Selling Your Business is an Investment Decision For Your Portfolio

There is an expression that states that you should not put all of your eggs into one basket. The principle behind that expression is rooted in portfolio theory that espouses diversification. Many small business owners are not properly diversified in their investment portfolios. In fact, there are many business owners who only have their business as their main asset and come to rely on the sale of their company to fund their retirement.

This article will examine some reasons why a small business owner should view business ownership through the lense of a well-diversified portfolio.

Diversification Reduces Overall Risk
Owning a business that represents a major proportion of your holdings means that you likely have a high degree of variability in your assets base. A simple real world example is an owner that does not have much money saved in RRSPs and has a business that is failing. The scenario, when looked at objectively, is one where a large asset class is under-performing and there no other assets in the basket of investments to compensate for this risk. Not a very good spot to be in.

The truth is, however, that many small business owners find themselves in the situation where all they own is their business and when it suffers then the entire “portfolio” suffers.

The key take-away is to take a hard look at all of your investments, use a professional investment advisor to consult you on an asset mix that fits your risk tolerance and then plan from there.

Some entrepreneurs may be fine with a risk profile that is heavily weighted to one investment (the business). Unfortunately, the majority of small business owners are not because they do not have the right information.

The Exit Strategy for a Business is a Key Factor
The return on small business is usually measured by the annual recurring profits that the venture makes as well as the capital gain realized by the owner on the sale of a the business. In other words, in a normal situation the total return on investment is measured by those two metrics.

The first measure (recurring profit) is relatively easy to realize – it is the ongoing economic profit that the business generates for the owners. The second one (capital gain as a result of a sale) may not be so easy. The reason is that not all businesses do sell and that is a fact that many business owners are startled to learn about.

The fact that not all small businesses are sold is a key factor when looking at your total portfolio. As a business owner, you need to have a clear grasp on the valuation of the company that the marketplace would likely deem it to be and also to be ready with that potential outcome. The problem is that many business owners expect a higher return than what the market will bear. Selling at a lower amount is not only personally difficult but also has real portfolio implications also. There are things you can do to increase your chances of successfully selling your business, which include working with a good business broker.

The key is to be well-informed when planning your portfolio with a small business as big part of it. This may require dealing with several professionals including an investment advisor, business broker, attorney and chartered accountant.

Suitable Business Location

Background

Modern society has three aspects – social, economic, and political. The social aspect deals with association between some social group/institution (such as family, school, collage, mosque, etc.) and individual, economic aspect deals with interactive relationships between firm/industry and economic agents, and political aspect is dynamic combination of parliament, executive, judiciary, media, civil society, political parties and voters. The economic aspect has three sectors – product sector, service sector, and financial sector. Business Location is important for product sector due to concerns about availability of raw material, it is vital for services sector in order to provide convenience to customers, and it is central for financial sector for efficient communication links. Thus, business location is vital for every sector of modern economy.

Determinants of Business Location

Business growth and survival is based on multiple demand and supply factors. We may group these factors into two categories – tangible and intangible. The tangible factors can be felt with five senses, while, intangible factors cannot be felt with five senses. The prominent tangible factors are capital, land, physical convenience to customers, and cash in hand, while the prominent intangible factors are entrepreneurship, organizational behaviour, consumer tastes, and social links. At production level, after capital, the possession of land and its suitable location is the most important tangible factor that fortify and maintains manager’s stability towards business struggle. At consumption level, customers have great attraction towards easy attainment of product or service. The physical convenience to customer is an important tangible factor that shapes demand-pattern of product or service, so that business location easily accessible to customers is vital for stable customer account. Thus, the most important demand and supply factors for business survival and growth – i.e., stable customer and stable entrepreneur – are strongly linked with business location.

There may be another division of decisive ingredients of business location, input and output elements. The prominent input elements are – convenience to entrepreneur, convenience to work force, cost of transportation, efficient communication links (i.e., phone, internet, wireless, mobile, etc.), government incentives, availability of raw material, availability of cheap labour force, and operational efficiency. On the other hand, the prominent output elements are – convenience to customer, distributional ease, and business effectiveness. The optimal availability and utilization of input elements are beneficial for cost minimization, while the optimal availability and utilization of output elements is beneficial for sales maximization, thus, the combined effect of input-output elements enhances the net return of business struggle, and both are strongly linked with business location. It is noteworthy that the input-output analysis may also include the social dimensions of business location.

Business Location & Taxonomy of Business

A traditional division of economic struggle or business venture is – farming, agribusiness, mining, manufacturing, and commerce. These classifications give shape to three basic sectors of economic aspect, i.e., agriculture sector, manufacturing sector, and services sector. Agriculture sector or Farming is indispensably based on land. A suitable farm location is required for distinctive farming activities. Agribusiness are highly dependent on land output coming from agriculture sector such as cotton ginning, spinning, tannery, flour production, and sugar manufacturing. These businesses are generally located near to the source of raw material. Similarly, mining is a business highly dependent on land and its hidden treasures, such as oil & gas refinery, gems and stones, and coal extraction. Expenditures on transportation of raw material and facility of warehouses are high and costly, thus, to arrange location of these business units near to the sources of raw material is reasonable approach. The administrative units of the business are generally located somewhere else, normally near to some financial hub. Agribusiness or mining are labour-intensive or raw material-intensive industries. The capital-intensive industry opt a different approach towards business location. Industry location is decided by capital efficiency, labor or raw material is secondary, e.g., automobiles, home appliances, and military equipments. In addition, government incentives, structural facilities, and focused working environment for knowledge workers are some decisive elements for the business location of capital-intensive manufacturing sector.

Commercial businesses or services sector are customer-driven businesses. The very existence of the business depends on easy provision of product/service to consumers. These businesses are highly sensitive to location and its physical appearance, a minor mistake towards location may bring a great loss to a business, for example, a restaurant on some odd area or bit away from customer’s easy approach may be a failure. Generally the posh area brings many customers due to snob and bandwagon effects. The snob and bandwagon effects, thus, play an important role in making final decision about location of commercial business. In addition, there are multiple small factors are involved at the time of area selection, for example customer’s ease on parking, customer’s security, and pleasant customer mobility during shopping. The customized location analysis for each and every commercial business is essential and indispensable. The location analysis of retail would be different from wholesale, retail is generally profitable within city while wholesale is suitable outside the city. A virtual factor has gained special importance in commercial business, product can be displayed on virtual location, monetary transactions can be made through credit cards and product can be delivered through company’s courier service. The services sector has accommodated the benefits of virtual location but indispensability and significance of physical location cannot be wiped out.

The non-governmental organizations, trusts, hospitals, and educational institutions are important intuitions of modern society. They are inevitable and essential part of every civilized state. They are critical for physical health, psychological strength, spiritual purification, and social ties. They are managed and operated with entrepreneurial skills and personal devotion. Efficiency and effectiveness of such institutions are also depend on multiple factors such as capital, volunteers, and physical location. A facility away from volunteers or user would be less effective. The location has dual effects; it attracts volunteers as well as users. A volunteer brings time and money, thus efficiency/effectiveness is increased, and user is eventual beneficiary of a welfare activity, an ultimate goal.

Business Location & Size Analysis

A business venture has four economic sizes -micro, small, medium, and large. A micro business is a single member firm. It has, generally, less than three staff members. A micro business is started with limited capital. The legal structure of micro business is sole-proprietorship. A micro businessman is, generally, self-centered and heavily dependent on micro-management (static, short-sighted, and person-specific approach of management). Physical location is extremely important for micro-business. Land ownership gives peace of mind and sustained motivation for work to businessman. A micro businessman remains micro in his business due to micro-management or austerity leanings towards life.

A small business has, generally, less than ten staff members. The small businessman has outward looking tendencies with high ambitions. He likes/loves his product/service. The greater psychological challenge of small businessman is MANAGERIAL EGO or NARCISSIM. A small entrepreneur may remain small during his economic life time due to managerial ego/narcissism. He is unable to get synergic benefits. He can work on someone else land and gives utmost importance to capital against the micro manager who is highly land-dependent. A small entrepreneur may enhance her business status through effective entrepreneurship.

A medium business has, generally, less than hundred staff members. The owner of medium size business is outward looking with high ambitions, however, pragmatic towards business aspirations. He likes social interactions, enters into socio-economic links and develops a business circle. He is social-oriented economic entrepreneur. He is generally trapped by social links due to extreme social tendencies. The physical location is important for him for solid social ties; it is, sometime, a trap on his economic growth. The social demand extracts his multiple business energies. A medium business may be a global venture due to availability of some global social linkages. A medium entrepreneur may enhance her business status through better management of socio-economic ties. A mid-size family business is sustainable goal for him due to great social leanings towards social ties. A location-oriented socio-economic networking of business can give a stable shape to business.

A large business has, generally, more than three hundred staff members. An owner or initiator of large business is inward oriented, outward looking, dynamic, and visionary. He wants to develop an empire, thus, a suitable physical location is materialization of his entrepreneurial dreams. The boundless intentional energy or Will Power is asset of economic entrepreneur of a large business. His entrepreneurial skills towards social linkages are relatively low. It may be his strength towards business, he is able to develop or run a large business with professional zest and zeal. Due to limited social leanings and low conceptual intelligence, he is dependent on social entrepreneurs and consultants. The dependency phenomenon, i.e., reliance on consultants/social entrepreneurs, is permanent feature of a large business and demands a proactive / positive stand of owner towards dependency phenomenon. A large business may be a global concern due to presence of marked profit differences between native and global markets.

Challenges / Opportunities of Business Location

A business either micro or small or medium or large faces numerous challenges / threats. The foremost challenge to a business location is cutthroat competition. Business life is predominantly competitive by nature. A suitable business location may add / reduce the competitive environment of a business due to uneven availability of capital, work force, or customers.

10 Strategy Tools For Smaller Businesses

I come from a background in large blue chip businesses, where I spent a fair amount of time helping predominantly large clients with strategic issues and during the last ten years I’ve started and built a couple of smaller businesses. SME owners and directors need to think about strategy, but they need to concentrate upon those elements that are going to produce the most impact – by all means read the business strategy tomes from cover to cover if you want, but this article aims to give you, a busy SME director, most of what you need to know about strategy and analysis in order to make a start.

1 – 3 Types of Excellence. Many commentators would agree that a company has the option to excel (that means really excel so that the market recognises that excellence) in one or two of three possible areas:

Operational excellence – which means doing things really efficiently and therefore probably being able to deal with higher volumes and therefore passing on cost savings to customers (although it is possible to think of examples where operational excellence was so valued by the customer that she would be prepared to pay a premium for it alone). An example might be EasyJet.

Customer intimacy – which means that you have systems and staff who treat customers as royalty (or at least good friends) and they feel loved and valued by your business. An example might be John Lewis.

Product leadership – which means that your product (or service) is highly differentiated from alternatives and substitutes in ways that customers value. An example might be Apple.

2 – Do a McKinsey. As a start-up or small business you may not be able to afford a McKinsey assignment to address your strategy issues, but you can apply one of their most powerful weapons to your advantage. MECE stands for “mutually exclusive, collectively exhaustive” – apply it to your problems and you could see great results. MECE is a useful model for analysing a business problem because it aids clear thinking by ensuring that categories of information do not overlap, and by reducing the possibility of overlooking information by requiring that all of the categories of information taken together should deal with all possible options. Information should be grouped into categories so that each category is separate and distinct without any overlap (mutually exclusive), and all of the categories taken together should deal with all possible options (collectively exhaustive). A “major issues list” should contain no less than two, and no more than five issues, with three being the ideal number. Let’s say that Acme Widgets Ltd use a MECE tree diagram to help them locate the source of declining profitability. The diagram as a whole represents the problem at hand; each branch stemming from the starting node of the tree represents a major issue that needs to be considered; each branch stemming from one of these major issues represents a sub-issue that needs to be considered; and so on. The problem to be addressed in this case is “how can Acme Widget Ltd increase widget sales?”.

You will hopefully find that analysing issues down to the constituent parts using this technique will clarify where the real issues lie and they will now be in more “bite sized chunks” and so be easier to handle.

3 – Markets & Industries. The expressions “What’s your market?” and “What industry are you in?” are thrown around pretty well interchangeably – what exactly do we mean when we say “market” and “industry”. If you use the definitions that I suggest then a great deal more clarity will start to appear around the potential strategy that you should adopt.

I suggest that market should mean – a group of people / organisations who have the desire & ability to buy products to satisfy a certain need or want ie buyers & their needs. Market therefore is not about your product or service (although of course related). I suggest that you spend a reasonable amount of time thinking about who the buyers of your products or services are / could be and what traits or characteristics they share. By being able to describe your market(s) accurately and precisely you will subsequently be able to focus your sales and marketing efforts far more effectively.

When thinking about markets (ie buyers) you should also consider:

* How attractive are your products and services to these buyers
* And how attractive is the market to you – is it clearly defined, growing, shrinking, are external influences going to affect its size in future, are they easy or difficult to persuade to buy, and so on.

I’d suggest that industry should mean – sellers that offer products or services that are similar or substitutes. Sellers sell into markets. So let’s say that you have founded a business offering disposable paper place mats for university canteens where businesses can advertise themselves to students. The classic Dragons Den question is “so what competitors do you have?”. Of course you would be wrong to say “none – we are the only people doing these advertising place-mats”. Rather you need to think about what industry you are in, and the answer is likely to be “the provision of advertising to target students” industry so your competitors would include – Facebook, local radio, advertising hoardings, Google Ads, free magazines etc. The key thing when defining your industry is similar or substitute offerings – you may think that you are unique but if your potential customers consider something else then that something else is in the same industry as you!

When thinking about industry (ie other sellers you should also consider:

* Can you sustain any advantage (indeed do you have any advantage?)

* How attractive is your industry (more on this below)

4 – Attractiveness of an Industry. Of course different industries have different levels of attractiveness and you should be aware of that right at the outset. But it isn’t necessarily the case that you should only operate in attractive industries and disregard unattractive industries. Good business can be created in “unattractive industries” and it is perfectly possible to fail within what would be viewed as an attractive industry. The analysis that you perform to establish that an industry is “attractive” can be carried out by the rest of the business world too, so others might stampede into the industry and change its attractiveness quite quickly. Industry analysis doesn’t ensure that you have picked a winner, it just means that you are well informed about your business environment.

The defining work on industry analysis was carried out by Professor Michael Porter of Harvard Business School and published in his 1979 book “Competitive Strategy” – Porter’s Five Forces.

Porter’s Five Forces

Competition: How strong is the rivalry posed by the present competition? The various factors, include: the number of firms in the industry, rate of market growth, economies of scale, customer switching costs, levels of product differentiation, diversity of competition, level of exit barriers.

Barriers to entry: What is the threat posed by new players entering the market? The various factors include: capital costs of setting up,highly specialised equipment, level of protection of necessary intellectual property, scale and branding of existing competitors, government regulations.

Substitutes: What is the threat posed by substitute products and services? The various factors include: the cost to customers of switching to a substitute, buyer propensity to substitute; relative price-performance of substitutes, product differentiation.

Supplier bargaining power: How much bargaining power do suppliers have? The various factors include: number of possible suppliers and the strength of competition between them, whether suppliers produce differentiated products, importance of sales volume to the supplier, cost to the buyer of changing suppliers, vertical integration of the supplier or threat to become vertically integrated (ie the degree to which a firm owns its upstream suppliers and its downstream buyers).

Customer bargaining power: How much bargaining power do customers have? Factors that will effect the bargaining power of a customer include: volume of goods or services purchased, number of other customers, brand name strength, product differentiation, availability of substitutes.

5 – Spider diagram. Understanding how your business compares to the competition and to customers perceptions of value is a really key element of strategy. A great way to form a better understanding is to establish the key important dimensions (by asking the people who matter, customers) and then representing them graphically using a “spider diagram” such as below. You can map how your business measures up and how the competition measure up and then it will be readily apparent where areas of competitive advantage / disadvantage lie.

6 – SWOT. Dear old SWOT (strengths, weaknesses, opportunities, threats) – it hardly needs any introduction

Strengths weaknesses opportunities threats

After a business clearly identifies an objective that it wants to achieve, SWOT analysis involves examining the strengths and weaknesses of the business (internal factors); and considering the opportunities presented and threats posed by business conditions, for example, the strength of the competition (external factors).

Don’t fall into the trap of SWOT becoming two lists – one of “pros” and the other of “cons” and make sure that you use it critically and with clear prioritisation. So for example, weak opportunities shouldn’t balance strong threats.

7 – The Sales Funnel. Strictly speaking this isn’t a pure strategy tool but a very powerful sales strategy analytical tool nonetheless.

If your problem is with generating interest and awareness, then look at your PR – where are your target market seeing you talking about what you do? Are you engaging with your target market? If your problem is with generating leads, then how well are you explaining how you meet your target market’s needs with your products or services? If your problem is with converting leads into serious buyers, how well are you encouraging your buyers to take action? How well are you demonstrating your credibility and expertise to solve their problems? If your problem is with closing the sale, what objections are you hearing from your potential buyers? How are you overcoming these objections?

8 – The 4 P’s. Again the purist might argue that this is marketing strategy rather than pure business strategy – but we don’t mind what you call it because it all helps to being a more successful business. There isn’t the space here to do justice to the 4 P’s of marketing but to skim the surface they are a framework for evaluating the marketing strategy for a product.

Price: the pricing strategy employed by a firm for a particular good or service will have a significant effect on profit.

Product: differentiation is a source of competitive advantage. Product differentiation creates value in the mind of the consumer.

Position / Place: the physical location of a good or service can be a source of competitive advantage.

Promotion: is used to enhance the perception of a good or service in the minds of customers. A promotion will draw peoples attention to any features of a product that they might find attractive.

9 – Strategic Advantage. Following on from his work which resulted in the “Five Forces”, Michael Porter suggested that businesses can adopt one of four generic business strategies, as represented in the diagram below.

Generic strategies

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.