Could Your Business Benefit from an Advisory Board?

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by Michael Iverson

Self-reliance is a characteristic of most successful small business owners. When an important business objective needs to be accomplished, an owner often takes a hands-on approach. In my experience, the owner’s personal involvement usually assures that the objective is met.

There is a possible downside to self-reliance, however; an excess of self-reliance can stunt business growth. It’s possible for an owner to give too much weight to his own ideas, when listening to the ideas of others would yield better results. To guard against this possibility, many business owners establish advisory boards.

What Is an Advisory Board?

An advisory board is a group of peers that a business owner consults periodically and informally. Members of the advisory board provide perspectives and experience that help fill gaps in the business owner’s knowledge base. In other words, a humble business owner realizes that he doesn’t have all of the answers. Advisors usually make their most significant contributions by helping to shape strategic direction for the business, although some are capable of suggesting operational improvements.

Members of the advisory board are invited to serve because they are respected and trusted by the business owner. The business owner has a personal relationship with each member of the advisory board, so everyone has an interest in seeing the business succeed. Advisory board members serve on a voluntary basis; they have no fiduciary responsibilities to the business. They must not be afraid to offer honest opinions, because opinions and ideas are their principal contributions to the organization’s success.

Getting Started

Many business owners see how useful it would be to have an advisory board, but there’s an obstacle to putting such a board in place. The owners are so involved in the details of day-to-day business that they haven’t cultivated many professional relationships. Don’t let that become your excuse for not establishing an advisory board.

Good candidates can be found through a local business organization (Rotary Club, for example). Or, an owner can identify and approach retired executives with knowledge of the industry. Current business contacts are another source of excellent candidates. A supplier or vendor certainly has knowledge of your operations and an interest in your business success.

Recruit advisors whose skills and knowledge bases complement your own. Think about the biggest challenges you face in building your business and add advisors whose strengths speak to these challenges. No matter what business challenges you face, others have successfully addressed many of the same issues. Your task is to find them.

An advisory board should be a small, manageable group. Typically, the right size is three to six advisors. Knowledge of your industry is helpful, but it shouldn’t be a pre-requisite. At least one or two advisors should be from other industries. They will lend fresh perspectives. A good mix of advisors includes people from varied disciplines: sales, marketing, engineering, finance, human resources and legal, for example.

Compensating advisory board members is discretionary, but most business owners feel strongly that advisors should be compensated to reflect their contributions to an organization’s success. There are many ways to show your appreciation for a person’s valuable input. Gifts, dinners and cash bonuses are a few ways to express that appreciation.

If you would like to discuss how your business can establish an advisory board,contact us.  We’re glad to share our ideas!

Understanding Fixed and Variable Costs and Your Break-Even Point

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by Michael Iverson

Running a business is difficult enough when you have a good grasp of your cost structure. If you don’t understand the relationship between your fixed and variable costs, achieving financial success in your business will be challenging. Let’s take a closer look at these costs and what they mean for your business.


A fixed cost, simply stated, is a cost that is incurred whether you generate $1 of revenue or not. For example, building rent is typically a fixed cost. A landlord charges a flat fee per month for use of a property. The rent amount will be the same whether a company sells $1 million worth of goods and services or nothing at all. Other examples of fixed costs include insurance, equipment leases, and non-hourly administrative salaries.


A variable cost is incurred as a function of generating revenue. If you do not sell no product or service, you don’t incur this costs. You begin to incur variable costs as you generate revenue. Variable costs include direct hourly labor related to the provision of a service or the manufacture of a product. It can also include sales commissions paid, the cost of raw materials, distribution costs, and utilities expenses related to manufacturing activity.


Metrics You Should Know


Average fixed costs—Identify and quantify the fixed costs associated with running your business, and calculate the average fixed costs for a month. Monthly averages typically work well because some businesses have a degree of seasonality to them. In the example below, Acme Company had average monthly fixed costs of $241,891 for the year 2013.

Average variable cost as a percentage of sales—Simply divide average variable costs for the period by sales for the period to calculate this percentage. If Acme Company had average monthly variable costs of $341,985 and average monthly sales of $856,803, its average variable cost as a percentage of sales is 39.9%.

Break-even point—The sales level at which Revenue equals Total Costs is known as the break-even point. As the term “break-even” implies, Profit is zero after you subtract all of your variable and fixed costs. It can be expressed as the equation:
Revenue – (Total Variable Costs + Total Fixed Costs) = Profit


It’s important to know your breakeven point so you understand at a minimum how much in sales volume you need to generate just to begin to make a profit. Let’s apply the principle to our Acme Company example: 

Avg. monthly sales $856,803 x 12 mo.= $10,281,636 Annual Revenue

Total Variable Costs = $2,902,696

Total Fixed Costs = $4,103,820.
$10,281,636 – (4,103,820 + 2,902,696) = $3,275,120


In this example, Acme Company earned a healthy profit of $3,275,120 for the year 2013. To determine the break-even point, we want to find the sales level where profit equals zero. By definition, fixed costs are static no matter the level of sales. We know the variable costs as a percentage of sales are 39.9%, or .399 for purposes of our equation. We solve for the unknown figure, Sales: 

Variable expenses / (1-.399)= sales required for breakeven $2,902,696 / (1-.399) = $4,829,777


The break-even point is $4,829,777 of sales revenue. Acme Company must generate this level of sales before it can start generating profits for the year.


Managers find it helpful to know the break-even point for purposes of business planning. The break-even point is a basic, but important, business metric. Once a manager becomes familiar with this relationship, he or she gains an understanding of how much the business can expand before adding more capacity—which means adding higher level of Fixed Costs.

If you would like help in finding your business’s break-even point, contact us.  We’re here to help!

Will You Sell to a Strategic Buyer or a Financial Buyer?

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by Michael Iverson

 

In the recent article Identifying a Likely Buyer of Your Business, I suggested a number of parties that might be interested in purchasing your business. To review, possible buyers include:

  1. Your management team
  2. Employees of your business
  3. A Family Member
  4. A Competitor, Business Partner or Vendor
  5. An Unknown Investor or Investment Group

These potential buyers can be classified as either Strategic or Financial.

A strategic buyer has knowledge of both your industry and your company. This kind of buyer has a compelling business interest in a possible acquisition of your company. The business interest might be as simple as buying out a prime competitor to achieve dominance of a local market. Or, perhaps a buyout is pursued with the intention of significantly expanding the business.

Typically, strategic buyers are willing to pay more for your business than financial buyers. A strategic buyer is familiar with your business or industry and optimistic about the prospects of your business enhancing his or her existing business. A strategic buyer isn’t afraid to pay full value for your business, because he or she expects to experience significant benefits when the two businesses are combined.

In contrast, financial buyers often have little or no knowledge of your industry or your company. This type of buyer is interested in acquiring your business’ cash flow, and motivated to buy at a discount – as a sort of hedge against his or her lack of familiarity with your business. Some financial buyers aspire to cut expenses of your business to boost profitability and flip the business in a short period of time for a profit.

Given a choice between selling to a strategic or a financial buyer, most business owners would rather sell to a strategic buyer. The price is usually closer to what the owner perceives as full value. In addition, the impact on employees is usually less.
If you have an exit plan in place, you increase your likelihood of selling to a strategic buyer, including identification of likely buyers. If you don’t plan your exit, you might end up selling to a financial buyer for lack of better options.

How Price Is Determined

Businesses for sale are usually valued at some multiple of operating earnings. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a variation of operating earnings that many investors use to compare profitability between companies and across industries. It strips away the effects of financing and accounting choices to focus on true operating profits.

Depending on the buyer, an offer for your business may be based on current year’s EBITDA or average EBITDA for the past three years. Typically, some multiple of EBITDA is offered; the multiple varies by industry. For example, 1.5 times EBITDA could be the offer for a business in a steady but low-growth industry, while 6 times EBITDA might be offered for a business in a high-growth industry. Any offer’s value also depends on whether you’re selling to a strategic or a financial buyer.

To learn more about the type of multiple your business might command, or to talk about developing a plan for its sale, contact me at Trillium Financial.

Selling Your Business: What Can You Expect From a Due Diligence Review?

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by Michael Iverson

Selling a business can be an exhilarating experience. Meeting with potential buyers, presenting the business in the best light possible, fielding inquiries, receiving preliminary bids and conducting early-stage negotiations is all part of the process. It’s pretty exciting compared to a typical day at the office.

At a certain point in the process, however, the excitement of an impending sale gives way to something much more serious. The would-be buyer’s offer is usually contingent upon completion of a due diligence review. The buyer gets a chance to conduct a very thorough examination of the business. If the review uncovers unpleasant surprises, it may be possible for the buyer to walk away from the deal.

No Stone Unturned

The buyer may well be making the biggest financial commitment of his or her life, so he or she wants to be sure about the purchase. Confirmation usually comes from outside professionals who advise the buyer through the due diligence period. At the very least, expect visits to your business by an accountant and an attorney representing the buyer. These experts will advise the buyer about whether he or she is making a wise purchase decision. Make sure everyone handling your data has signed a Non-Disclosure Agreement, then provide them the information they request.

Information requests from the buyer’s accountant are likely to include, but not limited to:

  • Financial statements for recent years and related audit reports
  • Tax filings for recent years
  • Financial projections, capital budgets and strategic plans
  • The business’ general ledger and schedules of Accounts Payable and Accounts Receivable
  • Schedule of inventory
  • A schedule of capital equipment, its location(s) and copies of purchase contracts or leases
  • A schedule of depreciation/amortization calculations related to equipment
  • A list of real estate owned or leased, plus copies of mortgages, deeds or leases
  • Analysis of fixed and variable expenses
  • Details of debt covenants and credit lines

The buyer’s attorney will likely want to review the following documents:

  • The company’s Articles of Incorporation, Bylaws and Minutes of the Executive Board
  • The company’s organizational chart
  • The company’s list of shareholders
  • Certificate of Incorporation
  • A schedule of any intellectual property of the company, including trademarks, trade secrets, patents, licenses, agreements with personnel and consultants providing technical know-how.
  • A list of litigation settled or pending; regulatory proceedings against the company; environmental actions pending.
  • Insurance coverages protecting the company and Executive Board from general liability, personal liability, product liability, errors and omissions, workers’ compensation, etc.

In addition, the buyer will want to see information about your product or service lines, customers, key suppliers, major competitors, and marketing programs of the company.

As you can see, the process will test your record-keeping and organizational skills. I often stress the importance of developing a business infrastructure. This is the occasion when all of the time and effort pays off for having a well organized and documented financial, operational, sales, and administrative processes.

Managing the Process

The buyer and his or her advisers have every right to gather the information they need to evaluate the business. You have every right to make sure their work doesn’t become disruptive to your business, your employees’ work and your clients.
Manage the process by setting a few guidelines for retrieval of information. The buyer’s requests should be made directly to you, or your designee. If the provision of information cannot be immediate; encourage the buyer to request things in advance.

The due diligence process can be very intense and emotional. Have key advisors to surround yourself so that you can keep your eye on moving the business forward. Understanding what to expect can save you a lot of time and emotional energy.