Monday, 28 November 2016

Will Trump be absolutely fantastic for Entrepreneurs?

How much can one contextualize into a short slogan? Recent US Presidential campaigns suggest that a lot. "Yes We Can!" or "Let’s Make America Great Again!" definitely galvanized the masses. The new President-elected loudly promised countless times that absolutely fantastic, awesome, extraordinary, terrific, and wonderful changes are coming. The political campaign more closely resembled the useless small talk on a barber shop rather than the informed and comprehensive policy debate the nation really needed.

In the weeks after the election the media has bombarded us with pros and cons of several (potential) nominations by the Trump transition team. Out of all the noise, my wannabe-unbiased mind has mostly identified concepts like white supremacy, anti-gay, anti-abortion, conflict of personal business interests, and nepotism.  I suspect that for over 64 million US voters something does not feel right.  One is left wondering about the extent of media bias that President-elect Trump so much shouted about. If you turn on MSNBC or FOX news I guarantee you sporadic cynical laughs (more frequent while watching the latter), given the extent of partisanship bias. You turn on CNN and there is a clear effort to appear unbiased but their reputation has been hurting for while, being the Clinton’s CNN aphorism just a recent example.  PBS plays the role of “saint” among the media, attempting to alert the commoners for the need of an altruistic analysis of daily events. Audience shares for each of these media outlets provide useful insights about the society we currently live in. PBS is one of those rare instances that you may want thank God for taxes on behalf of the common good.

One of the reasons for the electoral results is that Mr. Trump is a business man, not a career politician. Entrepreneurs are wannabe business people and expect the creation of more favorable conditions from their self-proclaimed “Master of the Apprentices”.  However, no policy draft has yet been announced to specifically benefit small business entrepreneurs. Notwithstanding, the promise of tax cuts and big public investments in infrastructure may have some positive impact on small businesses. Unfortunately, such externalities will likely be incipient because most of government contracts are historically allocated to big businesses, which then may hopefully outsource specific tasks from small businesses. The rise of oligopolies across most US industries diminish any potential trickle-down economics.

More, the President-elect has promised to lower taxes for corporations to bring back their money stashed overseas and to grant tax credits for private investments in public infrastructures – both fiscal policies will disproportionally benefit big businesses rather than small ones. In addition, these private investments in public infrastructure will likely increase the costs for consumers. Look for example at the European experiment with highways. Many have been privatized and the tolls skyrocketed to such levels that have become as expensive as the amount of gas used for the trip (e.g. Portugal). Hence, the expected impact of better highway infrastructures on a nation’s competitiveness has been drastically buffered by the hike in tolls. More, the national public roads became overloaded with slow traffic avoiding highway tolls. Hopefully, the President-elect will not apply a similar recipe to the renewal of US infrastructures.

One outcome is apparently obvious if the President-elect fulfills his promises. The national debt will likely increase in the short run due to the big infrastructure expenditures and the concurrent lower taxes, thus augmenting our dependency on foreign US-debt holders and potentially damaging our sovereignty (e.g. policies imposed by lenders on borrowing nations).

Entrepreneurs need from the President-elect a clear plan to foster small businesses. The nation needs the creation of value, not protectionism for import-competing industries nor merely a partial redistribution of existing wealth. Thus, a national plan for entrepreneurialism must comprise incentives for small businesses, both traditional and innovative ones. The former redistribute existing wealth, the latter create new wealth. Given the rise of economic inequality in the post-1970 period, some redistribution will create better conditions for competitive markets, sustainable economic growth, and avoidance of social unrest. A potential policy could be the allocation of financial incentives to the unemployed to create their own businesses (e.g. Germany), such as subsidies, a grace period for taxes, and loans with below market interest rates. Concurrently, bigger incentives of similar nature should be given to the creation of innovative businesses, the ones that the US actually needs to preserve its economic leadership.

The US will remain the main world economic power only if its industrial policy focuses on innovation. If instead, it turns to aggravate protectionism (e.g. the 1930 Smoot-Hawley Tariff Act worsened the Great Depression), then sooner rather than later it will lose its economic leadership, as clearly implied by the science of economics and modern world history. Competitive (strong) nations want free markets, (weak) nations unable to compete want protectionism. More, protectionism regularly leads to beggar-thy-neighbor policies which further suppress trade. Only through technological leadership can the US (population of about 320 million) compete with large nations such as China (about 1.35 billion) or India (1.25 billion).

“(…) The supporters of tariffs treat it as self-evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number - for example, have people dig holes and then fill them up again, or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs - jobs that will mean more goods and services to consume. Another fallacy seldom contradicted is that exports are good and imports are bad. The truth is very different. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. (…) ‘Protection’ really means exploiting the consumer.”  - in Milton Friedman’s “Free to Choose: A Personal Statement” (1990), p 40-41.

We all agree upon the desire to Make America Great Again! However, we may disagree on how the fulfillment of that promise can be achieved. Nonetheless, entrepreneurialism needs to remain a key US competitive advantage.

The article Will Trump be absolutely fantastic for Entrepreneurs? is republished from LS Blog



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Wednesday, 26 October 2016

How to Buy a Small Business – A Comprehensive Guide and Resource

Starting a new small business can be risky endeavor, which is why you should at least consider buying an existing business instead. LaunchScore.com is here to help you when buying a small business, with this comprehensive guide and resource.

An existing business may very well a better option given that it already has a location, supply-chain, trained employees, brand, customer base, historical cash flow statements, and tax returns.

There is already a formula in place to run the business and hopefully all it needs to boom is your vision, enthusiasm, and determination to put in place incremental innovations. Lenders are also more comfortable financing a business that already has financial records they can evaluate.

However, there are also disadvantages. Existing businesses typically cost more than starting one from scratch. Current employees and suppliers may have practices not to your liking and may be resistant to change.

Also, equipment and inventory may become a substantial financial burden, particularly if outdated.  The seller may omit or downplay existing business problems – and could even have “cooked” accounting records.

Though at first one may think that there must be something wrong if a business is for sale, that may not be the case. Hopefully, you will find a great business whose owner just wants to move on to another industry, life project, or retirement. Nonetheless, keep in mind that it is easier to fall into a lemon than a great business you can afford.

This guide is a comprehensive resource to help you fulfill your entrepreneur dream by buying a small business. It is separated into three sections to guide you to success:

  • Do you have what it takes to run a small business?
  • Doing the due diligence
  • Negotiating the price when buying a small business
Do You Have What it Takes to Run a Small Business?

The first step is to select the right type of business for you. Being passionate about a business does not suffice. A successful entrepreneur must be equipped with adequate human and financial capital.

During the process of selecting the right type of business, consider making an introspective assessment about the fit of your skills, abilities, and experience to the venture of choice. Even if that requires spending some months actually working for someone else that operates a similar business - perceptions are not knowledge. You need to get familiar with the industry and understand it.

Then, ask yourself if you are willing to spend sleepless nights worrying about a supplier, employee, customer, product, service, or regulator – business ideas are cheap but execution is dear.

Being a business owner is like parenting a restless toddler – it requires a growth plan, constant attention, intervention, persistence, and you need to be sufficiently intelligent to ask for help (e.g. hiring employees, consultants, accountants, lawyers, etc.), punish (e.g. firing employees, suppliers, etc.), and reward (e.g. promotions, bonuses, etc.) in a timely fashion. Also make sure that your spouse or partner is on board because this venture will likely have an impact on the time you spend with them and on your stress levels.

Concurrently, you also need to evaluate your financial capital and your relationship with money. Compile a personal financial statement detailing your assets, liabilities, and net worth – you will be required to deliver it at some point during the acquisition process. Note that you should be prepared to pay 30 to 50 percent of the business’ sale price in cash and finance the remaining amount.

Do you have sufficient startup funds for the selected business type and a good credit score to get financing? Do you have retirement funds or home equity that you can use to buy the business? Are you able to make rational financial decisions or are you a reckless gambler?

Having a non-emotional relationship with money contributes to wiser business decisions, especially when buying a business. The poor management of personal finances will most likely follow you into a business. A solid financial record along with a good credit score will ease negotiations and enable lower interest rates from lenders.

Doing the Due Diligence

Once you determine the type of business that fits your competencies and experience, you need to determine the target geographic location. LaunchScore.com provides a free tool to assist you with this task – just enter the business type of choice and our database will rank the best U.S. locations by potential yearly earnings (PYE).

Once you have a location you can search for available businesses for sale using one of the many online sources (e.g. BizBuySell), local newspaper classifieds, industry publications, franchises (e.g. FranchiseGator), and business brokers (e.g. SunBelt). Then go do some reconnaissance on the business, and if it appeals to you, contact the owners or brokers.

Once you have a targeted business or businesses, you need to know what to ask for in order to assess its operations and viability. Start by asking these questions:

  • what are the goods and services this business provides?
  • when was it first established?
  • why is it for sale?
  • how long has the current owner has been operating it?

You should also get the specifics of the small business's day-to-day management, such as:

  • the lease costs and expiration dates.
  • a list of licenses and permits.
  • proof of compliance with Occupational Safety and Health Administration (OSHA) requirements.
  • number of employees and suppliers.
  • sales and corporate tax information.
  • the business's revenue generating model.

Then you need to request legal and financial information. Here is a suggestion for documents you should review (source: FindLaw):

Organization and Good Standing
  • The Company's Articles of Incorporation, and all amendments thereto.
  • The Company's Bylaws, and all amendments thereto.
  • The Company's minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.
  • The Company's organizational chart.
  • The Company's list of shareholders and number of shares held by each.
  • Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities.
  • A Certificate of Good Standing from the Secretary of State of the state where the Company is incorporated.
  • Copies of active status reports in the state of incorporation for the last three years.
  • A list of all states where the Company is authorized to do business and annual reports for the last three years.
  • A list of all states or countries where the Company owns or leases property, maintains employees, or conducts business.
  • A list of all of the Company's assumed names and copies of registrations thereof.
Financial Information
  • Audited financial statements for three years, together with Auditor's Reports.
  • The most recent unaudited statements, with comparable statements to the prior year.
  • Auditor's letters and replies for the past five years.
  • The Company's credit report, if available.
  • Any projections, capital budgets and strategic plans.
  • Analyst reports, if available.
  • A schedule of all indebtedness and contingent liabilities.
  • A schedule of inventory.
  • A schedule of accounts receivable.
  • A schedule of accounts payable.
  • A description of depreciation and amortization methods and changes in accounting methods over the past five years.
  • Any analysis of fixed and variable expenses.
  • Any analysis of gross margins.
  • The Company's general ledger.
  • A description of the Company's internal control procedures.
Physical Assets
  • A schedule of fixed assets and the locations thereof.
  • All Uniform Commercial Code (UCC) filings.
  • All leases of equipment.
  • A schedule of sales and purchases of major capital equipment during last three years.
Real Estate
  • A schedule of the Company's business locations.
  • Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits.
Intellectual Property
  • A schedule of domestic and foreign patents and patent applications.
  • A schedule of trademark and trade names.
  • A schedule of copyrights.
  • A description of important technical know-how.
  • A description of methods used to protect trade secrets and know-how.
  • Any "work for hire" agreements.
  • A schedule and copies of all consulting agreements, agreements regarding inventions, and licenses or assignments of intellectual property to or from the Company.
  • Any patent clearance documents.
  • A schedule and summary of any claims or threatened claims by or against the Company regarding intellectual property.
Employees and Employee Benefits
  • A list of employees including positions, current salaries, salaries and bonuses paid during last three years, and years of service.
  • All employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements between the Company and any of its employees.
  • Resum├ęs of key employees.
  • The Company's personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies.
  • Summary plan descriptions of qualified and non-qualified retirement plans.
  • Copies of collective bargaining agreements, if any.
  • A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.
  • A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
  • A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.
  • A description of worker's compensation claim history.
  • A description of unemployment insurance claims history.
  • Copies of all stock option and stock purchase plans and a schedule of grants thereunder.
Licenses and Permits
  • Copies of any governmental licenses, permits or consents.
  • Any correspondence or documents relating to any proceedings of any regulatory agency.
Environmental Issues
  • Environmental audits, if any, for each property leased by the Company.
  • A listing of hazardous substances used in the Company's operations.
  • A description of the Company's disposal methods.
  • A list of environmental permits and licenses.
  • Copies of all correspondence, notices and files related to U.S. Environmental Protection Agency (EPA), state, or local regulatory agencies.
  • A list identifying and describing any environmental litigation or investigations.
  • A list identifying and describing any known superfund exposure.
  • A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations.
Taxes
  • Federal, state, local, and foreign income tax returns for the last three years.
  • States sales tax returns for the last three years.
  • Any audit and revenue agency reports.
  • Any tax settlement documents for the last three years.
  • Employment tax filings for three years.
  • Excise tax filings for three years.
  • Any tax liens.
Material Contracts
  • A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements.
  • Copies of all contracts between the Company and any officers, directors, 5-percent shareholders or affiliates.
  • All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the Company is a party.
  • All security agreements, mortgages, indentures, collateral pledges, and similar agreements.
  • All guaranties to which the Company is a party.
  • Any installment sale agreements.
  • Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements.
  • Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years.
  • Any options and stock purchase agreements involving interests in other companies.
  • The Company's standard quote, purchase order, invoice and warranty forms.
  • All non-disclosure or non-competition agreements to which the Company is a party.
  • All other material contracts.
Product or Service Lines
  • A list of all existing products or services and products or services under development.
  • Copies of all correspondence and reports related to any regulatory approvals or rejections of any Company's products or services.
  • A summary of all complaints or warranty claims.
  • A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development.
Customer Information
  • A schedule of the Company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years.
  • Any supply or service agreements.
  • A description or copy of the Company's purchasing policies.
  • A description or copy of the Company's credit policy.
  • A schedule of unfilled orders.
  • A list and explanation for any major customers lost over the last two years.
  • All surveys and market research reports relevant to the Company or its products or services.
  • The Company's current advertising programs, marketing plans and budgets, and printed marketing materials.
  • A description of the Company's major competitors.
Litigation
  • A schedule of all pending litigation.
  • A description of any threatened litigation.
  • Copies of insurance policies possibly providing coverage as to pending or threatened litigation.
  • Documents relating to any injunctions, consent decrees, or settlements to which the Company is a party.
  • A list of unsatisfied judgments.
Insurance Coverage
  • A schedule and copies of the Company's general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance.
  • A schedule of the Company's insurance claims history for past three years.
Professionals
  • A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the Company during past five years.
Articles and Publicity
  • Copies of all articles and press releases relating to the Company within the past three years.

This process should be complemented by your own business plan for the targeted establishment, taking into account local competition, the current state of the industry nationwide and locally, a SWOT analysis – assessment of strengths, weaknesses, opportunities, and threats - and financial projections based on your input and historical performance of said business. You will need this document anyway when reaching out to lenders and/or venture capital investors.

Most people find the process of due diligence quite daunting given the time and skills it requires. If that is your case, you will be better off enlisting the help of professionals such as business consultants, accountants, or lawyers.

For example, a qualified attorney can help you review the legal and organizational documents as well as assist you in evaluating the business’ financial condition – concurrently, the attorney can also facilitate determining which form of business entity is best for you (e.g. C-corp, S-corp, LLC, etc.).

Negotiating the Price When Buying a Small Business

Upon review of all financial documents for the targeted business, you will be able to compare the seller’s asking price to your own valuation and that of similar businesses for sale in the surrounding area (which you may also be considering to buy as well).

Recall that extensive due diligence minimizes the problem of asymmetric information but does not eliminate it completely – the current owner has insider knowledge thus you have to thoroughly do your homework to have the best leverage possible during negotiations.

Be aware that the national, state, and local economic contexts also play a role – businesses tend to be cheaper during recessions and more expensive during expansions. In this realm, you should check the historical patterns of GDP per capita and  consumer spending in the metropolitan area of interest as well, which is published by the Bureau of Labor Statistics (BLS).

There are several methods of business valuation, such as the Net Present Value (NPV), Return on Investment (ROI), multiplier, and book value (BV). During this process some sellers will also try to get paid for intangible assets (e.g. brand/store recognition, etc.) and that is when things get tricky.

It is up to you to determine the true value of such non-physical assets. Ultimately, the fair business price should be calculated strictly upon financial accounts, and then separately add whatever dollar amount you are willing to pay for such intangible assets.

The Net Present Value (NPV) method is the most scientific approach to determine the fair price of a business in today’s dollars. It consists in determining the present value of all future net cash flows (inflows minus outflows) given a desired rate of return, thus it takes into account that a dollar received today is worth more than a dollar collected on a future date – the concept of Time Value of Money (TVM).

The difficulty in employing this method lies on estimating those future cash flows. However, there are several acceptable techniques. For example, one can use historical data gathered from the business’ financial statements, determine a trend for each rubric, and them assume that it will grow at a constant rate over the next years. Alternatively, those future net cash flows can be estimated based on the expected growth rate for the local industry, or some other metric of choice. The typical discount rate adopted for small businesses ranges from 15 to 30 percent – this is also often called the real rate of return or internal rate of return.

Note that LaunchScore.com provides Net Present Value estimates in its market research reports. If you're thinking of buying a business in a specific city, check LaunchScore as another way to determine if the sellers asking price is fair.

The Return on Investment (ROI) method is a simplified version of the real rate of return given that it ignores the Time Value of Money concept, that is, it does not take into account how long the investment will take. Therefore, it is a very popular metric because of its simplicity.

The typical technique to compute ROI consists on dividing the amount of profits after interest and taxes by the investment cost (and then multiply by 100 to get a percentage). In this setup, the investment cost is the business' sale price or this value adjusted for additional expenses that have to be made upfront.

The ROI for small businesses also typically ranges from 15 to 30 percent, depending on the industry. However, you should inquire the seller about the exact methodology employed to determine the sale price as people tend to use variations of it. For example, sometimes taxes and/or interest are omitted from the profit calculations, thus inflating ROI.

The multiplier method is another popular metric because of its simplicity. It determines the value of a business based on a multiple of sales, sales plus inventory, or after-tax profits. The factor by which one of these variables is multiplied by is not determined by rigorous science but rather based on the seller’s perceptions or historical data for similar businesses in the area – something typically difficult to verify. Hence, you must always ask about the detailed rationale adopted by the seller to arrive at the asking price.

The standard book value (BV) method basically equates the selling price to a multiple of the business’ net worth – the difference between the value of all assets and liabilities. Assuming that you asked for all financial statements, then the employed multiplier (typically ranging from 1 to 2) can be easily inferred by collecting data for the value of assets and liabilities from the business’ balance sheet.

However, there are several nuances that can occur when computing this metric, such as: a) the so-called modified book value technique, which adjusts the worth of assets to the current market value (not the same as the value they have in the accounting records); b) replacement value technique, where net worth is calculate based on the total cost of replacing those assets nowadays; c) liquidation value technique, which uses as a proxy for the value of the assets the amount of money that could be attained if the business was liquidated now.

These alternative techniques within the BV method emanate from the fact that the standard methodology evaluates the value of assets based on the acquisition cost minus accumulated depreciation - if the asset surpassed its expected accounting life then its book value would be zero. Thus it is important to ask the seller about which BV technique is being adopted to determine the business’ net worth given that such value will vary significantly depending on said choice.

Once you fully understand the methodology employed to determine the asking price for the targeted business then the next step is to negotiate the final sale price. This endeavor will also take into account how do you plan to finance the acquisition.

As typically one is expected to pay 30 to 50 percent in cash, you will need to get a deal with the seller, lenders, or venture capitalists for the remaining amount. This implies engaging in another parallel process that will have an impact on how much are you willing to pay for the business so that you feel comfortable about the expected return relatively to the amount of risk.

If you need financing, one option is to negotiate with the seller a “hold a not”, which basically means that a portion of the sale price would be paid by regular payments over a predetermined time period to the seller, just as you would do to a traditional lender.

This is a game of patience, so do not rush. If you show the seller that you are too enthusiastic about buying the business you may be charged a hefty premium. At the same time, try to find out through legal means if the seller has financial problems beyond those that you potentially identified during the review of business-related financial statements because in that case you will likely be able to buy the business at a discount.

Finally, keep in mind that everything stated here has merely the purpose of serving as a guideline. In reality, the process of negotiating a business has many unforeseeable nuances specific to each case.

Therefore, we strongly encourage you to get all the help you can enlist, and consider hiring professionals, such as consultants, accountants, and/or lawyers to assist you throughout this journey. You may want to start by searching the valuable resources provided by the U.S. Small Business Association (SBA), and benefit from the free business consulting services provided by your local Small Business Development Center (SBDC).

How to Buy a Small Business – A Comprehensive Guide and Resource was originally published on http://www.launchscore.com



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Thursday, 20 October 2016

Two-faced or multi-perspective stakeholder manager?

Probably the single most interesting moment of the debate cycle was Trump’s suggestion that Clinton was two-faced. Her response struck me. She said, and I’m paraphrasing, that sometimes a politician needs to have different arguments for different audiences, and that can often seem like having both a private and public face. She invoked Lincoln to say that only by having tailored arguments for different audiences, could he manage to get important legislation passed.

Let’s consider the efficiency of the 'single argument for all audiences' versus its effectiveness for a moment. A government is not like a corporation. Corporations have shareholders they are responsible to. A few may also care about a small set of stakeholders that have other motives than profit; for instance by using a balanced scorecard or triple bottom line approach. A government has many more stakeholders to contend with. For a corporation to function effectively, there has to be alignment between its functions. Whether it is marketing or IT or operations, the organization must move together to succeed.

For a government, getting total alignment is not possible. Unlike employees, who can be coerced and incented to tow the line, a government forms a compromise over time. In a compromise, each party gives something up to get something else. The arguments used to get, say, an oil company to accept a carbon tax, would not be the same as those used to get a pipeline built across the Canadian border. A politician who says to the oil companies that a carbon tax is necessary to preserve the climate would not be aligned with his other face that argues for the pipeline with economic reasoning (development and cheaper oil).

To a climate advocate, a politician that pushes for a carbon tax and a pipeline at the same time, would likely be judged as two-faced. However, the politician’s job is not really just to take a position. Maybe the politician’s job is to get some resolution of the issues that cause conflict in and divide society, even if it means making arguments that seem contradictory. But if regular use of conflicting arguments leads to a degradation of trust in the politician over time, then his reputation may be damaged and future arguments may not be as persuasive. Does multi-argument stakeholder management then require a kind of cloak of secrecy (non-disclosure of “private” statements)?

When Lincoln executed his great moment of political mastery, he relied on the slowness of mail communication and the secrecy of his colleagues. If they went around spreading doubt or disclosing private statements, the jig would have been up pretty quickly. In the information age, only by putting on an event behind a locked and guarded door, and by impounding technology at the door could such a feat be achieved. A single Tweet could have stalled freedom in 1862. People are generally very bad a keeping secrets. They leak out for many reasons—booze, love and fame come to mind. To some who want a secret kept, the deterioration of memories and the lack of recording devices combine with the staleness of a late reveal to work in favor of the politician with a short game to play; like preventing an economic depression, a war, or a revolution.

By contrast, a single-message politician can hope for efficiencies. If you are always saying the same thing, you can just say it once. It is easier to remember a single argument and easier to repeat promptly. There is less bickering about what is being said or not said, and there is more general confidence in the leader’s candidness and honesty. However, this efficiency seems to breakdown when more than one party is involved in the decision. A single message might move the parties closer to conflict, or force one of the key stakeholder groups to withdraw from the negotiating table without resolution.

Clearly, I don’t have a moral answer to resolve the paradox of justifying means with ends, but I thought it was an interesting exchange between the candidates. One seems to be arguing about means, the other about ends.

The blog article Two-faced or multi-perspective stakeholder manager? is available on blog.launchscore.com



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Sunday, 25 September 2016

US States Ranked by Potential to Quit Your Day Job

It is the goal of many small business entrepreneurs to quit their day jobs. LaunchScore has compiled a list US states ranked by potential entrepreneur success, or how likely it is that you can quit your day job in the near future. The results may surprise you.

LaunchScore.com estimates the potential yearly earnings (PYE) of nearly 1 million small business opportunities across the United States. To rank the states by potential entrepreneur success, we calculated the mean PYE for each state, and then subtracted that from the current median income in each state. The amounts were rounded to the nearest thousand for ease of viewing.

The difference indicates how much more or less than the median income a new small business can potentially make. This difference is a reasonable indicator whether you can then quit working and enjoy the fruits of your success or focus completely on your business.

We do realize there are other factors at play that determine potential entrepreneur success, such as individual differences. However, we believe this ranking illustrates places where there is a lot of small business potential, and a closer look at the business opportunities in the cities in these states should be considered.

Where Does Your State Rank?

To see where your state ranks, take a look at the map included in this blog post. A description of each color ranking is outlined below.

To see the full list of US states ranked by potential entrepreneur success, check the table at the end of this article. Note that the states of Alaska and Vermont are not included, because our current data does not include cities in these US states. However, we did include Washington, DC in the ranked results.

If you interested in what are the top small business opportunities in your city, you can perform a search of your own on LaunchScore.com.

Green States Are Where It's At

These states have the strongest potential for entrepreneur success. Small businesses in states such as Connecticut, Michigan, and Maryland are estimated to potentially earn substantially more (from $25,000 to $48,000) than the current median income in these states.

Blue States Are Not Sad

These states have an above average potential for success. If you were to open a small business in Massachusetts, Georgia, or Texas, it could potentially pay more than the median income of most jobs, but not by that large a margin. Around $16,000 to $25,000 more per year.

Yellow States Are Not Shining Bright

In states such as Nebraska, Indiana, and Nevada, there is a lower than average level of potential success. Most jobs in these states generally pay just a bit less than an entrepreneurship. An entrepreneurship could potentially make $10,000 to $16,000 more than the median income in these states.

Red States (No, I Don't Mean Republican)

These states currently have the weakest potential for entrepreneur success. For instance, in Ohio and Delaware, small businesses are expected on average to make less than the median income of residents. Thus, for most people, having a job is currently more attractive than starting a business.

Rank  State Color Mean PYE Median Income Difference
1 Maryland Green $86,000 $38,000 $48,000
2 Michigan Green $62,000 $25,000 $37,000
3 Utah Green $76,000 $41,000 $34,000
4 Idaho Green $71,000 $41,000 $30,000
5 California Green $75,000 $46,000 $29,000
6 Iowa Green $70,000 $41,000 $28,000
7 Connecticut Green $63,000 $35,000 $28,000
8 Florida Green $55,000 $28,000 $27,000
9 Maine Green $72,000 $45,000 $27,000
10 Minnesota Green $73,000 $46,000 $26,000
11 Montana Blue $68,000 $43,000 $24,000
12 Illinois Blue $68,000 $43,000 $24,000
13 Tennessee Blue $59,000 $34,000 $24,000
14 Arkansas Blue $65,000 $40,000 $24,000
15 Colorado Blue $71,000 $47,000 $24,000
16 District of Columbia Blue $87,000 $63,000 $23,000
17 New Jersey Blue $55,000 $31,000 $23,000
18 South Carolina Blue $61,000 $39,000 $22,000
19 Kansas Blue $66,000 $44,000 $22,000
20 Wyoming Blue $76,000 $54,000 $21,000
21 Texas Blue $64,000 $42,000 $21,000
22 Wisconsin Blue $54,000 $33,000 $21,000
23 Arizona Blue $65,000 $43,000 $21,000
24 Rhode Island Blue $57,000 $37,000 $19,000
25 Georgia Blue $63,000 $43,000 $19,000
26 Louisiana Blue $54,000 $35,000 $19,000
27 Mississippi Blue $50,000 $31,000 $18,000
28 New Mexico Blue $61,000 $43,000 $17,000
29 Massachusetts Blue $66,000 $49,000 $17,000
30 North Dakota Blue $60,000 $44,000 $16,000
31 Nevada Yellow $62,000 $46,000 $15,000
32 Indiana Yellow $54,000 $39,000 $15,000
33 Nebraska Yellow $60,000 $45,000 $14,000
34 South Dakota Yellow $65,000 $50,000 $14,000
35 Kentucky Yellow $47,000 $33,000 $14,000
36 Missouri Yellow $57,000 $43,000 $13,000
37 Alabama Yellow $56,000 $43,000 $13,000
38 New Hampshire Yellow $64,000 $51,000 $13,000
39 West Virginia Yellow $62,000 $48,000 $13,000
40 Oklahoma Yellow $56,000 $42,000 $13,000
41 Hawaii Yellow $69,000 $57,000 $12,000
42 Oregon Yellow $59,000 $47,000 $11,000
43 Washington Yellow $72,000 $61,000 $11,000
44 North Carolina Red $57,000 $50,000 $7,000
45 Pennsylvania Red $41,000 $34,000 $7,000
46 New York Red $54,000 $49,000 $4,000
47 Virginia Red $68,000 $64,000 $3,000
48 Ohio Red $39,000 $40,000 -$1,000
49 Delaware Red $34,000 $38,000 -$4,000

US States Ranked by Potential to Quit Your Day Job See more on: http://www.launchscore.com



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Saturday, 17 September 2016

Vegetarian Restaurants For Sale – What to Pay for a Healthy Business

With health conscious eating on the rise, it might be a good time to open a vegetarian restaurant. Looking for vegetarian restaurants for sale is also a good option, as buying an existing business might be a quicker way to success.

Food businesses everywhere are adding healthier options to their menus. There are even restaurants creating and offering separate menus, in addition to their usual ones, just for vegetarians and vegans.

While that’s great, wouldn’t it be better having a vegetarian only restaurant? Now is the time to get into the vegetarian restaurant business, especially in a city like Lafayette, Louisiana.

According to LaunchScore.com, the potential net profit yearly earnings for a vegetarian restaurant in Lafayette in just 3 years could be over $100,000. In just a few short years your business could be earning six figures off a business that provides a health benefit to the local community.

Look For Vegetarian Restaurants for Sale in Lafayette

There has been a steady increase in the number of vegetarian restaurants opening every year, because the demand is there. That's why looking into buying a vegetarian restaurant that is for sale might be the best idea.

If you're not sure what to pay for a vegetarian restaurant in Lafayette, you can check the net present value in this detailed report on LaunchScore: https://launchscore.com/opportunities/vegetarian-restaurant-in-lafayette-louisiana.

There’s high potential here in Lafayette for vegetarian restaurants. Having a restaurant in Lafayette that offers dishes with no meat or animal products has a great chance of being successful.

If you’re worried about the risks, here’s why you shouldn’t be. Lafayette has an A rating on ease of starting a small business. It is also located in a state that is known for its food.

Data shows that 42% of vegetarians started between the ages of 18-34, while 40% started between the ages of 35-54. Keeping that in mind, the average age of residents in Lafayette is 34.

Not only will your business be booming, you’ll also be helping Lafayette residents make healthier choices and giving them more options when eating out.

Do you now believe this is a promising business opportunity? You can check the score of vegetarian restaurants in your city on LaunchScore.com, if you don't live in or near Lafayette.

Also, when looking for vegetarian restaurants for sale, check out what you should pay, as well as its potential, on LaunchScore.

The article Vegetarian Restaurants For Sale – What to Pay for a Healthy Business See more on: http://www.launchscore.com



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Thursday, 15 September 2016

Cracking the Craft Beer Market

Craft beer bars and microbreweries are all the rage in the United States. Many modern consumers would rather try a local brew, than the same old beer from the big boys. But how do you break into the craft beer market?

In may seem like it is too late to open yet another craft beer bar. While it is true that there are a lot of places out there, it doesn't mean there aren't opportunities available.

Having the right product is vital in the craft beer market. Entrepreneurs need to distinguish themselves from both the known beers and the local competition. But there is another factor that will be just as important for your success.

Location, Location, Location

As the old adage goes, location is everything. We are not talking about where in your local city, but in which city is such a business needed by its residents. You may think your product will succeed in your city, but even with a superior product it may fall victim to over saturation.

Let's look at a test case of Gilbert, Arizona. According to the data on LaunchScore.com, the town of Gilbert is ripe for the picking for the next craft beer place. You can view the details yourself here.

Gilbert is within the Phoenix metropolitan area, and its local business scene downtown has been on an upward swing over the past few years. Many new, local, and hip eatery's are seemingly popping up overnight. If there is one thing people in the area like to do, it's to eat and be seen at these restaurants and pubs in the downtown.

With the explosion of interest in the craft beer market, a city like Gilbert is a perfect opportunity for such a business. There is currently limited competition in the area, and are in need of businesses like a microbrewery. There are events held every weekend in the area to promote local shopping and spirit of community. Both of which would help any new and upcoming bar that brews locally made beer.

According to LaunchScore, the right craft beer bar in Gilbert could potentially make a net profit of $129,839 in just its second year. With profits growing continually from there.

Community Growth Nourishes Business

As the cities such as Phoenix continue the mad dash of outward growth, opportunities for new business will also grow in places like Gilbert. There becomes a necessity to feed and entertain the people in these new places in new ways.

The price of rent in Gilbert is still fairly reasonable, and now is the time to get in the market and make a name for yourself. The demographic of Gilbert is getting younger, hip, and they are typically transplants from other parts of the country.

Craft beer bars are great places for locals in any community to get out and network, get to know their community, and create new friendships. What better way to beat the heat and broaden horizons than sharing a cold beer and some food with fellow like-minded people.

So when considering the craft beer market as your next business venture, be sure to keep such factors in mind. A move to Arizona might not be possible for you, but this was just one example. You can always check the score of this or any other business idea in your city on LaunchScore.com.

Cracking the Craft Beer Market is available on LS Blog



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Wednesday, 14 September 2016

Health Club Near Me Business Opportunity

Where is there a health club near me? This is a phrase often heard when people move into a new neighborhood, or finally get into the work force after years of schooling.

As people settle into their new lifestyle, they start looking for their morning coffee shop, favorite restaurant, local pub, and also their new gym. While a lot of the others mentioned may be numerous, research shows that health clubs are a business opportunity that is needed in specific parts of the United States.

One such location is in Rochester Hills, Michigan. Statistics indicate the quality of such an investment ranks in the 98th percentile compared to other business opportunities in the same area. You can see for yourself in the detailed market analysis provided on LaunchScore.com: https://launchscore.com/opportunities/health-club-in-rochester-hills-michigan

Growing Population Means Growing Opportunity

The reasons for the quality of this business opportunity are clear when you look at the data. The area of Rochester Hills is growing and is popular with college-educated, white-collar employees, who work in the tech industry, automotive design, or healthcare. Its residents earn consistent middle class incomes, with a median income of $80,000.

Most of Rochester Hill's residents are in their late 20s and up, with a current median age of 43.1. Many have started families and are planting roots in the area that they plan to live long term. This indicates a growing base of potential long-term customers who have a distinct interest in maintaining their health, as well as physically working off the stress of mentally demanding careers.

As a side benefit of this, many stress the need for fitness to their children as well, providing you with potential employees as they reach college age. Not just “people you can hire,” but people you already have a relationship with, whose knowledge, skills, personalities, and work ethics you’ve already seen for yourself.

Health Clubs Make Your Finances Fit As Well

Financially, the outlook for a new health club in Rochester Hills is strong, with a likely Potential Yearly Earnings, or PYE, of $190,375. The net operating profits in the first year is estimated to be $95,188, with a startup cost of only $173,622 (based on the larger of PYE and median income multiplied by the cost of living).

Net revenues and earnings should more than double by year 5, and terminal value should be nearly $600,000 by the end of the 5th year. It’s safe to say opening a health club in Rochester Hills, Michigan, is one of the most promising opportunities currently available.

If you don't live in the Michigan area, you can do a search of this business type in your city on LaunchScore.com to receive the same detailed opportunity information. Just be sure to act on a good opportunity like this quickly, so when someone asks "where is there a health club near me", you are there to greet them when they arrive.

The post Health Club Near Me Business Opportunity is republished from blog.launchscore.com



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Sunday, 11 September 2016

Business opportunities in O’fallon, Missouri

O'fallon, Missouri is a wonderful city just a short drive from Saint Louis, Missouri. With a population of over 80,000 people, O'fallon is a bustling city full of opportunity!

The residents of O'fallon are busy, working adults looking for better ways of living. Health food stores are desperately needed here. There are the usual stores, including GNC, but O'fallon residents are tired of the same old chain stores. They are looking to get healthy, fit but also feel more than just a numbered customer that the big businesses treat them as.

They love good, small business, with a B rating for small business friendliness. These residents are friendly and expect the same from their local businesses. They are so friendly, in fact, in 2006, Money Magazine named O'fallon #39 out of the 100 best places to live in the entire United States of America! With a medium income of $78,634 the consumer is able to afford the healthy lifestyle, and just need a business to help their journey along. As American's waist line expands, health care costs are rising, and many are questioning the safety of genetically modified foods; opening a health food store has vast potential in this market.

Considering the increasing concern over health, countless numbers of people are looking for ways to increase their energy, improve their sleep, lose weight, etc. Any research will show, the easiest way to better these things is through a good, healthy diet. By opening a health food store in O'fallon, Missouri you will not only be helping people but also be enjoying watching your own business grow. The residents of O'fallon are loyal consumers and are just waiting for a new friendly face to move a healthy business into town. Taking all into consideration, you could be looking at $141,173 in yearly earnings! Are you ready to succeed?

The blog post Business opportunities in O’fallon, Missouri was initially seen on The LaunchScore Blog



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Microbrewery opportunities in the Washington DC area

A new microbrewery in the DC area could be yours if you choose to make a great investment. In between the two states of Maryland and Virginia this area is prime real estate to start a business you want to see thrive.

With a positive net cash flow projected within the first five years of opening, it is a great opportunity knocking at your door. DC is accustomed to hosting politicians, world leaders, and tourists from around the globe. From the locals to the tourists you will always have a steady stream of customers wanting to experience DC's beers to the fullest.

Big companies like Budweiser and Coors have been losing business to the microbreweries that have popped up. Being a microbrewery the options of selling beer straight to the customer or to local restaurants is a huge plus. Companies like Flying Dog and Dogfish Head see sustained success year after year following this model. They have huge followings all along the east coast.

With the amount of people visiting DC you could spread the name of your microbrewery far and wide in a relative short amount of time. While growing your sales and influence, the microbrewery would be in the perfect area to become another powerhouse on the east coast. The microbrewery would become well known relatively quickly in Virginia, DC, and Maryland through word of mouth and various beer festivals. The spot in DC would also allow for the microbrewery's clout and sales to expand easily into West Virginia, Delaware, and Pennsylvania. In those five states and one district alone the company would be able to prosper and see huge revenues. When it is time to finally break through and reach states like New York in the north and Florida in the south, investors will truly see why buying into this microbrewery was the best choice of their lives.

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Friday, 9 September 2016

Don’t quit your day job!


Entrepreneurs holding down day jobs to pay the bills face a dilemma. In the macho-startup culture, risk is do or die, you have to be "all in", you have to put in 80 hours a week. Some investors don’t take your seriously if you don’t kill yourself for your startup, or if your passion isn’t constant and unwavering.

Well, seems there is emerging evidence that the macho mentality is wrong-headed. University of Wisconsin professors studied this issue and found that entrepreneurs that keep their day jobs are more risk-averse and have lower core self-evaluation (i.e., aren’t overconfident) than those that take the full plunge. But the kicker is that these day-jobbing entrepreneurs (they call them hybrid entrepreneur) are more successful when they do finally commit to their ventures—they survive MUCH longer.

"we find evidence that individuals who enter full-time self-employment in a staged entry process through hybrid entrepreneurship survive significantly longer than individuals who enter directly from paid employment." - Raffiee and Feng, 2014, p. 958.

They also find that the positive effect of hybrid entrepreneurship is stronger for more experienced entrepreneurs and individuals of lower intelligence. So unless you are a born genius, keeping your day job till your venture starts to pay dividends may be wise.

I thought this tidbit was extra-interesting in light of the recent push-back against the macho-entrepreneurship Zeitgeist. Check out this TED talk about the virtues of taking it slow! We always hear about speeding up--get to market--rarely about taking it easy.

Raffiee, J., & Feng, J. (2014). Should I quit my day job?: A hybrid path to entrepreneurship. Academy of Management Journal, 57(4), 936-963.

 

The blog article Don’t quit your day job! was first published on LaunchScore



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Sunday, 4 September 2016

How do venture capitalists make decisions?

A recent study by Ivy League scholars investigated how 885 institutional Venture Capitalists (VCs) from 681 firms make decisions about their investments and portfolios. The average VC firm in the sample analyzed more than 400 companies per year but made merely five investments during the same period. The main finding is that VCs regard the management/founding team as the most important factor driving their decisions.

The researchers assessed 8 types of decisions, namely: deal sourcing; investment selection; valuation; deal structure; post-investment value-added; exits; internal firm organization; and, relationships with limited partners. They also looked at potential variations in VC practices across industries, stage, geography, and past successes.

The authors observed that most of the deals emanated from the VC’s own networks - more than 30% of deals were generated from professional networks, another 20% referred by other investors, and 8% from companies already on their portfolio.

Overall, VC’s investment selection was primarily driven by perceptions about the management team, followed by business factors (such as the business model, product, market, and industry) and company valuation. Notwithstanding, the authors found some variations, namely that the management team tends to be the most important factor for early-stage and IT investors but for late-stage and healthcare investors business factors outweigh the importance of the management team. Interestingly, the fund’s fit and ability to add value to the deals was perceived as the least important factor overall.

Another relevant finding is that few VCs use discounted cash flow or net present value techniques to evaluate their investments. Instead, the most commonly used metric is cash-on-cash return or the multiple of invested capital. However, some do use the internal rate of return (IRR) as an evaluation metric.  Concurrently, very rarely do VCs adjust their target returns for systematic risk. Curiously, 9% of the overall respondents and 17% of the early-stage VCs do not use any quantitative deal evaluation metric.

In relation to the deal structure, the researchers found that VCs were relatively inflexible on pro-rata investment rights, liquidation preferences, anti-dilution protection, vesting, valuation, and board control though they appeared to be flexible in relation to the option pool, participation rights, investment amount, redemption rights, but mostly about dividends.

On the other hand, VCs do provided a significant number of services in the post-investment stage, primarily consisting of strategic guidance, connecting customers, operational guidance, and hiring of board members and employees.

In terms of exits, the data suggested that VCs exited about 75% of their deals through acquisition, instead of IPOs. About 10% of the deals made 10 times their investment but about 75% of the remaining lost money.

The average VC firm on this study’s sample had 14 employees and 5 senior investment professionals which on average spent 22 hours/week networking and sourcing deals, and 18 hours/week working with the firms on their own portfolio. Lastly, the performance of VCs was primarily evaluated by cash on cash returns and net IRRs, and most of those surveyed were confident in their ability to generate above market returns.

 

Reference:

Gompers, Paul A. and Gornall, Will and Kaplan, Steven N. and Strebulaev, Ilya A., How Do Venture Capitalists Make Decisions? (August 1, 2016). Stanford University Graduate School of Business Research Paper No. 16-33; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 477/2016. Available at SSRN: http://ssrn.com/abstract=2801385

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