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.

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.

Just Bootstrap It!

The Nashville City Paper ran a cover story yesterday on entrepreneurial bootstrapping written by Candace Moonshower.  From her story:

Every generation has its inspirational maxim, and it is not surprising that these sayings are often associated with getting somewhere quickly and achieving something meaningful. Who hasn’t heard ‘Just Do It’?

Back in the day, when men and women wore boots and boots had straps, we were exhorted to pull ourselves up by said bootstraps and achieve the near-impossible through hard work, tenacity and our own initiative.

These days, our boots may be sneakers or flip-flops, but in the midst of hard times, we’re rediscovering our bootstraps.

Venture Capital Starts 2009 with a Thud

Venture capital investment retrenched to the lowest level since 1997 during the first quarter of 2009.  VCs invested just .0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association.

Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.

Don’t look to VC backed deals to be the engine that leads us out this recession.  The biggest drop in deal flow was for venture receiving first-time financing.

Recession Sharpens Skills

Friedrich Nietzsche said, “That which does not kill us makes us stronger.”

So it seems to be for many entrepreneurs during this recession, according to the results of the American Express OPEN Small Business Monitor.

  • More than three quarters of entrepreneurs believe managing through the recession has made them better business owners.
  • Four in ten business owners have an optimistic outlook on near-term business prospects, on par with one year ago when the macroeconomic climate was significantly different.
  • Nearly four in ten entrepreneurs feel the current economic environment creates opportunities for their business.

While optimism has stabilized, business owners are still managing their firms with caution — bootstrapping more than ever.

Consistent with the NFIB survey I wrote about a couple of days ago, this survey found that capital investment plans remain very low, hiring plans are down significantly, and many entrepreneurs are adjusting their own retirement plans. Forty-two percent of business owners plan to make investments as a way to grow their business over the next six months, down from 53% last spring. Just over one-quarter of entrepreneurs have plans to hire this spring (28%), which is among the lowest Monitor readings in its history.

Small business owners are not taking this recession lying down. Many are finding new resources to tap and new ways to manage costs beyond the traditional steps of laying off staff or cutting back on staff hours. Nearly half of business owners (45%) are open to bartering for new products or services with customers or suppliers and nearly one-quarter (23%) report their barter activities have increased due to the economic environment.

Additional steps include:

  • 48% have instituted hiring freezes
  • 30% are no longer taking a salary
  • 27% have a family member working pro bono
  • 25% are renegotiating leases and supply contracts
  • 16% have cut benefits
  • 18% work a second job

Not all entrepreneurs view the current economic environment as a hardship; a distinct group (37%) says that the current economic environment actually creates opportunities for their business. Among these opportunistic business owners:

  • two-thirds have a positive outlook on the economy
  • half plan to make capital investments
  • just over one-third plan to hire.

Nearly all of these glass-half-full entrepreneurs (92%) say that managing through the recession has made them a better business owner, compared to 77% overall.

Dig Deeper

I wrote recently about the wonderful experience I had this spring teaching a new graduate seminar that explored how entrepreneurship shapes our economy, society and culture. 

What all of the students came away with is an understanding of the true complexity of the issues we face today.  The standard my party is better than your party debate and the bumper sticker solutions that seems to always lead us to just doesn’t cut it in times like these.  They discovered how essential it is to dig deeper into the fundamental assumptions, the data we have on what works and what doesn’t, and the longer term trends.

The Acton Institute has put together a powerful resource page that provides deep and thoughtful analysis of the current crisis and possible solutions.  It also dives into the moral and cultural issues that are so intertwined with any set of economic policies. 

Brew a fresh pot of coffee and explore some of the writings they are collecting at this site.

Don’t Assume it is not a Good Time to Exit

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.

Small Business Owners Still in a Funk

The National Federation of Independent Business Index of Small Business Optimism fell 1.6 points in March to 81.0 (1986=100), making March the second-lowest reading in the 35-year history of the NFIB survey.  Two of the index components improved and eight declined, but nothing in the survey indicated a signal that the economy is improving.

Small business owners have yet to be impressed by some recent slightly encouraging economic news.  They remain skeptical, unwilling to commit to more spending or hiring until they see more customers in their stores.
 
The hard components of the index, those measuring owner spending and hiring plans, actually reached a survey record low.

“At this point, it is not clear that we have hit a quarterly bottom in the index, and we can only hope for a reversal and subsequent expansion led by the small business sector,” said NFIB Chief Economist William Dunkelberg.  “There are signs that the economy is bottoming in the reports of sales, housing starts and auto purchases, but they were not strong enough in March to lift the spirits of small business owners.”