There was a lot of hand wringing when the music industry consolidated, yet again, a few years ago to create three giant companies that seemed poised to dominate the market. It was 2003 and I had just moved to Nashville. Many of my friends wondered what an entrepreneurship professor was doing moving to a city dominated by such a mature industry and taking a job at a university that has one of the largest music business programs in the country.
Well, beneath the feet of the three dancing dinosaurs that dominate the current industry structure there is a whole new structure beginning to take form. The music industry has long been made up of lots of small businesses and independent contractors, as seen in this article from StartupJournal.
What has changed is that this grass roots level of music entrepreneurship is beginning to become more than self-employed artists (see the Future of Music for a discussion of these changes). Technology and consumer preferences are facilitating a restructuring of the music industry that will lead to an unprecedented shift of power. Both content and distribution have been firmly in the hands of the industry giants for the past few decades. However, the changes that are taking place in how music is made and how it is gotten into the ears of its customers are beginning to loosen the “big three’s” grip.
It would be a mistake to assume that we are simply taking a small, controlled step forward to the “next thing,” as when we moved from the 45 to albums and from albums to CDs, and that the industry giants will somehow grab control of digital distribution. Why? It is because this step in the evolution of the music industry is not being created by the market leaders as seen with the last few changes. This change is outside of their established system. It is revolution, not evolution.
I think that the iPod does not represent the “next thing” in the industry, as many are assuming, but really just one of several catalysts that will help propel entertainment into several years of entrepreneurial innovations and breakthroughs just as we witnessed in the information/computing industry in the 1980s and 1990s.
The music and entertainment industry is entering a period of new beginnings. This is spring time in the music business.
Author: Jeff Cornwall
Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.
Selling Lessons for Techies
“If we build it they will come.”
Not likely.
“This thing will sell itself!”
Don’t count on it.
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To be successful, the start-up of a business should involve attention to the product/service and how to connect with customers. For some entrepreneurs selling comes easy; it even seems to come naturally. But, to others, the thought of hawking their goods is a terrifying prospect. They avoid selling by continually tinkering with their product or service.
As Forbes.com points out, this can be particularly true with techies and consultants. They offer some basic tips on successful selling that can help even the most introverted entrepreneur:
Explicitly Define The Value You Bring
The critical first step in defining the value you bring is to be able to clearly and concisely define what you do. I get worried when I ask a techie entrepreneur to tell me about their business and thirty minutes later I have to politely ask them to stop. Every entrepreneur needs to be able to describe what they do, no matter how complex the concept, in twenty-five words or less. This is the “elevator pitch” or “cocktail party answer” to the question, “Tell me about your business.” Very often you have just a few moments to communicate what you do and what value it brings before potential customers or investors make up their minds about you and what you can do for them. There will be time for details later. A first impression must be made and it must deal with value.
Manage Expectations
Don’t over-sell what you can offer or set unrealistic timelines. While it may make the initial sale, the goal is to develop a loyal customer base. If you set expectations that you cannot deliver, customers will not return. As the old adage goes, “The goal of good marketing is not only to get ’em in the front door, but to close the back door so they don’t get away.”
Price it Right
Many techies and consultants can be elusive about their pricing. Keep it as simple and clear as possible. Don’t do to your clients what so many attorneys do to theirs. Lawyers are often vague and even defensive when asked about what they will charge for something. Then when the bill arrives, the client can be shocked to see all of the charges on their invoice. The blog site the [non]billable hour offers some great insight into billing professional services fairly and effectively.
But Will He Have Pimples?
Where there is customer pain there is opportunity.
A former student of mine from Minne-so-cold, Natalie, sent along a profile from seattlepi.com of a business that may deal with not only the pain of the customer, but a pain experienced by retailers who try to serve these customers. The common source of these pains? Teenage retail employees.
Experticity, which recently landed $1.2 million in angel financing, is testing a technology for in-store computer kiosks that would allow shoppers to touch a flat-panel screen and then get questions answered from a customer service agent — one who may be located thousands of miles away. With a broadband connection transmitting data and voice, the customer service agent could advise a shopper on the benefits of certain products, pull up pricing information on eBay or show diagrams of how products work. The system also could be designed to allow shoppers to speak with agents in Spanish, Russian or other languages.
One of the questions I always ask those who are considering starting many types of retail operations is this: “Do you want your financial future left in the hands of a bunch of high school kids?!”
While this may solve part of that problem, the Luddite in me cringes at the thought of another computer to interact with. You see, I still get yelled at by the woman’s voice in the computerized self check-out for messing something up every time I try to buy a few groceries at Publix …..
Determining Business Value
What does a buyer really “buy” when they buy your business? Is it your assets? Your reputation? Your team? Your customer base? The answer to all of these is yes, and no. The only reason any of these have value is if they will continue to create cash flow profits for the years to come for the new owner. After all, what good are a building, machines, or customers if they do not generate profits?
As we know, accountants have come up with about 17 different measures of profits (another full employment ploy on their part, no doubt). The one that matters here is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). That is the best measure of cash profits of a going concern for most businesses. Using EBITDA makes comparing businesses possible as it controls for financing, corporate form and accounting practices related to assets which all can vary.
So what does a buyer look do with EBITDA? In the simplest sense they use a multiple of EBITDA to give the business a value. The higher the multiple, the stronger they expect earnings to be going into the future. In most cases, the multiple they use on EBITDA ranges from 3 – 8. Now that is a huge swing in possible values. A company with EBITDA of $1 million could be worth anywhere between $3 million and $8 million!
The multiple varies based on any number of factors. The Christman Group LLC (a firm that specializes in exit planning for entrepreneurs) offers their top ten factors that have an impact on the size of multiple you can expect when your sell your business:
Number 10: Industry Outlook
If the outlook for the industry is bright, the price goes up. Buyers look hard at the outlook for a company’s gross margins, future growth projections, international economic factors, etc.
Number 9: Depth of Management and of the Sales Team
If an owner wears all of the hats, including generating most of the sales, the price will go down. A strong and experienced management team to operate the business is key value driver.
Number 8: Customer Base
If a company has limited customer concentration with no single customer representing more that 5-10% of revenues the price goes up. If the customer base is made up of “blue chip” companies, the price goes up too.
Number 7: A Good Story to Tell
Telling a company’s story is critical in helping the buyer recognize the full value of a business. An extensive confidential offering memorandum that describes the business operation, the marketing and sales programs, its organizational structure, its facilities and equipment, its financial performance, and provides a financial analysis including a believable 5 year financial forecast.
Number 6: Stage of Industry Consolidation
If a company’s industry is experiencing consolidating with the big companies getting bigger through acquisition, prices for smaller companies will rise.
Number 5: Company Track Record
If a company can show a track record of consistently growing profits and sales, buyers will pay more.
Number 4: Type of Business
A manufacturing company with a proprietary product will sell for more than a job-shop manufacturer. A distributor that adds value by offering installation, repair, and/or engineering/design will sell for more money than a non-value-added distributor. A service company with a special expertise will sell for more than a similar service company without this expertise.
Number 3: Revenue Size
The larger a company’s revenues, generally the higher the price. A business with $25 million of annual sales will sell for more than a company with $5 million in sales.
Number 2: Market Position
A company that dominates its market or has a unique niche in the market will sell for a premium over other companies that do not dominate their markets.
Number 1: Having Multiple Buyers
When there are multiple buyers bidding on a business, the price of the business will exceed the price paid for a business that is sold without competitive bids.
Not All Boomers are Living Only for the Day
I have been kind of rough on us baby boomers over the past couple of weeks. It seems that we are not planning our family business succession very well. Also, some of us are looking to entrepreneurship as a quick fix for our poor retirement planning.
However, a recent survey on small business and retirement planning conducted by the NFIB cuts us a little slack in all of this. It finds that most baby boomer entrepreneurs have given considerable thought to their retirement. Interestingly, nearly half (46%) intend to never fully retire.
Carnival of the Capitalists
COTC is hosted by Blawg Review this week.
Education in Action
One of the things that makes teaching entrepreneurship so enjoyable is that it is a “full contact sport.” That is, to teach entrepreneurship effectively requires finding ways for students to put the knowledge we offer them into action. We can do that through how we teach our classes and through the co-curricular experiences we can offer our students that lets them take their learning out of the classroom. One of my students, Tyler Oban, sent a link to his blog site where he has found that this is catching on throughout all of business education.
More Evidence of Job Growth in Small Business
Inc.com offers a preview of its Inc 500 issue coming out in November. What they found in this year’s list is more evidence of where jobs are being created.
The businesses that made Inc. magazine’s 24th annual list of the country’s fastest-growing private companies…together generated some 25,180 new jobs last year alone, up a full 35% on a year-over-year basis. They’re also planning to add 17,000 more jobs in the coming year.
By contrast, Fortune 500 companies lost jobs on average between 2001 and 2003, before rebounding by just 1.3% in 2004.
Since being founded, this year’s Inc. 500 companies together created more than 95,000 jobs.
Although this list is a self-nominated list, it still offers a remarkable snapshot of the entrepreneurial economy.
In Every Pile of Manure……
Rob at BusinessPundit has a great post that proves the old entrepreneurial saying: “There is a pony in every pile of manure if you just dig deep enough.”
Carnival of the Capitalists
COTC can be found at Accidental Verbosity this week.