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Business Survival

Why Build a Business Just to Close It?

Everyone thinking, starting, running or growing a business should read this column because sale or closure is likely to apply to you whatever your business’s intention is.

Pavlo Phitidis

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Every business has one of two destinations: A sale or a closure. Irrespective of what your intent is today, your business will be sold or closed and unfortunately, 96% of businesses started are never sold.

They close, are wound up by fed-up entrepreneurs, dumped onto unsuspecting family members or handed over in some shape or form to even more unsuspecting staff.

To avoid being part of that dire statistic, as a business owner understand how to build a saleable business from the start.

To achieve this, make an effort to understand some basics on valuation and how buyer selection can maximise your price.

Understanding these levers puts you in control and allows you to be the price-maker rather than the price-taker.

We-recommend-tickRecommended: Your Business Will Only Grow As Much As You Grow

When building a business for sale – something that all business owners should be doing every day – consider carefully the following pointers:

1. Don’t be the business

If you are the business in the mind of the buyer, the sustainability of the business is highly unlikely without your presence. The lesson here is to figure out how to build the business to run without your hand. This means three things:

First, identify limited customer segments that you can serve. Being all things to all people makes you a generic business and no different from your multiple competitors. In such instances, you will be the price-taker and not the price-maker with a buyer facing many options other than buying your business.

Second, once you have identified the customer groups you wish to serve, map out the steps that you need to take to build a system of delivery. This means through all the functions of your business, create a series of activities that, when brought together, create a particular experience for a customer who is dealing with your business. The outcome here is that you will have created a specialist business, one that focuses on very specific customer segments, and the knowledge gained on how to serve and satisfy those customer segments makes your business distinct from your competitors. It makes it special.

Next, you have created a business that is run by systems or operational processes. This is a business that can continue without you. Getting these two building blocks in place means that you can value your business on its continuation, something every buyer is looking for, the promise of ongoing sustainability and profits. For this you will be well rewarded in price.

2. Understand valuation

A business’s value is not derived from stock or debtors. A buyer sees value in two things, one you can price and the other not: The future potential of the business to sustain itself in its current form and the potential of the business given the buyer’s capability and vision behind its purchase.

You can charge a premium for the first and this is how the value of your business will be calculated by a smart buyer. It will be assessed on its ability to continue without you and generate free cash flow from each and every month of trade in the future.

The past will be used as a reflection of what the future holds but it will largely be ignored beyond that. Just as you are less interested in what a share on the JSE has done and more interested in the potential dividend stream it promises in the future, a buyer holds a similar view of your business.

Charging a buyer for what they can do with your business once it’s acquired is of no consequence to them. They will not pay for the ‘sweat of their brow’ to generate additional performance over and above what the business can reasonably deliver on the back of your efforts to date.

Incidentally, love, time in the game, sacrifices, risk, commitment, multiple generation family legacy and all those fine qualities, don’t count in valuation.

3. Pick wisely

The choice of buyer is vital to securing a sale beyond your business’s price tag.

If your buyer is looking for a strategic advantage in buying your business, it’s likely you will be able to add a premium onto its market value. For example, if your buyer hopes to secure your customers as a result of the purchase and then offer additional services/products to your customers thereafter to grow sales, there is a premium value there.

If it is to close out competition and corner the market then there is additional value, should the transaction be allowed. A strategic advantage in the sale of your business to a buyer will claim a premium.

In all cases, you should be able to visualise who would want to buy your company three to five years after you started it. It’s only then that you will have a clear understanding of what business you are in and what makes what you do special.

4. Time it right

Timing in a sale makes a massive difference to price. Timing refers to both your readiness and state of mind – yours not the business’s – and the appetite for businesses in your sector or industry.

Don’t decide to sell when you are tired, exhausted and bored of your business. It’s too late! You will acquiesce to the first buyer and price on the table, especially if the buyer plays you along a bit.

Maintaining a position on value and the advantages of the business to the buyer over a protracted negotiation needs resilience.

If you don’t believe in your business and you are simply offloading it because you have overstayed your welcome and you are ‘wanting to simplify your life’, you will be led by the buyer in matters such as the price and terms of payment to offload your frustration.

Also, there is always a buyer at a price but if you time the sale when the trends favour you, a premium will be won. Imagine trying to sell a DVD store today? Timing is everything.

5. Don’t bet on only one horse

Ensuring that you have multiple buyers on the line is a psychological advantage that enables you to hold
your price.

This is achieved through both sourcing your buyers 24 months before you want to sell and learning what they would typically want ahead of an introduction. If it’s a sale to a private buyer, what kind of person should this ideally be beyond someone who can afford it? Here, you need to think like that buyer.

They are going to buy your business for the lifestyle, then see how your business fits that lifestyle. If they buy to grow further, understand what your business needs to demonstrate to convince them of that future growth.

If the buyer is a corporate, understand how they require reporting and governance to run and build it into your business to fit close to their understanding of these activities. If your buyer in your mind loves ice-cream, give him ice-cream, don’t try to sell him a cake.

Options favour the brave. Do your work ahead of time to inform your broker of exactly the kind of buyer best suited to your business. Then, insist on meeting no less than three. If you have three buyers loving your business, you become the price-maker, not the price-taker.

We-recommend-tickRecommended: 3 Tips to Create Sustainable Business Enterprises

Remember this, every business in the world has one of two destinations. A sale or a close. By starting with the end in mind, building for value and creating something that can be sold, you have options. The alternative will simply make you a statistic.

In brief

Every business has one of two destinations: A sale or a closure. Irrespective of what your intent is today, your business will be sold or closed and unfortunately, 96% of businesses started are never sold.

They close, are wound up by fed-up entrepreneurs, dumped onto unsuspecting family members or handed over in some shape or form to even more unsuspecting staff.

Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za

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Business Survival

How To Embrace An Exponential Mindset For Your Business

In the age of exponential technologies, it’s a risk not to take a risk.

Mic Mann

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Think global and exponential

If you’re an entrepreneur trying to establish a successful business, it’ll be dead before it even takes off, if you don’t build it for the future. You have to think three to five years ahead, so when it launches, it’s still relevant.

Think like former Canadian pro ice hockey player Wayne Gretzky, who said: “I skate to where the puck is going to be, not where it has been.” And these days it’s easier for entrepreneurs to predict the future thanks to technology and data insights.

Consider what Singularity University co-founder Ray Kurzweil calls The Law of Accelerating Returns. He says the only thing that’s constant is change and that change itself is accelerating exponentially. As per Moore’s Law, information-enabled industries are doubling their performance and halving their price every 18 months, according to the price-performance ratio. The field of biotechnology has managed to surpass that.

Related: 5 Mindset Changes You Must Make When Going From Employee To Entrepreneur

There’s no time to slow down, your business has to constantly evolve, and you have to keep asking “what’s next”. Encourage experimentation and innovation in your company. Innovation focuses on incrementally improving your already existing products and services, while experimentation allows for fresh outlooks and breakthrough strategies that leapfrog old ways.

We should reprogramme our linear mindset into an exponential one. Don’t aim to grow your business by 10 per cent year-on-year, but rather 10 times. The first thing I learned at Singularity University is the potential of exponential growth. If you take 30 linear steps, you only move 30 places, but if you move 30 exponential steps your place doubles with each step and by the 30th step, you’ve moved over a billion places.

We’ve seen this happen with unicorns – not the magical creatures, but start-up companies that are valued at over $1 billion within their first year – like Slack (cloud-based team collaboration tools and services) and Square Inc. (a mobile payment company). It once took around 20 years for American companies to reach the billion-dollar valuation mark, now it may take less than a year.

In the early stages – until your third step – your progress may seem linear. Many exponentially-geared companies give up at this point – just as their growth rate is about to explode. Persevere!

A few decades ago it was unthinkable for an individual or start-up to disrupt entire industries. Start thinking globally, not locally. Use staff-on-demand and crowd souring to propel your business ahead of the competition. It’s unlikely that you have the world’s smartest minds working for you, however with the power of the crowd, you just might.

If you’re struggling to find a solution, turn the challenge into a game and offer prize money. You’ll have thousands of people attempting to solve your problem, but will only pay for the best solution. Kaggle is a platform for predictive modelling and analytics competitions. It lets statisticians and data miners compete to produce the best models for predicting and describing data. Mining company Gold Corp placed its geological data online and offered money to anyone who could locate gold at their Canadian mine. Four of the five winning entries struck gold. And in 2011 it took a team of gamers 10 days to solve an enzyme riddle that could hold the key to curing AIDS.

The six Ds of tech

As companies become information-enabled they should internalise what Singularity University co-founder Peter Diamandis calls the six-step growth cycle of digital technologies. These Six Ds of Tech Disruption are digitisation, deception, disruption, demonetisation, dematerialisation, and democratisation.

The first step is digitisation. Once something enters the digital realm it gains the potential for exponential growth. Think of the radio and CDs. You no longer need either, instead you can stream online, listen via YouTube or download music. After digitisation, growth appears slow, even deceptive. Sadly that’s when many companies opt out. Be patient!

Related: How To Build The Right Mindset For Start-up Success

No one imagined Kodak would disappear after a century. Kodak thought they were in the business of printing photographs, while they were in the business of memories. Think about the need your business solves. Kodak invented the digital camera, but was too scared to disrupt its own industry. It didn’t realise that people were no longer taking photographs in the same way, so their competitors disrupted the industry instead.

Today, the camera has become part of the smartphone and photographs are predominantly shared via social media. Instagram epitomises the next step in the equation: demonetisation. With time technology becomes cheaper and even free. Instead of printing photographs, many people instantly share them on a free smartphone app like Instagram.

Next comes dematerialisation. The radio, camera, video recorder, GPS, calculator and calendar are disappearing from the physical world as they’re being built into the smartphone. The wallet will dematerialise next with the advent of online transactions and cryptocurrencies.

Finally, democratisation happens when government, corporates and the wealthy no longer hold control and masses of people have access. Just think, the average South African with a smartphone has access to much more information than the president of the United States of America had 20 years ago.

In the age of exponential technologies, it’s a risk not to take a risk.

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Business Survival

Why, When You Fail, You Should ‘Fail Forward’

So, you’ve fallen on your face? Consider that you’re walking in the footsteps of some ‘famous failures,’ like Steve Jobs, Oprah Winfrey and Stephen King.

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Arianna Huffington

5 Inspiring stories to keep in mind

1000 times he failed

Teachers described him as “too stupid to learn anything.” He got fired from two jobs because he was “non-productive.”

Then he tried inventing something completely new. What’s even crazier is that he tried 1 000 times, unsuccessfully. When a reporter asked him how it felt to fail 1 000 times, the story goes, he replied, “I didn’t fail 1 000 times. “[The invention] was an invention with 1 000 steps.”

Through pure determination, Thomas Edison – initially a failure – made the world a brighter place to live in. If such good things come from success, then why do we choose to always look at the brighter days and completely disown the tough times?

Here are five more inspiring stories to keep in mind, should you ever feel that you’re the biggest failure.

The woman whose book got rejected 36 times

Arianna Huffington

Arianna Huffington

You’d think that once one book you’ve written becomes a bestseller, publishing another one would be a walk in the park. But it’s not that easy. At least not for Arianna Huffington.

Having produced that first bestseller, The Female Woman, when she was only 23,, Huffington tried to pitch her second book, but none of the 36 publishers she approached said yes. Still, she didn’t give up.

And that’s just one of a couple of failures from The Huffington Post’s co-founder. She has been dropped from hosting a BBC show, garnered 0.55 percent of the vote (when she ran for governor of California) and been unsuccessful when she called for then-President Bill Clinton’s resignation through her website.

But now The Huffington Post gets millions of visitors every month; she’s had a successful book career; and, if it helps, she’s very rich. Clearly, “failure is a stepping stone to success.”

Related: How Failing Fast was Nomanini’s Ticket to Creative Innovation

The woman who was “unfit for television”

Oprah Winfrey

Oprah Winfrey

Oprah Winfrey is worth more than $3 billion. But it hasn’t always been like that. And, considering that a Baltimore TV producer called her “unfit for television” right before he fired her, it’s telling that the main source of Oprah’s success was a TV show that ran for more than 20 seasons.

Oprah also tried to get into the movie business with the movie Beloved. It lost to Bride of Chucky in terms of revenue and consequently lost the $80 million invested in it. Oprah has said this failure sent her into a state of depression.

But then, in 2013, she got back onto the horse (speaking cinematically) with The Butler.

See? Even when you make it, you’re still at risk of failure. Henry Ford, William Crapo Durant and Walt Disney (among so many others) all went bankrupt after they’d already made it big. But each one sprang back in his own way.

The man who was fired from the company he’d founded

Steve Jobs

Steve Jobs

Not all of Apple’s products have received mass acclaim. More specifically, not all of the Apple products launched by Steve Jobs have been successful.

One such failuret was the Lisa computer. This was supposed to be a desktop computer targeted at personal business users. For a purchase price of $10,000 (about $24,000 today) consumers could buy the first desktop that would allow them to use a mouse to work with a 5MHz processor and up to 1MB RAM. The Lisa sounded like a magnificent idea, at least at the time.

However, the pricey computer sold poorly, and then-CEO John Scully, someone Jobs had chosen for that position a few years earlier (there are so many lessons in this story), helped remove Jobs from the Macintosh division in 1985.

So Jobs left Apple. Then he founded NeXT, and failed again, but sold the software division of NeXT to Apple in 1997. Then he returned and became CEO in 2000, and this time he was determined to make Apple something special. He succeeded.

Related: Why Balls to the Walls Could Mean Failing Fast

The man who almost gave up after 30 rejections

Stephen King

Stephen King

Stephen King was just selling short stories and teaching English when he had the idea to write Carrie. However, despite the $2,500 advance he received for the novel, he decided to give up on the book after 30 rejections.

But his wife wasn’t going to let him do that. She urged him on, and he finally agreed to submit the manuscript again.

Carrie is one of King’s bestsellers and went on to become two film adaptations, one of which won the lead actress Sissy Spacek an Oscar.

The man who quit – just before striking gold

gold-mine-panning

Talk about hitting a gold mine

One last story comes from Napoleon Hill’s book, Think and Grow Rich. In it, the author writes of an interview with a millionaire named R.U. Darby who in turn described an uncle of his who, having heard of the riches that came from finding gold, set out to do just that. After weeks of commitment, this miner finally spotted a vein of shining ore. He raised the money for the necessary machinery and went ahead and he started shipping the gold. However, before long, he’d lost the vein of the gold ore.

Related: How Tebogo Ditshego Transformed a Failing Business and Tripled his Revenue

He tried to find it again and was unsuccessful. Then his workers quit and sold the machinery to a junk man. The junk man called in an engineer to inspect why the project had failed, and it was determined that the vein was just 3 feet (three) away from where the Darbys had left off.

The lesson? Before you stop trying, try again. If not for yourself, then for other people. What would the world be like without Thomas Edison’s invention? How about Alexander Graham Bell? Use failure as a step to elevate you because it’s by learning to accept failure that we can see great success.

This article was originally posted here on Entrepreneur.com.

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Business Survival

How To Recession-Proof Your Business

South Africa is in a technical recession. Here’s how to navigate the turbulent times ahead.

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For the lay-man like myself, it’s important to understand that a technical recession is an economic term that describes two consecutive quarters of negative growth in an economy. For South Africa, gross domestic product (GDP) declined 0,7% during the first quarter of 2017 after contracting by 0,3% in the fourth quarter of 2016.

Why is this a big deal? Because the economic outlook, even without the technical recession, was bleak. Ratings agencies are losing confidence in South Africa. S&P downgraded the country to junk status earlier this year, followed by Moodys, which revised South Africa down a notch.

Related: Can Your Business Survive A Recession?

How organisations respond to recessions

There are a number of knee-jerk reactions to a recession as a direct result of decreasing revenues and profits. The most relevant to SMEs are:

  • Cutting R&D spending. This means no new product lines, and no incremental innovation expenditure unless it returns direct value to the business.
  • People get fired. In a time where underperformance has a double impact on the business, people that aren’t performing are performance-managed out the door.
  • Market shares shrink. This is often due to reduced R&D spends.
  • Processes are evaluated. Companies start looking for efficiencies that should have already been in place.

Outlook and opportunities for SMEs

For SMEs, sales and product planning in a recession is key and must align to the way big business is responding to the recession.

Fundraising for capital expenditure is more expensive, but not impossible. It may be valuable to invest ahead of the curve to capture the emergent big businesses during this period and therefore external investment may make sense.

In an increasingly collaborative economy, SMEs should look to each other for partnerships and complementary projects that cost little to assemble, but amount to great value for a big business.

Survival of the nimblest

Cut down

SMEs have the ability to be nimble and move quickly to change organisational structures and deliver on just-in-time value. This can be hamstrung by unpredictable fluctuating expenses like cell phone contracts that may vary in cost in an unpredictable way from month to month. The fewer of these costs on your books, the better.

Related: How Renay & Russell Tandy Have Survived 2 Recessions And Built A Successful Agency

Sell harder

The term ‘always be closing’ is a famous sales mantra, it’s also applicable in a recessionary context. First, because you don’t know what they don’t know and unless you tell them — who will? Second, the feedback loop of understanding the concerns and actions from your customer or client can only be understood through interaction.

Position smarter

Is it clear that you are the best provider for the job that needs to be done? If not, it is important to build a stakeholder strategy that puts your business in front of the key procurement and strategy custodians. This may be a great opportunity to exhibit demos, case studies and showcase the efficiency that you offer.

Focus on value

I can’t over-state this. Value, value, value. It goes without saying that one of the key reasons anyone would consider an alternative supplier is because of the specific problem they solve, so this should be your approach in reinforcing the value you bring to the table. Repetition builds memory structure.

One recession doesn’t fit all

It’s important to understand that for SMEs a recession can have an expansionary effect in the same way the lipstick effect applies to luxury goods and services.

The lipstick effect is the theory that when facing an economic crisis, consumers will be more willing to buy less costly luxury goods. Instead of buying expensive fur coats, for example, people will buy expensive lipstick.

A series of psychology experiments have confirmed for the first time that while tougher economic times decrease desire for most items, they also reliably increase women’s yearning for products that boost their attractiveness.

Parting shot

So, for SMEs, the formula is simple — don’t panic, analyse your customer value chain and position your solution accordingly and then sell, sell, sell.

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