Category Archives: Business Musings

Business Valuation

For a number of reasons I’ve had to discuss / review business values.   Based on that, I thought I’d discuss business valuation in more detail.  Let’s start with the most common valuation method which is the earnings valuation method.

The Basic Calculation

The basic calculation was calculated as follows – net assets multiplied by the earnings multiplier. Or written out:

(Assets – Liabilities) + (Profit  x Earnings Multiplier) = Business Value

Things however get complicated for a number of reasons.

Assets

Assets for most e-commerce businesses include the stock, furniture, website and the accounts receivable amounts.

Note, however that things can get complicated if the company has decided to purchase assets like furniture outright or has already applied depreciation.  In addition, you’ve got t o assess the value of a website which can be tricky.

Goodwill theoretically should be there. but Goodwill is often disregarded in cases like this.

Liabilities

Liabilities are generally easier to do.  You have Loans and Accounts Payable to worry about, but not much else..  Shareholder loans can be tricky as you need to assess what the loan requirements are – many companies have a substantial shareholder loan but no documentation attached to it.

Profits

Profits at first seem pretty simple – just take the Net Profit right? However, it’s more complicated than that.  When selling, you want to include things like the Owner’s draw and discretionary expenses (Add Backs) that might have been taken out of the Net Profit that are not necessary to the running of the business.

Often, especially with smaller companies; a number of discretionary expenses are added to lower the tax burden.  These costs shouldn’t be part of the actual profit and thus, the sale price.

Profit Multiplier

How about the profit multiplier? Well, this is tricky.  The multiplier can be as low as 1 and as high as 10 depending on the industry and the growth (expected or historical) of the company.  This is a harder number to find though business brokers or business sites like BizBuySell, etc can be a good place to start.  Generally, multipliers of 2 to 3 are quite common for profitable businesses.

Other Factors

Are there other factors to take into account? Yes, a ton.

  • Growth potential of the company can drive up the profit multiplier
  • A history of profitable earnings can increase you general profit, not to mention your profit multiplier (if it’s shown to continually increase as well)
  • Documentation and processes – a well documented business with policies & procedures that make it turnkey can significantly increase the value of a company
  • Seller financing (i.e. you being willing to be paid out from the profits) can increase the value of the company
  • Market share / ease of entrance into marketplace.  If you are in an industry that is hard to enter and/or have a substantial market share (i.e. market leader); you can often command a higher premium for the company

Other Valuation Methods

Lastly, let’s talk other valuation methods:

  • Book value (what’s it worth on paper?)
  • Liquidation value (great if the company is liquidated and/or not an on-going concern)
  • Debt-paying ability / Free cash flow (how much free cash does the company provide, thus allowing the business to be bought for that value)
  • Capitilzation of earnings (basically, figuring out the return the buyer can expect)
  • Revenue multiple (for high growth companies, this could be viable if they are not making any profits).

At the end of the day, there are a ton of methods of valuing a company.  It’s worth noting why a company is being sold too – if you approach a company ‘blind’; unless the owner was intending to sell the company; you are likely to pay a premium compared to one that is actively looking for a buyer.

Morality and business

One of the things that you need to consider when you are a business owner or  entrepreneur is deciding how far you’ll go.  Where is your line? Don’t think it matters?

Illegal Businesses

Would you take part in illegal businesses? Say selling drugs? For the vast majority, that’s a huge no.   For that reason, and because frankly I know little about this side of the world; I’m just going to stop here.

Grey Businesses

How about those that are arguably illegal.  Or mildly illegal.  For example, would you sell alcohol online? How about drop-shipping it? What about products that might be illegal in another country?

For example, the Canadian pharmaceautical business does a lot of sales into the US – even though it’s technically illegal to do so.  Except, the legality is in the US – it’s illegal for you to sell to them, but if you are Canadian, it’s perfectly legal here…

You probably are asking yourself, why bother? But the grey market businesses are incredibly profitable – because few people get involved in them, the markups and demand i often unmet.  You could make a lot of money that way – and I know a number of people in Vancouver who have.

There are obvious consequences to all this – for e.g. if the US got really annoyed with you, you might have to avoid traveling to the US at all.  See Mark Emery for one.

Legal Businesses

It’s all good right, no considerations on morality there? However, there’s something to think about when you deal with returns, refunds, shipments.   When do you stop being nice and when should you hold the line?

What if it’s an innocent mistake on the customer’s part?

On top of that, there are things that are legal but might not be moral.  If someone doesn’t defend their trademark, is it wrong to use it? What about buying products and re-selling them; even against the manufacturer’s wishes?

Decidng where your line is can be difficult, since often wherever you draw the line; there’s going to be money on the  other side of it, but it will help.

Adding products to your site

One of the most time consuming aspects of running this business is adding new products to the site.  Now, unless you are able to hook up your site to your manufacturer(s) or distributor(s), you’ll need to do most of this input by hand.  Which means it takes time.

In addition, there’s always the consideration of SEO.  Unique content is a must, and that means rewriting your product descriptions as much as possible.  However, to do that you  need time and expertise.  It’s not enough to just throw up some content and hope it’s good – you need ot make it both good and relevant.

So, what can you do?

Contract it out – you could hire some writers to work for you.  A writer with copy-writing (and web writing) experience could rewrite product descriptions.  It’s not a bad idea, after you input the product basics.  Costs would probably be in the $0.10 – 0.25 range per word; so not too bad unless like us, you have a constantly increasing amount of products / rotating products.

In-house – you could train people to do it in-house.  Of course, the question then is how good the training is.  Still, it gives you better control of what is happening in your business.

Copy & Paste – take a selective approach.  Rewrite the one’s that make the most sense, the one’s which have the best sales once they’ve done well. The rest – just copy and paste.  After all, not all pages have to rank – just the one’s that will give you funds.

 

E-Commerce Business: Web Development / IT Thoughts

If you want to run an e-commerce store, one of the major factors is that your entire business runs off a bunch of code.  You could run a B&M store without a single piece of electronic equipment in the store, but there’s no way you could do that with E-Commerce.  As such, you need to start considering how you want to manage the IT side of the business.

Within this, you have 3 major areas:

  1. Web Design – what your website looks like.  The HTML / CSS / Javascript side of the business for the most part.
  2. Web Programming – sometimes, it’s not a matter of adding new design elements to the site but adding new features.  Upsell / Cross-sell options, new payment gateways, new shipping methods, etc. all fall under this.
  3. Hosting – where your website lives on the Internet.

When considering each area, it’s worth considering whether you want to go to a:

  • in-house solution
  • contracted solution
  • Software-as-a-Service (hosted) solution

Your choices will vary depending on the amount of in-house expertise you have, the reliability of your contractors (and their expertise), your available funds and the frequency of updates in each area.

My personal recommendations generally boil down to keeping hosting contracted and varying between in-house and contracted solutions for web design & development depending on the size of the business.  If you are starting out, and don’t have the skills to back it up, SaaS systems are probably the best option.

Not to sound alarmist or anything…

Has anyone else noticed that this Christmas season has had a slow start? Normally, right after Rememberance Day; like clockwork we get this huge surge of sales on our site.  It goes up by 1.5 to 2x and just keeps climbing till a week or so before XMas.

Right now, it’s gone up but not to the same amount. I’d say we are at 1.3x our normal sales volume.

A bit worrying since we have been banking on a good Christmas to cover some bills.  Anyone else feeling the heat yet?

E-Commerce Perceptions

It’s strange working in the e-commerce field talking to disparate groups.  If you talk to your ‘run-of-the-mill’ general folk, once you explain what you do ‘sort of like Amazon‘; most of them nod their head sagely and go ‘oh yeah, great field; you are the next big thing‘.

Then you talk to people who work in Brick & Mortar stores, people whose livelihood are impacted by our new venture, by the Internet and you get a completely different point-of-view.  We are predators, we are everything that is evil and wrong with the world.  We destroy local businesses and savage communities. In short, we are the enemies of all the right thinking men.

It’s a huge contrast, from a quiet ‘yay, you’ to ‘death to the heathens’ attitude so many bring.  Sometimes, you’ll see it couched as other forms of discussion, how we are really ‘irrelevant’ or unimportant, how we are a small part of the economy.  If we are (and we are to some extent); why are you bothering to even comment?

It’s funny sometimes standing in the middle, just trying ot make a living.

Hummingbird & Search Query Unknown

So, Google’s been altering the way it works as usual.  Let’s talk:

Hummingbird

So, Hummingbird just released (okay, it was announced released – it’s been around for a month).  For our sites, we’ve seen a small drop off in traffic – not enough to say it had to do with Hummingbird rather than general movement.  However, interestingly enough our page views have gone up which shows better engagement so it might actually be Hummingbird doing a better job.  Conversions took a drop but not significantly, which could be attributable to any one of a milllion things too.

Overall, Hummingbird seems to be a non-starter since it targets longer tail words anyway; and those have always been harder to focus on when you are an e-commerce business like ours.  With so many new products appearing all the time, it’s just tough to generate any good in-bound links to a product.  Worst, more often than not those links just disappear anyway.

Search Query Unknown

What has been worst for us is the complete rollout of the (unknown) search query use by Google.  That hurts – a lot.  Sure, other non-online marketers have been dealing with the lack of data forever, but we’re online – we get data damn it.  It really is frustrating, and will make SEO so much harder in the future.  Not knowing what the number of search queries for a term and whether it’s worth going for makes it more a blind guess.

Mind you, Adwords is doable and combining search rank data with page data will help; but that’s a lot more work.  Doable work, but more work.  Joy…

 

Business Mind

I’ve been talking (and have talked) to a few people about running their own business or taking an idea or current business to the next level.  The more recent pair already had existing businesses and were looking at expanding to a more formal setting.  It was interesting discussing matters with them, partly because I own and run a mildly successful business and partly because of how it illuminated the things I had learnt the hard way.

I never had a mentor when I started this business, partly because I felt I knew or could learn everything I needed to run it and partly because I had a strong network of friends who could provide guidance and information when I needed it on specialised topics.

One thing they didn’t teach me was the title of this post – a Business Mind.

What Is It?

Ever walk into a restaurant / grocery store / other business and then, just for fun, start scanning the business as an entity? Do you count the number of customers? Guess at their average transaction value? Take a stab at their expenses to figure out their revenue and expenses? Maybe even consider what processes / sales / marketing approaches you’d take.  All the with knowledge that this is idle speculation?

Yeah, that’s what a business mind is.  It’s a way of looking at the world that sees dollars and cents, processes and people and it’s something that’s hard to shut off.  Even in a random conversation with strangers, I find myself falling into that state of thinking.

For the Greater Good

When you start analysing businesses, especially those outside of your own area you are attempting to pick up new ideas.  Oh, sure – you might want to invest in those businesses later if you are rich and successful.  Mostly though, as an entrepeneur you are looking at these businesses for ways to make yours better.  It’s why it’s hard to turn off – any little good you can eke out can be applied to your business.

In addition, it’s a puzzle.  Perhaps because I’m a Geek, my mind likes puzzles.  Business is the biggest, most challenging puzzle there is.  The rules constantly shift, the players are numerous and unknown at times and there’s no set ‘win’ condition.  You can just keep playing.

Pieces on the Chess Board

Unfortunately sometimes you get too carried away.  You get drawn into your own world, and start forgetting that the people you are analysing are more than chess pieces.

You forget that not everyone has the same win conditions in their mind as you do.

And as a businessman, you always look for the downside.  You are always looking for the problems.  Which can be weird when you are talking to friends and family who just want some help.

Sometimes, turning it off is your best call.

 

Unfair Playing Field

I wrote a post on Starlit Citadel’s business blog. Yeah, yeah I should write more article here too. I will…

Anyway, the discussion was with relation to how some of the major e-commerce businesses out there can run losses for a much longer period than we can, and as such structure their company in such a way that they can / will make those losses.

I mean, when a public company is losing 80% of their revenue to COGs and Fulfilment, even minor variations in things like IT, Marketing and the like can seriously affect the profitability of the business.

I’m not sure I’d call it unfair per se – it is the field we entered and created in many ways, but it’s still a playing field that is heavily weighted in their favour.  So the trick for a small business is to learn to not compete directly against them.

Whether it’s entering a business sector that they have no interest in or perhaps taking advantage of a geographic benefit, you need to be able to compete on things other than free shipping and price.

What’s your answer to the Amazon’s & ThinkGeek’s of the world?

Business Follow Through

One of the most amazing aspects of business that I find is the lack of follow through by so many individuals who run their own business.  Time and again, I’ve met numerous consultants, individuals or businesses who lack the ability to follow through and achieve a sale.  Some personal examples:

  • 2 different businesses that I’ve offered to help set their e-commerce websites up at no cost
  • a restaurant that was supposed to help us schedule a party / dinner
  • logistics companies that don’t follow through on contact forms
  • a gateway provider we met in person who  never followed through with a quote
  • a freelance content writer who we were looking to hire
  • etc.

All of the above are real world examples of individuals and businesses who missed out on an opportunity for business.  In many of the cases, we were ready to buy and just needed a little follow-up.  Instead, we received silence.  So, remember – follow through whenever someone offers – you never know where it’s going to lead.