Entrepreneurs’ Spirits are Up

My read of the entrepreneurs here in the Nashville area is that they are feeling a bit more optimistic.  Those who have weathered the storm seem to feel that the worst may soon be over.

The latest national survey from the NFIB seems to support my anecdotal observations, as their Index of Small Business Optimism rebounded in April.

This rebound was not due to hard evidence of economic improvement, but is tied to “soft indicators” — the “feel good” portion of the survey.  Expectations for gains in real sales increased.  

While small business owners think future prospects are brighter, the daily realities show deep problems remain.  Actual employment, capital outlays, inventories, sales and earnings languish at historically low levels.

“At least we seem to be headed in the right direction,” said NFIB Chief Economist William Dunkelberg. “Typically, optimism first returns, then spending follows as confidence builds.  But there are a lot of difficult days ahead, even if April’s data represents a turnabout.”


Accidental Entrepreneurs Share Their Stories

The Wall Street Journal offers five inspiring stories about accidental entrepreneurs:

With the economy tanking, lots of people are striking out on their own. Some
never thought of starting a business until they got laid off. Others kicked
around the idea but never found the time or the passion to pursue it. Now,
launching a start-up seems like a better bet than taking on an endless job
hunt.

Call them entrepreneurs by necessity. And while some of them have waited
years preparing for just this moment, others may not be quite so ready or eager
to make the move.

Read their profiles here.

Selling a Business During the Recession

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.

Small Business Lending Working without SBA Interventions

Are markets getting out ahead of government intervention when it comes to small business lending?  It seems that small business lending is starting to heat up, but the SBA is mired in the complexity of trying implement their part of the “stimulus.” 

From the Wall Street Journal:

The increased activity comes despite the fact that the SBA has been slow to
implement some measures aimed at stimulating lending and loan sales on the
secondary market. The agency missed a March 4 deadline to create a secondary
market specifically for 504 loans, capped at $3 billion. The government hopes
this will facilitate the buying of bundled 504 loans….

The SBA had said it plans to finalize the regulations by June, but an
announcement may come this month. The agency says the delay is the result of
sophisticated financial modeling and complicated legal-documentation changes
that need to be made in order for these new programs to work.

I see two possible outcomes once the SBA gets its act together.  Neither are particularly encouraging and they are not mutually exclusive.

One outcome would be the flood of small business lending that the administration wants.  That will inevitably lead to a small business loan bubble that will surely pop sometime in the not too distant future.  Too many small businesses will be given loans that they cannot afford.  The SBA programs often put social agendas ahead of economic ones, just as we saw with the home loan disaster fueled by government meddling in those markets.

The other possible outcome is that the bureaucratic complexity will bog down SBA programs,adding nonproductive costs to the lending process.

Since the markets are working on their own, why not step out of the way?  After all, as blogger Matthew Bandyk from US News points out, 58% of small business owners have no interest in SBA loans.

Business Start-up Rates Slow in 2008

According to the latest annual Kauffman Index of Entrepreneurial Activity, although entrepreneurial activity was slightly up in 2008 when compared to their 2007 report, there were some worrisome signs about the economic engine of the US economy. 

While low and moderate income potential businesses were up, high income potenial businesses decreased from 2007 to 2008.

Specific increases in entrepreneurial activity were identified among the following groups:

  • People between the ages 55 to 64
  • Immigrants
  • Latinos
  • Asian Americans

People in the Midwest had a decrease in entrepreneurial activity. 

Specific states with the highest entrepreneurial activity were Georgia, New Mexico, Montana, Arizona, Alaska and California.  While states with the lowest entrepreneurial activity rates were Pennsylvania, Missouri, Wisconsin, West Virginia, Iowa and Ohio.

Among the fifteen largest metropolitan statistical areas, Atlanta had the highest entrepreneurial rate, while Philadelphia had the lowest rate.

Unlike other studies that capture young businesses that are more than a year old, the Kauffman Index captures all adults ages 20 to 64 when they first create their businesses, including both incorporated and unincorporated businesses, and those who are employers and non-employers. The Kauffman Index defines entrepreneurial activity as the percent of the adult population who start a business as their main job each month.

USASBE moves to Belmont

 

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I would like to be the first to welcome the United States Association of Small Business and Entrepreneurship (USASBE) to Belmont University.  We will be hosting USASBE here at Belmont through early 2011.

We are delighted to have USASBE on our campus.

A big congratulations to Becky Gann, who will serve as the USASBE Interim Executive Director.  Becky has served as the Program Coordinator for our Center for Entrepreneurship since I arrived here almost six years ago.  I will miss Becky’s steady hand running our co-curricular programming in the Center.

Thank you Becky for all you have done for our students!!

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Test Drive of HP Office Pro 8500 Continues

I have been test driving the new HP Office Jet Pro 8500 printer this week.  The last couple of days I have been exploring some of the other features that this all-in-one can offer.

The printer has slots that allow for many standard sized photo cards to be inserted directly into the printer.  Since our camera’s card does not fit one of the slots sizes on the printer, I used the front USB port to serve as a bridge.  It was reasonably easy to use this way, and the colors on the printed photo were excellent.  The print and copy quality of the printer would allow for reproduction of brochures and other promotional materials at a level of quality that would be more than satisfactory for most small businesses.  I printed a full size photo on an 8 ½ by 11 sheet that had bold colors and a reasonable picture clarity.

When it comes to using a new fax machine or scanner I tend to want to curl up in a fetal position in the corner.  It is a situation where the Luddite in me comes out in full force.  I was one of the very last in my circle of entrepreneur friends to install a fax machine back in the late 1980s.  I claimed it was because I did not see the cost benefit, which was partly true, but it was also because the thought of having to learn another new technology overwhelmed me.  After all, I had just learned how to use the personal computer only a couple of years before that time, and I was still getting over that trauma.

Luckily, the fax and scanner controls are simple enough on this machine for even someone like me to figure out without too much hyperventilating. 

The feature I was most interested in trying out was that it is wireless.  I tend to roam about our home with my laptop – although my home office is in our upstairs loft, I spend many mornings blogging and catching up on things on the back porch, or on colder or rainy days working in our family room.

To use the wireless feature, the printer has to be connected to your wireless router.  Unfortunately, our wireless hub is set up at my wife’s computer station at her kitchen desk.  The printer is just too large to put by her spot, so I cannot try this out until I move the modem and router to my loft office where I keep my printer.  That project will have to wait until things calm down from this busy spring term.

As for my conclusion about this printer?  It is a great workhorse for small businesses than need a reasonably robust and versatile all-in-one.  It is probably overkill if you have only occasional or very light use of its features.  But if your business regularly needs high quality printing, faxing and scanning, this machine is a reasonable value, as it is comparable in quality to a laser printer and much more efficient to operate.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).

Seeds of Creative Destruction

There is some evidence of the seeds of creative destruction at work in the economy.

Although venture capital spending was down in the first quarter of 2009, innovation and entrepreneurship are steaming ahead without infusions of VC dollars.

From an article by Scott Harris at MercuryNews.com:

The sheer volume of entrepreneurial activity is striking, and often seems utterly independent of the investment dollars available. One reason is that so much can now be done so cheaply via the Web.

Consider the thousands of applications that techies have developed for Facebook and the Apple iPhone — business platforms that didn’t exist a few years ago. Consider the startups launched on shoestring budgets by Y Combinator and other incubators. Consider the boom in back office software-as-a-service (SaaS). Consider, also, the boom in clean tech — startups that require serious money — as well as the abiding interest in the life science sector.

This is clearly becoming the age of the bootstrapper.  Don’t focus on investment dollars or massive infusions from the SBA as a sign of activity.  Focus, instead, on the grassroots bootstrapping entrepreneurs who will reinvent our economy — if we just would get out of their way!

A Bootstrapper’s Tool

My test drive of the new HP Office Jet Pro 8500 printer continued this evening.

I had several long documents that I needed to print this evening at my home office.  Being a bootstrapper at heart – or as some in my family might say, “cheap” – I like the relatively low cost of printing with this machine.  Inkjet is always going to be lower cost than a laser, and this printer seems to perform at a reasonably comparable speed to my HP laser printer at the university.  It has a quality that is clean and crisp.  This inkjet has certainly come a long way from the models I had even a few years ago in terms of print quality.

HP claims that the printer will save 50% over a color laser printer.  Add to this that it can print front and back – saving paper in quite a few of my print jobs – and the fact that you can recycle the cartridges through HP for free, you have a fairly economic printer.

OK, but shouldn’t a bootstrapper buy the lowest cost printer on the market?   Not always, as I like to remind people that bootstrappers are cheap, but cheap with a purpose.

It is possible to create a lot of materials that not that long ago would require working with a printing company.  The printed materials that you can create with this printer will be considerably less expensive than if you have to send it out.  And it will look much more professional than the low cost printers I have traditionally had in my home office in the past.

Simple stationary, brochures, and so forth can be created with this printer that is perfectly acceptable for the purposes of many small businesses.  By tying into HP’s creative studio, it is possible to create some professional looking materials.  Be aware that some of the links through this site do carry additional costs.

So what don’t I like so far?  The one main drawback is that the machine is a bit noisier than I am used to with the smaller printers I have used in the past.  But all in all, so far so good.

As part of this blog marketing initiative, my readers can receive a coupon code to get 20% off the HP Officejet Pro 8500 Wireless All-in-One by clicking this link.

(This is a sponsored post).