XYZ Company
June 2009
Thank you for the value you add to our business community.  We trust you will find the following articles useful for you and your clients.
 
If you know anyone who is thinking about buying or selling a business, we would be glad to assist them. Your referrals are appreciated.
 
Sincerely,
 
Joe Broker
 XYZ Company
555.555.5555
 
Valuing Your Business
An Owner's Litmus Test 

When business owners ask that familiar question - "What is my business worth?" - they might find the best answer in the mirror. Of course, there are always the financials to consider, but numbers fail to tell the whole story. Goodwill is important, but value cannot be based on it alone. The true value of a business can best be determined by looking at the person at the helm - the business owner.

As the owner of a business, you will want to ask yourself some hard questions. How do you measure up when it comes to attitude, management strategy, customer-service smarts, and community relations? Take the following litmus test and see if you make the grade.

1. Do You Think Positive?
Are you so focused on the bottom line that you forget to look at the clouds from time to time? Owning a business is the acknowledged American dream, yet many business owners allow themselves to get bogged down by the harshest sort of reality. They neglect to keep the dream alive, to think positively about the business today and tomorrow. In our technological world, it's easy to forget the importance of having the right attitude. If business owners aren't positive, how can they expect customers and employers-and at some point, prospective buyers-to be positive? The owner who sees only the downside of the business will probably not see a turnaround. Of course, there are always the real-life factors: banks that won't lend, customers who stop buying, services that become obsolete. However, if these problems didn't exist, the negative-thinkers would find a whole new set of problems to fret about.

If you feel you could do with some positive polish, begin with just that. Spiffing up the place of business with fresh paint, newly cleaned carpeting, well-stocked shelves, a cheerful potted palm or ficus - just to name a few suggestions - will speak volumes about the state of the business. 
 
Less visible, but equally key, is a positive plan for the future of the business. Business owners should be prepared to spend what it takes to generate new business, and they should take the time to explore new possibilities for long-range success. If the company currently has no mission statement or business plan, creating one will be evidence of the owner's enthusiasm for the future and for the ongoing success of the operation.

2. Are You a Macro or a Micro Manager?
In today's workplace, with a manager hovering at every corner, who has an eye on the big picture of the business? An owner who manages every manager and spends the rest of the time shuffling paperwork all day is estranged from the big outside world of the business. Owners should occasionally get out of the office to work the floor, drive the delivery truck, or sell the product. Owners who put themselves in the trenches are in touch with the business, and this first-hand understanding will be evident to anyone who assesses its value.

Part of being a macro, big-picture manager is preparing for contingencies. The value of a business increases dramatically when the owner demonstrates appropriate delegation of duties and provides a backup managerial plan. If the owner is the business, and personal disaster should strike-the answer to "What is the business worth?" is not a pleasant one.

3. Do You Smile When You Say "Customer Service"?
Do you avoid treating a customer like a number? Follow the lead of successful mail-order operations, such as L.L. Bean, who ask for the proper pronunciation of a customer's name and who do not automatically address the customer by first name. Basic up-front courtesies are important, but they do not supplant other customer service virtues such as patience and willingness to problem solve. Whether products and services are sold by phone or on the floor, employees should be up to speed on what they're selling. Nothing sparks a sale better than a salesperson with hands-on knowledge and expertise. This works for companies as large as L.L. Bean (whose employees seem to have Ph.D.s in every item in their catalog) or as small as a neighborhood bistro, where the waitperson can explain every nuance of sauce or vintage of wine. Every hour spent training employees in the product pays huge dividends for the business's long-term success.

4. Are You "Out There" with Community Relations?
Business owners need to keep their company's image "out there" and visible to the public. Advertising can build image at the same time it attracts business. Anything from a display ad within the yellow pages' listings, to a monthly newsletter (hard copy or on-line), to the offering of free seminars, positions the business as more than just the sum of its products. An example of a business owner with multifaceted image-making skills is a caterer in Asheville, N.C. This caterer dishes up the city's best lunches and dinners, whether for takeout or to eat with obvious relish at the small tables she sets out on the sidewalk. She sends out a monthly newsletter with recipes and manages to snag appearances on radio programs to talk about her commitment to buying local food. When Garrison Keillor's "Prairie Home Companion" (a production of Public Radio International) came to town, she volunteered to cater for the cast and crew. They ended the program by having her stand for a huge ovation. Her small store-front operation had a line the next day that wound around the block.

For the less adventurous, or conspicuous, there are plenty of more conservative ways to promote the business and its owner. Taking an active role in the Chamber of Commerce, getting involved in trade or service associations, and sponsoring worthy local events all contribute to great public relations. In addition to the more traditional public donations - providing kids' sports team uniforms, taking out ads in yearbooks - employees can join hands for walkathons or volunteer to work the phones for public TV or radio fundraisers. Being a good community partner is good for the business, good for the workers, and it's great for that reflection in the mirror that takes us back to where this discussion began.
Buying a Franchise
What It's Worth

When considering entering the world of franchising, an important consideration is assessing the value of the business. All of the following factors either affect or help determine valuations of typical franchise operations:

1. Franchise Agreements:
Typically, franchise agreements can cover a period of twenty years; sometimes with added options. In most situations where a franchise unit has fewer than ten years remaining on the agreement (and options, if any), the value would diminish proportionately.

2. Territory Exclusivity:
Many franchisors do not, as a matter of course, provide an "exclusive" to franchisees within a given territory. More commonly, however, the franchisor will offer a franchisee limited protection for five years, during which time only he or she will be allowed to expand operation to additional units. Even limited protection can be assigned some value; any current territorial rights may have additional -- and significant -- value.

3. Business Hours
Potential franchisees should consider operating hours when assessing the value of a business. Business in general, and franchise operations in particular, are staying open for increasingly longer periods -- some operate 24 hours a day, seven days a week. Locations in certain areas -- city centers, bus stations, train depots -- may open for shorter hours and fewer days. Since most business owners/managers would prefer the less demanding hours of operation, a premium value will be placed on these units.

4. Location:
This is the most obvious variable. A franchise operation in a suburban or small-town setting has a higher value than one in an inner-city or high-crime-rate area, regardless of other similarities (rent, sales volume, etc.).

5. Cash Flow:
Surprisingly, profitability may not necessarily be the key factor in valuing a franchise operation. A demonstrated, well-documented cash flow can definitely add value to the unit; however, the smart buyer will also look at other variables, such as unusually low food costs or labor costs, sales history, and potential for growth or improvement under new management in determining the overall value. Extreme situations provide the obvious exceptions to importance of cash flow: where the cash flow is extraordinarily high, capitalization of earnings becomes a truer method of valuation; where the franchise is actually losing money due to inefficient management, there would be some reduction in value.

6. Leases:
Taking into consideration market variation, the typical rent will be set at approximately ten percent of retail sales. Modifications in value could result if the lease does not cover a period of at least ten years.

7. Remodeling:
Many franchise agreements will require units to be refurbished within a certain number of years (ten is typical), with the franchisee bearing the cost. Since these costs typically fall within a range from $75,000 to $150,000, potential franchisees should pay particular attention to where the operation stands on this timeline. For example, a unit due for remodeling in a year or less could be reduced in value by a fair percentage of the cost of the improvements. The total cost would not be deducted from the value, since these improvements would also be expected to improve business anywhere from five to twenty-five percent.
In This Issue
Valuing Your Business: An Owner's Litmus Test
Buying a Franchise: What It's Worth
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XYZ Company
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Anytown, NY 12345
555.555.5555
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