Entrepreneur: What's In a Definition?

Are you an entrepreneur or a small business owner? Does it make any real difference?

How do we define "entrepreneur"? Bob Reiss, successful entrepreneur and author of Low-Risk, High-Reward: Starting and Growing Your Small Business With Minimal Risk, says: "Entrepreneurship is the recognition and pursuit of opportunity without regard to the resources you currently control, with confidence that you can succeed, with the flexibility to change course as necessary, and with the will to rebound from setbacks."

Read on to understand the differences between a small business owner and an entrepreneur. Understand how you may be at risk if you do not meet the definition of an entrepreneur.

All business people attempt to recognize and pursuit opportunities, but entrepreneurs pursue these opportunities on different terms and without a bit of entrepreneurialism in all of us, continued success will be hard to achieve..

• Entrepreneurs pursue opportunities without regard to the resources they currently control, but small business owners often become protective of their assets because of their success and are hesitant to put their existing resources at risk. Entreprenuers find creative ways to acquire the resources they need to achieve their goals. One of those resources is capital. This creativity is often lacking in small business owners who resort to banks and mainstream financing opportunities. Being creative in acquiring the resources you need to build and grow your business can be very helpful.

• Entrepreneurs pursue opportunities with confidence that they can succeed, but small business owners often have experienced previous failures and become a bit gun shy.

• Entrepreneurs have the flexibility to change course as necessary and are not static but fluid. They continue to seek opportunities and/or different methods of operation. This requires creativity and venturesome tactics. Small business owners think “inside the box” and dwell and the day to day challenges while entrepreneurs take creative approaches and think outside of the box.

• Finally, entrepreneurs have the will to rebound from setbacks. A small business entrepreneur becomes a small business owner when we fail to rebound from these setbacks.

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EBITDA Defined

EBITDA before recast numbers is your profit, before interest expense, taxes, depreciation and amortization.

Recast adjustments may include the following:

• rents that are paid to you at rates above market
  
• salaries that are paid to you or others that are above market levels
  
• payroll taxes that relate to the above salary adjustments
  
• sales that are anticipated from locations, including routes, that have not yet been opened for a full year
  
• price increases that have not yet been implemented for a full year
  
• professional fees that will not be continued by a new owner
  
• office staff and related expenses that will not be needed by a new owner
  
• non-reoccurring expenses (one time, unusual items)
  
• major expenses that would normally have been depreciated over longer periods
  

EBITDA after adjustments is EBITDA before recast plus / minus all recast adjustments

Valuation Multipliers

Generally, in this industry a multiplier of 3 to 5 times EBITDA is used to determine a business’ value. At times 2, 6 or more may be available. The range is dependent on a number of variables including:

• sales growth
  
• strength of operating management,
  
• strength of locations,
  
• type of solvent in use
  
• age of equipment
  
• length of leases
  
• contamination issues
  
• equipment and building capacity
  
• wholesale volume
  
• pricing
  

Valuation Formulas

Everyone uses something different, but a good starting point is

EBITDA recast X Multiplier = Value

If you'd like more detail about your specific business, Click Here and someone will be able to work with you on a private and very confidential basis.

Do I really have to wait for references to be checked?

We've all interviewed applicants who seemed perfect for our open position and we've been tempted to make a job offer immediately, foregoing the standard reference and/or background checks. It is easy to become impatient. Usually, you've waited weeks to hire someone, putting an ad in the paper, sorting through the replies, interviewing those that actually showed up for the appointment and all the while the work is backed up. The position must be filled now!

So - when you do finally interview a great candidate - why can't you hire the applicant immediately?

Limited Perspective
Before you make a job offer, remember that your perspective is limited – you’ve formed an opinion based only on a couple of short interactions. Why not take it one step further and gather additional feedback to get the whole picture? Have a policy to check references and background information of all potential hires. You might be quite surprised as to what you find.

Reference and background checks complete your understanding of the applicant’s qualifications. When buying a car, you do your research. You look into the car’s history (e.g. its performance record, its safety record, cost of maintenance) before buying to ensure you are making a good purchase. Similarly, you need to research the background of your potential new employee. You’re making a major investment in this individual and you’d like to improve your odds of success.

Understand Who You Are Hiring
Reference and background checks allow you to verify information such as dates of employment, educational credentials, and job duties. They also allow you, with the proper authorization, to check into criminal, financial, and/or civil records. Further, because past behavior is the best predictor of future behavior, feedback from previous managers or supervisors can be invaluable. They are often able to give you insight as to how the individual actually performed while on the job.

Tips for Pre-Hire Verifications

Be Consistent. Just as in pre-employment testing, you must ask the same questions and verify the same information for every candidate for an open position.

Be Selective. Be selective on the background information you require from applicants. While you may want a credit report from applicants for a money-handling position, you probably will not need that information for a production position.

Verify Required Certifications/Licenses. If the position requires certain certifications, licenses, or degrees, make sure you confirm those credentials for each candidate. You don’t want to be surprised by realizing that your new hire can’t drive the company van.

Verify Prior Employment. Call the applicant’s former employers and ask about the applicant’s qualifications. While some companies may only verify dates of employment and job title, others may provide you with valuable information about the applicant’s work habits. At the least, you verify the applicant’s work history; at best, you find out that the applicant was a great employee.

Call References. While any reference provided by the applicant will most likely say only positive things, you may find out information that will help you determine if the applicant will “fit” the job and your company culture. For example, the reference may tell you that the person is methodical and likes systems. While this is not a negative reference, it is important to know - especially if you are looking for someone who is highly flexible and who responds to change well.

Document Answers. When checking references or talking to previous employers, write down the questions you ask and the answers you are given. If a previous employer only verifies title and dates of employment, note that the employer refused to give you additional information. This documents that you used your best efforts to gather information about the applicant and helps in issues of negligent hiring.

However thorough you choose to be, retrieving background and reference information can either back up the good feelings you already have about the candidate, or provide critical information to help you avoid a bad hiring decision. Either way, with a little research, you complete the picture and make an informed hiring decision.

This article was written with assistance from PMSI.

Small Businesses Don't Fail Because of a Shortage of Good Ideas,

but They Do Fail All Too Frequently

As a small business owner, you work very hard and probably very long hours. Do you find that you have lots of great ideas, but never enough time to implement these ideas? Do you feel that you’re working hard, but that you’re not working very smart? Well you’re probably right. Are you losing ground against your competitors or against your historical results? What are you doing wrong? Everything!

Take a look at how you are spending your time now.

Are you fighting the most critical fires yourself and then, if there is time left over, trying to implement some of those great ideas?

• Wrong!

Are you fighting all of those fires yourself because you feel that most of your staff can’t help you?

• Wrong!

Are you always short on cash, having to juggle bills, but don’t think you’ll qualify with a bank for additional capital?

• Wrong!

Finally, are you blaming the economy for your poor financial results?

• Wrong!

Finding the time to improve any or all of these conditions is your first challenge. You can neither buy nor sell time. You can only choose to use the time you have for one thing or another. Reducing the time you spend on some items will provide you an opportunity to spend time elsewhere.

Smother the fires. You have to smother some of those daily fires before you can move on, but it probably seems that you’ve been trying to put those embers out for years and the sparks continue to re-ignite themselves at the most inopportune time. Developing very simple internal systems with a few checks and balances can identify the issues before they begin to blaze and make it easier and quicker to put the embers out than those raging fires.

Begin with a current fire. Identify the cause of the fire – improper tools, inadequate training, incomplete communications, etc. Create a system or procedure that will help to avoid this issue in the future. For instance, schedule continuous training in this area every 6 months. Write down the schedule. Print it. Distribute it. See if that permanently smothers the fire. Then move on to the next fire. Over time, you will have developed a complete set of written systems and procedures for your entire operation. You’ll have time to move forward with your organization.

Develop your staff. Moving forward and even completing the fire fighting assignments will require involvement at all levels of your organization, but historically these employees may not been involved at all. Frequently your staff has less formal education than yourself, has not been involved in much of the company except the portion that is within 3 square feet of their work area, they have personal and family issues that they struggle with, limited free time, and yet the majority of them are committed to doing a good job given the right tools and support. This is a great foundation for building your organization.

A good way to start is to involve each individual in any item that impacts their specific work area. This is the area they are most interested in and most knowledgeable about. Asking for their input, involving them in decisions, getting them to decide how to avoid those fires in the future and implementing their suggestions allows these individuals to slowly grow and understand the organization, its needs and their contribution. This is a very slow process, but gradually you’ll have time and a critical asset to move forward with the growth-oriented projects.

Get the cash. Just as you thought that your staff wouldn’t or couldn’t help you in your organization, a similar concept exists for the access to another critical asset – cash. There is lots of money available to small businesses. Developing the right concept, contacting the right audience, and communicating the right message are skills that you may or may not have. Sometimes it’s necessary to use some outside expertise, like a CPA, to assist in this project. Don’t hesitate to spend a little in order to make a lot.

A proper financial reporting foundation must be established. Timely financial reports, not just sales and cash that you might track today, must be prepared. It’s easier these days than ever before to accomplish this task with a variety of small business accounting packages available. Once you have such a tool, you will find it very useful, not only to obtain additional funds, but for your own operational and planning requirements.

Understand the science of complexity. Now that there is some structure in place, fewer fires than ever before, you’re in a good position to move forward with your organization. To do so, successfully, is no easier just because you’ve freed up some time, developed some people and added some useful tools to the business. The projects that you envision have their own challenges and complexities that must be recognized.

In a simple environment we expect that a push of a button or a turn of a lever will provide an immediate, direct, anticipated and predictable response. The real world is not structured in such a simplistic and mechanistic manner. Hoping that our environment has a high degree of predictability might be considered naive by some and wishful thinking by others. A concept, a strategy, and a plan do not ever become easily implemented in an exact and direct manner.

A plan, hatched by a business owner, is impacted by variables beyond your control. Your plan is impacted by people and events outside of your business as well as from the inside. Employees that you plan to participate in a new venture become trained and then may depart. As you are developing and attempting to implement your business extensions, your competitors are doing the same thing. Someone who once was not considered a competitor begins to expand his market far beyond historical borders and can impact your plans. Customers are becoming educated on their choices or their priorities may shift away from your product. Each independent body is following their own simple rules and consciously or unconsciously impacting every other independent body.

Recognizing this level of complexity is the first step to succeeding as your business enters this new period of complexity. Understanding that interdependence is the norm, that interaction occurs, that connections are as important as individuals, that adaptation is natural, that communication is essential, that isolation is not sustainable, and that life is very messy will be critical to your success in your new ventures.

This complexity has implications for your organizational structures, market responses, leadership styles, staffing, use of technology, and learning. Consider just adding one significantly different product line into your business today or one very large customer. What is the impact on your organizational structure? Who will do the work? How will it integrate into the existing workload? What might fall by the wayside in the main line business? What new skills, technology, training, and procedures have to be developed? Who will implement these areas? How will you monitor and control them? How will you create a larger continuous learning environment as your sphere of influence increases? Each of these questions needs to be answered before moving forward.

At the moment, there may only be a few fires. Staff can handle the majority of issues. You have solid monitoring and controls in place. Frequent communications with you is efficient and effective. Life seems pretty good.

Adding a new product line takes time from throughout the organization. How will you respond when the number of fires increases from just a few to many, when staff suddenly does not have all of the answers to the majority of new issues that arise, when there are few reporting and controls in place, and when you get too busy to have frequent communications? Anticipating these issues is the first step to avoiding them.

Maximize the impact. We all want the biggest bang for the buck. We try to create solid business plans. Those plans need to include retaining the solid sales base that you’ve developed. Trying to anticipate these unexpected challenges and working hard to avoid disruption to your base is required. Plan to invest more time, money and resources than you initially think you’ll need to succeed in the new ventures. They nearly always exceed their initial budget. There is training time in sales and operations. There is money in up front investments and perhaps carrying accounts receivables. There is new equipment, physical layout changes and new distribution systems required. Prepare for the worse and expect the best.

To learn more, check out the rest of our web site. Register for an upcoming seminar “Managing A Small, Privately Owned Business” or contact Deborah Rechnitz, CMA CMC, Managing Director of Methods for Management, INC. 253-851-6327, 3425 Vernhardson St., Gig Harbor, WA 98332. Ms. Rechnitz can contribute additional articles for your Association newsletters, provide seminars to small businesses on practical, day to day issues and consult on management topics to help businesses grow and prosper.

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Shrinking Profits!

Seen any shrinking profits recently? Has your profit, as a percentage of sales, dropped from 10% to 9% to 8% to 7%? Is it as low as 5%? Hard to pay your bills at this rate isn't it? Have you looked back to try to explain this drop and been unsuccessful? Sometimes the causes are as big as day and yet hidden in the darkness.

Understanding the numbers. Profit is, obviously, one of the most important line items on your financial statement. Frequently it is the line item you look at first or at least second, right after your sales line. The dollar amount for profit may jump up in good sales months and drop during 5 week payroll months, but on a year to date basis, the percentage of profit to sales tells a lot about the health of your business.

Profit goals range anywhere from 5% to 25%, depending on a variety of factors. The rate of growth has a lot to do with achieving this percentage. If you are experiencing very fast growth, up front costs for new locations or additional staff to support this growth usually lowers profits in the short term. Very large operations frequently have profit results on the lower end of the scale because management rarely performs operational tasks, but 15% of $5,000,000 is still a lot more than 25% of $500,000. Regardless of your size, constantly improving this number is the challenge for all operators.

The Biggest Bang For Your Buck. With very little time to spend looking at financials statements, you have to spend your time wisely. There are items that never change from month to month like rents. There are other items that are very small. There are still others that you have no choice about, at least in the short term, like repair and maintenance, utilities, and vehicle expenses. These items may go up and down from month to month, but they rarely are the cause of shrinking profits.

There are two major items that have consistently caused shrinking profits, but the root issue is rarely obvious. Sales and labor are certainly the obvious culprits, but understanding how they cause the negative results is more important than running down to the production floor and getting frustrated at your poor productivity. That will not fix the problem.

Each sales transaction has two components -- revenue per piece or revenue per order and the number of pieces or orders. Labor costs have three components -- wages per hour, productivity and the number of pieces processed. The relationship between all of these components can result in a cost, as a percentage of sales, between 10% and 50%, depending on your industry, and that's before payroll related taxes and benefits! These levels will significantly impact your profitability.

Understand the Details. It's been said that the Devil's in the details and maximizing your profitability is no different. There are four variables affecting a high labor cost and contrary to popular opinion, productivity is rarely the most significant component. Volume, of course, cures most ills, but it is harder and harder to come by and without other changes, labor costs could still be increasing faster than sales. What, then, is the answer?

The third wage component, after volume and productivity, is the wage rate itself. This is calculated by dividing total wages by total hours and incorporates overtime costs as well. This rate frequently increases at a rate in excess of price increases on your product. The result is shrinking profits! Evaluate your own price increases over the last two years. Perhaps you've had increases of 2%, 3% or even 5% per year. Now compare just the starting wages of your staff over the last several years. Was it $6.00 in '98, $6.25 in '99 and $6.50 in '00 or is it up to $7.00 in 2000 in order to attract qualified staff? That amounts to nearly a 17% increase over the last three years. The affect of these results will be a drop in profits by the difference between the wage increases and the price increases. With no other changes to offset this scenario, profit percentages fall. Exhibit 1 reflects an example of a price incrase of 5% with a more than offsetting labor/cost increase of 8.5 percentage and a resulting profit reduction from 10% to 6.19%.

Exhibit 1

Prior Year
Sales 100
Labor 50
All Other Expenses 40

Profit Before Taxes 10 or 10.00%

Current Year
Sales 105
Labor 58.5
All Other Expenses 40

Profit Before Taxes 6.5 or 6.19%

Current Year Adjusted
Sales 108.5
Labor 58.5
All Other Expenses 40

Profit Before Taxes 10 or 10.00%

There is an alternative scenario reflected in Exhibit 1 with the current year adjusted. The price increase needs to be in line with the wage increases, unless there are major changes in productivity results. An 8.5% increase in prices will fully offset the necessary wage increases to meet market demands. Profit, as a percentage of sales remains constant. It is critical to maintain this relationship in order to maintain your existing profitability because without profits you can not continue to exist in the long run.

Productivity in this analysis has been held constant. Productivity improvements do impact the profitability of a company, but generally with the significant wage pressures in this strong economy, increases in productivity with existing equipment and existing processes will not, by itself, bring profits back in line with historical levels.

Today, profits don't come easily in this business. It takes time and effort and both are in short supply. You need to make the best use of your time. Spend time this month looking at your historical revenue per piece and your wage rates for the last two years. Did you stay in sync or have you fallen behind? Your time may be worth four percentage points of profit. Now that's a good use of your time!

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Pricing Strategies