Loans R Us

While most of the news in the Wall Street Journal this week was pretty bleak, a small business feature on franchising opportunities talked about an innovative financing idea.  The gist of the piece is because small business lending is so hard to get now, franchising companies are including a service to help you get financing as part of their deal.  According to the article, assisting putting the right borrower with the right lender really makes a difference.  They cite an example of a home health care franchise that was finding less than 10% of their new franchisees could get financing.  Now that they have a program together, they are finding 75% of their applicants can get funding.

While this is good news, it also reminded me that people looking for opportunities beyond their current job (or unemployment) should make sure to consider the details of what it will really take.  I’m going to excerpt a wonderful example here from a blog called Flock Free Nation

Bob has a job where he earns $50,000 a year. He wants to be his own boss so he buys one of the smaller fast food franchises where he takes home $50,000 in profits every year. He is his own boss and he makes the same income as before. Sounds good right? Not so fast.

To have a business where he earns that same $50,000 he had to:

• Pay a franchise fee of approximately $25,000
• Pay $150,000 for equipment and leasehold improvements
• Pay $20,000 for inventory and working capital

The post goes on to point out that while Bob is financing all this, the point of leverage is supposed to be that it earns you a return.  He’s still working the same (let’s face it -- more) hours and he’s getting the same salary.  Now though, he’s got an increase in both risk and expenses.  That said, he’s presumably doing work he finds more rewarding.  The other possibility is that as he gets the hang of running the business, the math will improve.  My suggestion is to at least do this type of math up front, so you’re clear on what you’re really getting into.

My college roommate left a job to run her own company.  She’s doing really well given that it’s a new business and the economy is terrible. She is definitely engaged in a way that she never was in her old job.  However, even she admitted to me, “It’s like the difference between falling in love and being in the relationship.  Now I’m starting to see the flaws…”

Price = Value

I remember when being on LinkedIn meant you were tech savvy for a non-tech person.  I also saw the shift to “you are completely out of touch if you’re not on LinkedIn”.   Now I’m trying to get some lessons learned about business valuation from watching the IPO.  (I didn’t get any financial benefit directly, so this is an effort to make the glass half full.)  It helps that I’m fascinated by the question --  what is a business worth?  As we saw from the IPO, there were plenty of opinions, but those who voted with their pocketbooks put a much higher price in place than my calculator would have ever predicted.  (This is a digression, but I also do agree with the school of thought that says the MVP award goes to the bankers, who made money on this deal and set themselves up for future profits at LinkedIn’s expense.)

Opinion aside, let me be clear that the value of anything is the price someone will pay for it. A valuation is an idea of what something should cost.  A purchase or a round of funding involves a real price, and real value.  The goal is to position the business to capture maximum value so the price is as good as or better than the valuation.  Ironically, the key to good positioning is making sure you know the fundamentals behind the numbers and that they add up to the truth.  LinkedIn wasn’t overly modest about their prospects, but they also acknowledged challenges for growth.  Did their bankers leverage a perception of market scarcity by limiting the amount of stock and getting the offer out quickly?  The answer would be yes.  Putting your business in a flattering light is OK, just make sure it’s only the lighting and not the basic assumptions that are the subject of adjustment.

Another key point for building value comes from the June issue of the Journal of Accountancy.  I’m highlighting where this idea comes from to give it more credibility, as it may seem counter intuitive at first. 

CPAs can frequently spend too much time on numbers, and not enough time telling their company’s story. The company’s background, niche, management, strategy and other less quantitative matters, are colloquially known as the company’s “story.” The story is what investors will typically remember and is generally what will drive them to invest. The story generates excitement where numbers alone usually do not.

LinkedIn got a higher value because of the story.  You don’t need high priced investment bankers to have a compelling story.  I see small businesses almost every day that have a great story.  Good numbers are part of the price, but being clear on why the businesses succeeds and will keep succeeding ultimately is where you can unlock value that translates into a better price.

I’m going to stop now and go update my LinkedIn profile…..