It is a great essay that all entrepreneurs and aspiring entrepreneurs should read.

And to Professor Dunnigan, my old accounting professor at UWSP, thanks for the lesson on sunk costs.  It saved me a lot of wasted money and time over the years.

You get a call from someone who says that they are interested in buying your company. Your heart races and you get a tingle of excitement. Could this be it? Is it your time to finally cash in?

Slow down! You have a long road ahead (or maybe a very short road to nowhere in most cases).

BizScoops has a very clear summary of the many steps in a typical deal process. It is a great framework to help an entrepreneur understand the process of selling the business.

It is a rocky road, even at its best. When we got prepared to start the process of selling our health care business, I was lucky enough to have an attorney who gave me a strong dose of reality about how many deals fail along the way. It helped keep me grounded in what can be one of the most emotional rides of your life.

It all usually starts with a letter of inquiry. The first time you get one, the temptation is to start counting all the money you are about to get. But, hold on to your hats. This stage is about as serious as a smile and a wink at a singles bar. Any company in an acquisition mode will be spreading these around all over the place trying to get a bite. About 90% of the time these inquiries go nowhere.

If the flirtation process of the inquiry moves ahead, next will often come some sort of letter of intent. This is kind of like a promise to go steady. Both parties agree that they are seriously interested in seeing if this can move ahead. Often there is a promise of exclusivity required, but most sellers try to avoid this to keep the buyer honest and hopefully drive up the selling price with a little good old competition. More often than not, the buyer prevails in this and the seller has to promise not to entertain other offers, at least for a little while. Somewhere in this stage the basic form of the deal starts to take place. There are confidentiality agreements that allow the buyer to get enough information to float a trial offer. Remember, the deal almost never gets better for the seller past this point, so this is where you need to negotiate hard. About 50% of the deals that get to the inquiry and deal formation stage fail to make it any further. (If you are keeping score, we are now down to 5% of those initial inquiries still being active).

Next comes due diligence. This is like the stage when he or she gets to meet your parents, find out what you really keep in your sock drawer, learn what you actually make and what you spend your money on, and decide which family you are going to spend Thanksgiving with each year. The buyer will want the right to go through all of your contracts, all of your personnel records, all of your corporate minutes, and do anything else they can possible think of to dig stuff up about your business. It is an intrusive process to say the least. At this point you will likely have to share with your employees and customers that you are thinking of selling, if you haven't told them already. And the worst part is that your employees and customers may get all concerned over nothing, as about 50% of deals fail during due diligence. (We are now down to about 2.5% of the deals still being alive at this point).

Finally, if you make it through due diligence, comes the closing preparation. This is kind of like the final preparation before going to the alter, including negotiating a prenuptial agreement. Remember the old saying "the devil is in the details"? This has never been more true than in the closing process of selling a business. This is where the lawyers from both sides kick into overtime, fighting over the specific terms of the sale. Of course at this point you are ready to say, just get it over with! But, those details that your lawyer wants you to focus on and pay attention to really matter. Why? Because the deal is not really over at closing. There are hold-backs of money, warranties, and sometimes earn-outs that all can lead to major problems post sale if you are not careful during preparation of the closing documents. When your attorney says to pay attention, be patient and listen, you better pay attention, be patient and listen. If the sale of your business is not handled properly, the next stage is litigation, where all of that money you made selling the business can still be at risk. (Another large chunk of deals can fail during the closing process, leaving only about 1-2% that make if from initial inquiry to a final closing).

The moral of this tale is to be realistic, be informed, and be prepared when you enter into the exit stage of your business. And remember that while falling in love is great, it is a long way to the altar.