Is your company valuable to someone else?

Creating value in a company is still considered by many to be one of the great ways to create wealth, create jobs and realize the American dream. However, many businesses are not sellable for a value that would motivate the owner to sell and others are not sellable at any price. Are you creating a company that will realize its full sales value without you? Is your hard work focused in areas the marketplace will value most and reward with you with a premium valuation? Do you have a clear strategy to not only create but maximize company value?

Does your company provide unique benefits for founders and owners?

You have sacrificed a great deal to build your company, is it reciprocating in the most creative, effective and important financial areas? Beyond a nice company car and expense account, is your company taking advantage of available planning opportunities to create a tax efficient liquid asset base, helping to protect your assets, protecting your family and partners? Have you taken the time to insure your company is providing for you as well as you do for it?

Does the company creating tax efficiency?

Business ownership is one of the great tax planning vehicles available today. Beyond expense reimbursement and the benefits mentioned above, are you structured properly to maximize tax efficiency at the time of an eventual exit from your business? Has your company taken the steps to ensure maximum efficiency of annual distributions and provide downside market protection on investment assets? The tools and mechanisms exist to allow your company to create greater tax efficiency for a higher tax environment in 2013.

Is the company vulnerability free?

Are your officers and directors properly protected personally from frivolous lawsuits? Does the company and your partners have the immediate liquidity to acquire the shares from a deceased or disabled partner? Are important personal assets creditor proof? Once your organization is past the survival stage and moves into maturity, these are important questions that will protect your most valuable asset and allow you to sleep easier at night.

Do you have a great culture?

You probably spend more time with your company then anywhere else, and creating a great culture may be the most important ingredient for a company that is great to own. Entrepreneurs talk a lot about culture, yet it is rare to experience a great corporate environment. While compensation and benefits are a component of great culture, it is often the little things, the creative policies and flexibility that create a great corporate culture.

Your business impacts every other aspect of your life. Having a company that is great to own will likely make the other areas of your life more rewarding and enjoyable and will enable you to realize full value for your business when you eventually decide to exit your business.

Question Photo via Shutterstock

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These two experiences have helped deepen my understanding of the five Sacred Rules that distinguish great franchise opportunities.  I offer them here, in case you are considering converting your business into a franchise company.

Rule #1: Make your partners profitable.
This first rule sounds easy, but it often gets obscured by the economic pressures you will begin to feel preparing your financial projections.  First and foremost, your concept must allow your franchisees to make a significant profit.  The more the better.

Yes, a unique, exciting concept is helpful in attracting attention and selling franchises, but the business process and procedures, both operations and marketing, must give your future business partners (franchisees) the opportunity to be successful financially.  The more successful they can be, the more successful your franchise company will become.  If you maintain focus on this rule, many of your other challenges will become much smaller.

Rule #2: Have a great answer for the question, “What have you done for me lately?”
Creating ongoing value is critical for a successful franchise relationship.  Once you have trained your franchisees and helped them establish their businesses, the value the franchisor contributes to their future success will diminish with time, at least conceptually.  Are your recipes unique and always changing? Does your scheduling system make your franchisees more efficient and profitable? Is your marketing process effective and inexpensive? Is your budgeting software critical to profitable projects? Does your real estate department help find great locations? These and other questions are ones franchisees will ask.

While a strong franchise agreement will protect the franchisor, the objective is to create a win-win relationship, and to continually innovate to make your business, service, marketing and products better.

Rule #3: Quit or hire.
Keep in mind you are embarking on an entirely new business endeavor in which you have no practical experience: franchising.  You are no longer running your business and training others how to do the same; you are the CEO of what you hope will become a successful national franchise company.

I’ve seen many companies fail and wind up entangled in the legal system because they never make the full commitment to their franchise company.  Hiring a franchise development company to create marketing and sales documents and prepare your Federal Disclosure Document is enough to help you sell a couple of franchisees.  But if you want to become a meaningful and successful company, you have to support your earliest partners and make sure they are successful.

Christian Faulconer, CEO of Franchise Foundry, offers some good advice here: Remember, if you decide to build a franchise system around your successful business, it’s like starting a second business. Selling your products or services to your customers will still require significant time and effort, but now you also have to find time to build the franchising infrastructure and market and sell your franchise opportunity. It can seem like you are running two separate businesses, and the demands can become overwhelming without the right partners.

Keeping your current full-time job as president of your business and then working in your startup franchise company almost never works out.  Consultants don’t cut it, either.  Make a commitment and either quit your job as president or hire someone to run the franchise business, but recognize you probably cannot be successful at both jobs at the same time.

Rule #4:  Raise capital.
There are two reasons for this sacred requirement.  First, it is a great reality check and screening mechanism.  When you begin to talk with others, friends, customers and especially franchise consultants, you’ll hear only positive feedback.  If you want to really hear the truth, ask for a check.

Consultants will tell you the idea is a sure success because they have a hammer and you are the nail.  Friends want to support you and it is always easier to praise and encourage than provide constructive feedback. Your customers already love your service, so they are not the best ones to offer feedback on the viability of national expansion.

Kert Gennings is the COO of Boardwalk Fresh Burgers and Fries and has grown two large food-service franchise companies. He offers this thought: “Preparing a formal business plan for converting your company into a franchise company is a very enlightening exercise as it will help you crystallize your thinking.  Once complete, use that document to raise the money you will surely need to have a fair chance at success.  If you cannot raise the money, listen to what the marketplace is telling you.  Not that you have a bad business, but that perhaps it is not ready for national expansion.”

Secondly, you will need the money you raise to help with marketing, sales, franchise support, registration in states that require it, and hiring a person to help run your old or new business (see point 3).

Rule #5:  You must have a great selling process (selling is service and vice-versa).
You must have a process to sell your franchise to people you do not know.  Ninety-five percent of your customers who tell you they are interested in becoming a franchisee will never write you a check.  And even if all of them do, it is not enough to create a viable business.  You need to sell to people you do not know. All successful sales are the natural outcome of a successful process.  If you want a great example of an automated process, you can visit Process Peak.

Keep in mind, your initial franchisees will be early adopter personalities, risk takers.  They will become franchisees because they like ground-floor opportunities and are easier to sell based on a concept and an opportunity.  However, when you update your FDD, you are required to list your current franchisees (with contact info).  Those people will become a critical part of your sales process weather you like it or not.  The key to your long term-success is how happy you make those early franchisees, and if you are cutting corners to save money or because you are not committed to the idea of franchising your business, their negative comments to prospective franchisees will really hurt future sales.

Keep in mind that franchising is a heavily regulated industry. The IFA has developed a process for selling franchises called FranGuard. Your sales team should be familiar with that process and the steps you need to take to protect your system as you sell franchises.

Becoming the next great American franchise is a worthy goal, but there are many challenges along the way.  Make sure you’ve done all of your research and identify partners who are truly vested in your future success.

The post Want to Franchise a Business? 5 Sacred Rules to Become the Next Great Franchise appeared first on Small Business Trends.

You do not need to know anything about “social media” to use LinkedIn. You do not have to tweet while waiting at the airport or post photos of your board meeting or family vacation.  There is no doubt, the more effort you put into this business communication tool, the better results you will get.  My objective here is to give you the very basics required so others can identify you as a potential partner, seller, employer, buyer, etc.

LinkedIn is my number-one tool when helping clients identify potential buyers (or sellers) for their company.  It is also very effective when trying to identify potential partners for shared revenue deals.  If you want these types of opportunities to find you online, here are 4 easy, yet very effective, steps to follow. No time? You can even delegate these to your admin or someone in business development. I’ll create a future post about how to find opportunities using LinkedIn (that requires more effort by you).  For now, let’s keep things simple to get you in the game.

As mentioned, the key is to be “findable,” and that will be accomplished when you establish your profile.  In our increasingly crowded online world (LinkedIn had 85 million users on 12/15/10) , you are relevant if you have a presence online, and out of touch if you do not.  Here are a few simple steps that are almost guaranteed to help a business opportunity find you in the next six to 12 months.

1. Your title

Your title needs to accomplish two things.  First, tell others you are the person who can make a decision about acquisition, JV, licensing, etc.  Additionally, describe your core service capability.

LinkedIn allows people to search their entire database based on keywords and assigns greater relevance for certain areas of the profile.  Your title is one of the most heavily weighted areas on your profile, so use it effectively and you will rank higher in search results for those looking for your service.

So, being the CEO of “a franchise development firm: The Franchise Builders” may sound redundant, but it is a very effective way to improve your rank when anyone is searching for the term franchise.  Being the COO at Dimension Solutions does not help searchers looking for a program management company.

In 2010 we completed an acquisition for a client who was selling their company in the “program management” space ($14 million revenue).  The acquiring company’s press release stated it was the most important acquisition of their fiscal year.  This deal happened because I found their VP of sales while searching LinkedIn’s database.

2. Recommendations

Personal recommendations are not necessary at a C-level and may even work against you.  Leave that to your business development people.  If you are going to have them, however, be sure to have at least 5 percent of your connections as recommendations until you have over 20.  To have 500+ recommendations and only 4 or 5 recommendations does not enhance your profile. (Additional thoughts by Chris Brogan on a good recommendation).

3. Connections

When I find a potential candidate with fewer than 50 connections, I seldom make contact.  LinkedIn only has clout with those who recognize its capabilities and engage it as real business tool. If you have fewer than 100 connections, you probably do not use or value this form of interaction, so I’ll move on to others who do.

Christian Faulconer is the CEO of Franchise Foundry, a franchise development and investment firm.  They are constantly looking for business ideas that could become the next great national franchise.  Since locating him last year, they have signed deals and are developing two new franchise concepts they are very excited about.  Those deals found him, because his profile was “findable.”

If you (or your admin) spend a few minutes each day finding those you are connected to in the real world, you will very quickly have 100+ connections.

4. Professional Photo

A search result will often provide dozens (or hundreds) of results.  As an active user, when I scan for quality a match, my eye is naturally attracted to those profiles with photos (I seldom consider those without one at this stage).  Your photo indicates how seriously you regard LinkedIn as a business tool.  If it is a serious tool for you, I’m more excited to make contact and pursue business with you through this network.

Take a look at this search for Security Consultant. Which results will you click on to take a closer look?

Remember, LinkedIn is a social media tool, and social media is about connecting to others you don’t know yet and deepening the relationships you already have.  A photo will help you accomplish that connection on a deeper level much more quickly.  Keep it simple and professional and save the fishing, skiing and family photos for your Facebook account. (Additional photo tips here).

Your title and photo will take about 10 minutes to add to your profile.  Building connections a bit longer, but just one successful business deal will provide a great return on time invested.  I’m confident these steps will produce results and hope you will share your experience so we can all learn to be more effective with LinkedIn.

(For additional tips see the Slideshare presentation).

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All of this has contributed to the slowing of our economy over the past two years, but is now finally showing signs of rejuvenation.  With angel investing expected to pick up slightly in 2011, here is a “look behind the curtain” to see how one very successful angel investment group tracks and considers its investments.

This spreadsheet shows seven actual investment positions (PDF) of an angel investor friend of mine–and here are three critical insights that will help you be more effective at attracting angel investment in the coming year.

1) Pre Money Valuation

This is the value of your company before the addition of the funds you are seeking.  For example, company number 4 is seeking $500,000 (current raise amount) at a $2 million valuation.  This means the company will have a value of $2.5 million after the investment, and the new investors will own 20 percent of the company’s value ($2.0 million + $500,000 investment = $2.5 million/$500,000 invested).

It is worth considering the company’s 2009 and 2010 revenue numbers and customer/partners to form a basis of comparison for the value of your company.  Many angels tell me they will not even consider a new company with an initial valuation above $2 million, because such companies just do not exist.

2) Liquidation Preference

I covered this in an earlier post but investor preference is 1) almost always required, 2) flexible to fit almost any situation and 3) helps attract investors.

3) Market Perspective

It is always difficult for an entrepreneur to have a proper perspective on the marketplace, investment landscape or client reactions.  Keep in mind that any angel investor (or even family/friend investor) is comparing your opportunity to other alternatives.

This spreadsheet, which gives you a peek at other company investments this angel has made, should serve as a measuring stick and allow you to see how valuable all your small successes are when building a successful company.

If you are building a company worth an angel investment, it has to be worth selling for a significant profit for you and your investors.  Be sure you have a clear vision of how you will accomplish your exit plan and become a successful portfolio company if you are hunting for angel investment in 2011.

The post A Peek Behind the Angel Curtain Reveals 3 Secrets to Attracting Money appeared first on Small Business Trends.

Fortunately, we had a great investment banker who was able to arrange a sale of the company and its technology to a public company out of Canada for $1.5 million USD.  Our 35 percent equity stake in the company would return only $525,000 of our initial investment, a 50 percent haircut in less than 18 months. Ouch!

That’s when I first learned about, and fell in love with, the concept of an investor preference.  Since then it has been a required part of any private investment I participate in. You will require the same after reading further.

Because of our “preference,”  we were entitled to the first $1 million of proceeds from the company sale and 35 percent of everything over and above our initial investment.  We realized $1.175 million of the $1.5 million net proceeds and were the only investors to earn a positive return on our investment in the company.

Given the difficult angel investment environment today, a preference is almost required from savvy investors.  The limitations of your preference are what the company will accept, and whatever you feel is reasonable protection for the risk you are taking with your investment capital.  Here are some fairly common examples:

• 100 percent preference and 10 percent annualized return from time of investment
• 100 percent preference and proportional share of additional proceeds (stated above)
• 200 percent preference on investment amount
• Full preference with an equity kicker if company has not been sold within 5 years

An investor preference is limited only by your creativity and imagination.  It is also a wonderful opportunity for entrepreneurs to create an offering that is more attractive to initial investors.  With early investors, a preference is a great way to reflect management’s confidence in (and fairness towards) future prospects for the company.

Raising angel money is a very difficult task. A well-constructed investor preference can help minimize investor risk in a creative way that helps attract startup funding.  There are a lot of variations, complications and opportunities when creating an investor preference, so be sure to do your homework and think through the implications for future financing rounds.

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Over the years I’ve realized that receiving your first letter of intent or “LOI” is a very confusing part of the business sale process. Experienced sellers (there are not many of these) realize there is about a 40 percent chance that a LOI will actually result in the sale of your company.  In fact, the majority of LOIs never actually turn into a closed deal.  There are many reasons for this, and how you approach, think about and react to your first letter of intent will dramatically impact your opportunity for a successful sale.

As evidence, let me present the most recent annual report from Riverside Company, one of the best mid-market buyout firms in the country.

As reported in their 2009 annual report, Riverside Company submitted 63 LOIs yet closed on just 15 of those transactions (23.8 percent):

• 4,228    Deals Considered
• 1,315    Companies Screened
• 347     Company Visits
• 63     LOIs Submitted
• 15     Deals Closed

They are very good buyers and know how to close deals, yet less than 24 percent of their LOIs resulted in a happy, wealthy seller.  The tough economic climate of 2009 was a contributing factor, as was Riverside Company’s extreme discipline as a buyer.  Regardless of the specific reasons, this example is instructive for any entrepreneur who is considering a company sale.  There are a few important lessons to glean from this report about the process of selling your company.

Deal Flow

Most acquiring companies, private equity firms or buyout firms have a network of professionals they rely on for deal flow; Riverside relies on them almost exclusively.  In 2009 Riverside developed a complete screening memo for 1,315 companies and submitted a LOI to less than 5 percent of those companies.  A professional introduction or “friend of the firm” is always the best way, and often the only way, to present your company if you want any serious consideration.

Real Interest

Selling your company is a humbling process.  You’ll talk to dozens of buyers who are not interested, and many of those who are interested will tell you “your baby is ugly.”  I often talk with CEOs or entrepreneurs who tell me they get calls about buying their business “all the time” as if that adds credibility or value to their company.  The problem is that it sometimes leads to arrogance, which is always a problem when selling a company.

Again, if you consider the Riverside numbers, only 8 percent of the deals they considered created enough interest even to arrange a management meeting (that is, a visit to the company).  Calls of interest are always gratifying, of course. The key is to stay humble or the process will do that for you.

Minimum Deal Size

Riverside actually visited 347 companies in 2009. These management meetings are often preceded by a phone call to determine if a visit is warranted.  If it is, there are expenses for hotels, meals and airline tickets on top of Riverside’s existing infrastructure to handle their deal flow.

Understanding these dynamics helps to realize why many investors require a minimum of $1 million to $2 million of net earning (EBITDA) to take a close look at a company.  There is almost the same amount of due diligence for a $10 million purchase as there is for a $150 million transaction.

Distraction

I spoke with a client just yesterday who confessed he is excited to receive a pending LOI and completely distracted by the possibilities his deal represents to him personally.  He finds himself thinking more about the sale than about how to grow his business, which is quite normal.  Once we get past the LOI stage, he’ll have to produce plenty of due diligence materials, which will also require time and attention.

Experienced buyers recognize this and will use human nature to their advantage when timing their transaction process.  Time is most often on the side of the buyer, and good buyers will often use that advantage to wear you down mentally and emotionally.

Selling your company is a long process with many ups and downs, timetables, information requests, accountants, lawyers and advisors.  If you want to sell your company for maximum value, be sure to have a good team of advisors who will let you know when to get excited. (Hint: It will not be when you get your first LOI.)

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