It can be difficult to accurately place a value on a potential investment. A common mistake is to estimate using historical data such as previous profits or assets owned, when in actuality it is far more useful to try and work out the future potential of the company. This is known as the investment approach to valuation:

• Discounted cash flow (DCF) is an estimate of the amount of money a company will make in the future, taking into account that money earned today is worth more than money potentially earned in the future, resulting in a discounted rate reflecting the uncertainty and risk involved
• Net present value (NPV) is the value derived from discounting future cash flow back to the present by a percentage representing the minimum desired rate of return
• Long-term cost of capital is a popular rate used when discounting. The level of risk is also a large factor in determining discount rate – for example, purchasing a foreign business in a different market sector would result in a much higher discount rate than a local business in the same market
• Terminal value (the amount expected to be received when the business is sold) is often also considered. However, only private equity investors usually expect to sell the business within five years - most purchasers see an acquisition as a long-term investment
• Internal rate of return (IRR) is the flip side of NPV and is used to work out a break-even rate of return. It is possible to find out which level of discount rate will result in a positive or negative NPV. A business attempting to assimilate a supplier may be happy with an IRR of 15%, whereas a venture capitalist financing a startup could want an IRR of 35-50% in order for the risk to be worthwhile
• These techniques are best used as a comparison between different potential investments than as a way of deciding whether to invest at all

Hat-tip to Robert Moore from Business Data International Limited

The process of taking over another company can be a very exciting time for you and your business, but it can very quickly turn into an unpleasant experience with serious lasting consequences. Here are some of the biggest mistakes made by companies during takeovers:

• Inadequate due diligence – You need to have done extensive research into the finances, existing contracts and liabilities of the company you are buying in order to avoid lawsuits, extra expenditure or loss of sales.
• Ignoring the culture of the target- If you underestimate the importance of culture then you are likely to experience some clashes, as no two companies will ever seamlessly fit together. To avoid misunderstandings and conflict from the beginning it is best if you set down a clear and consistent policy favouring the dominant culture.
• Forgetting to keep customers informed – You will need to reassure customers that the takeover is in their best interests because your competitors will attempt to unsettle them during this period.
• Failing to retain key employees – It is possible that competitors will also try to steal your best employees at this time by playing on insecurities they have about their own future within the company. You must reassure them and also be forthcoming about job cuts because an atmosphere of uncertainty will lead to false rumours spreading.
• Overpaying for target – Do not get carried away and end up paying far above the market value of the target, especially in e-business where it can be easy to over-estimate the value of a company because of the amount of potential you believe to be there.
• Bad leadership – Without a clear and powerful leader to drive the takeover forward it will stagnate. Make sure that if you are creating a combined managerial team from the two companies everybody is sure of their role.
• Not understanding foreign markets – A cross-border merger can easily fail if you simply assume that things are the same in another country. Legislation or consumer attitudes towards products and advertising can be vastly different.
• Poor IT integration – This process is never as simple as just swapping one IT system for another. In order for the transition to go smoothly it will require a lot of planning.
• Failed brand consolidation – It will be important for you to have a clear idea of how you want to manage the new brands you acquire. Maintaining a brand can be expensive in marketing terms so you may wish to drop some entirely.
• Mis-timing the takeover process – You will need to get the timescale just right in order to be successful. Rushing to completion could ultimately result in a poor merger with aspects overlooked, but going too slowly will only extend the period of upheaval further.

The best advice for completing a takeover successfully is to consider all the areas that could potentially go wrong and make sure you have a comprehensive action plan to guide the company through this period.

Hat-tip to Robert Moore from Business Data International Limited

If you decide to buy an already existing small business it is useful to be aware of some of the VAT issues involved. Overlooking the importance of VAT will at best result in delays closing the deal and at worst could cost you a lot of money. Of course, you should always consult a specialist accountant if you have any detailed queries, but it can be helpful to know about the big issues:

• If you are buying a business in the hotel trade, education, financial services, charity or property industry you will be subject to specific VAT rules - so consult you accountant
• Usually VAT consideration comes down to two options – a transfer of a business as a going concern (TOGC) or an asset sale
• A TOGC is outside the scale of VAT. To qualify, a transfer must meet all these conditions:

1. The new owner must be in possession of a business that can be operated as such
2. The business (or part of it) must be a going concern at the time of transfer
3. The assets transferred must be intended for use in the same kind of business
4. There must not be a series of consecutive transfers of the business
5. If the seller is registered for VAT the buyer must also be registered, either because all the conditions for compulsory registration are met, or accepted for voluntary registration
6. There must be no significant break in trading right before or after the transfer
7. If only a part of the business is being transferred, it must be able to operate separately as a standalone business

• If the business does not meet these conditions it is likely to be classed as an asset sale and VAT will be charged
• Any land or property included in the transfer will need investigation, as although they are exempt by default there are exceptions (such as if the owner has chosen to tax their interest in them). Make sure this is investigated and sorted out before the deal is completed as you will be stuck with a larger tax bill otherwise

Hat-tip to Robert Moore from Business Data International Limited

As a small business owner it is possible that at some point in the future you will find yourself entering negotiations with another company, perhaps because you have become so successful that you wish to buy a competitor or because you feel it is time to sell up and move on. Negotiations are delicate processes that take a long time to conduct and often fall apart, sometimes even in the final stage. Here are some useful tips that may come in handy if you ever have to participate in negotiations:

• Have clear goals in mind going into the negotiation process and do not lose sight of them. If you remain mindful about these important issues you will not mind conceding the smaller things
• Do your research going into negotiations as it could provide you with the upper hand if the other party has a weakness that you able to find out about
• Use psychology to understand the aspirations of the other party. If you are buying a business the owner may feel loyalty to their staff, so if you demonstrate the measures you are putting in place to safeguard their employment it will reassure them
• Try to have a team of strong negotiators (senior management or good salesmen) who can make a positive impression on the other party. You can role-play the negotiations beforehand with them to get some idea about how it is likely to go
• Do not make your opening offer too early into the negotiation process. After getting to know the other party well, you may come to find that your planned opening gambit is inappropriate and you can adjust it accordingly
• Make sure your opening offer is credible and does not undermine the other party. A well delivered serious offer sends a clear message that you are close to sealing a deal. Try to be the first to place an offer on the table as you will gain a huge advantage in setting the tone for the rest of the negotiation (although you may rarely miss an unexpected great first offer from the other party)
• Avoid indecisive language like ‘we are hoping for / would like’ as this will make you seem lacking in focus or weak
• If you encounter an offer from the other party that is so far removed from your own objectives it offends you, let them know this in order that their next offer is vastly improved. Do not be rude to them but make sure you convey the message through the words you choose and the body language of you and your team
• Plan beforehand the concessions you are willing to make to close the deal. Try to make the other party concede first and try to arrange it so that the concessions you make are actually not a huge loss to you but would be a huge benefit to them
• Do not be reluctant to remove yourself from negotiations (even at a late stage) if you are unable to satisfy the main objectives you had at the start. Although it may feel like you have wasted your time, in the long-run you could seriously regret making an unsatisfactory deal if you settle for less than you wanted

Hat-tip to Robert Moore from Business Data International Limited

Recent research at LSE into the productivity gap between which leaves the UK trailing behind the US, France and Germany has found the main problem to be family-run firms. This somewhat surprising conclusion suggests that family-run businesses suffer from poor management practices. The report author Nick Bloom was so convinced of his findings that he urged Gordon Brown to drop the 100% inheritance tax relief given to family businesses.

The problem is not passing down ownership of the business to the next generation but passing down control. Selecting a Managing Director from within the family means that the choice of managerial talent is severely limited. This is especially important in large corporations which require a skillful CEO and not someone who is young and inexperienced.

In addition, if the eldest child is groomed from an early age to be the eventual successor it can actually lead to them coasting through their education and the early part of their career due to a lack of motivation. They may feel there is no need for them to try because they are guaranteed top job, therefore they do not develop the skills to be able to do the job well. It can also lead to low morale within a company because there is a ‘glass ceiling’ that employees will never be able to be promoted above as they are not part of the family.

The report recommends that forBritain to close the productivity gap with the US , business owners should consider only passing equity stakes to their children and giving the running of the company to somebody else.

Hat-tip to Robert Moore from Business Data International Limited

An important consideration for a small business owner when looking towards the future is the possibility that the ownership of their business may change. In fact, a third of privately owned businesses in the UK expect that this will happen to them within the next ten years, a slightly higher amount than the worldwide average.

Over half of all business owners in South Africa and New Zealand expect a change of ownership, the highest level in the world. At the other end of the scale, only about a tenth of Russian and Indian businesses expect a change. Businesses in the Phillipines, a rapidly developing nation, have in the past two years gone from almost no expectation of ownership change to nearly half of all business owners thinking it will happen to them. This is in contrast to the UK where the figure has remained the same since 2003, although if the anticipated crackdown on capital gains tax relief happens then a large increase is expected.

The reason for different countries having such huge differences is thought to be related to low interest rates, banks willing to lend and successful businesses with high profits creating an entrepreneurial culture. This is particularly true in the high levels of anticipation of business ownership change throughout the western world.

For many businesses in the UK it will be useful for them to have some form of an exit plan in case the day comes when it seems like the right time to sell. This is because:

• It will be one of the most important decisions you ever make, both for the company and your own finances
• In order to continue the success of the business following a transition of ownership meticulous planning is required
• You will wish to make as much money from the sale as possible!

With this in mind, the commonest forms of ownership change in the UK are:

• Trade sale – over half believe that they would sell their business to someone else when the right time arrives
• Management buy out / buy in -16% of UK business owners believe they will sell their business to the management team within ten years
• Private equity investment – 13% feel they are likely to be bought out by investors, lower than the global average expectation of 20%
• Flotation / IPO – only 8% feel they are likely to make a public offering in the next ten years

Hat-tip to Robert Moore from Business Data International Limited

Many of you seem to be looking at franchising to get into business, while this can be a relatively painless start to your own small business, caution is essential. I thought I write down some pointers of what you should have in any franchise contract, this is not a nice to have list, but the bare essentials. This list could easily be much longer, depending the area you work in:

• Sell/transfer - you need to have the right to sell or transfer the ownership of your franchise at will;
• Products & Services - obligations to the franchisor, for example buying products and services;
• Territory - exact and precise boundaries of your franchise territory;
• Training & Support - this is why your are doing this, so make sure you get what you need;
• Pricing - exact and precise pricing, commissions or rentals of all product and services;
• Termination - make sure you can get out if you have problems;
• Investment - how much and when do you need to invest.

This all should be based on previous exhaustive research and information gathering on the franchisor.

• Companies financial health, history and management team;
• Bankers and other professional advisors to the franchisor;
• Companies track record, how long has it been going;
• failing that precise details of pilot operations;
• detailed description of franchise and territory;
• number of existing franchises and the right to talk to any of them;
• Initial and any other payments to franchisor;
• realistic business planning data, cash-flow, profit and loss;
• find out how exactly the franchisor makes their money;
• realistic working capital need, long term viability of franchise;
• take a bank reference;
• training and support guarantees from the franchisor;
• help with raising finance;
• restrictions if there are any;
• get a sample contract.

Again this list is not exhaustive, but should help you to get started. Every-time during your evaluation period if you have a question, write it down and ask. It is a bad sign if questions you have will or can not be answered. Do not fall for pressure sales tactics. You should walk if your questions are not answered without a good explanation or any of the following happens:

• Says: “Act now to get in while it is still cheap”;
• If it is all too easy with huge profits from day one;
• any problems with franchisors directors or officers;
• demands large up front license fees;
• does not know the market they are operating in;
• evasive on access to existing franchises.

A franchise can be exactly what you where looking for, but it can also turn out to be a nightmare, like any business you need to be careful and do not get carried away by the sales pitch. Talk it though with an accountant, to make sure the figures add up.

If it sounds to be too good to be true, it …….. . ST.

Two professors, Julian Lang and William Bygrave, from Babson College in the US have found that the business performance of businesses started, with or without business plan, was unaffected.

This finding is not entirely surprising, since I believed for a long time, that getting too hung up about business plans can be a great waste of time, especially if you are not in a position to evaluate all variables that make up small business success.

I still believe cash-flow forecasting, SWOT analysis and a simple business goal sheet are helpful as far as business focus is concerned. A full business plan however, in my opinion is often a waste of time.

Some people plan and plan, but never start a business, why is that? If you are looking for problems you will find them. ST.

Don’t get confused about what you, the business owner of your small business or start-up business, like SOHO-, SME, SMB-, Micro-, Lifestyle-, Home-, DIY-, Hobby-, Boomer- or Personal business, like professional, contractors, freelancer, self-employed, sole-trader and virtual assistants, should be doing? You need to do both of cause!

Unfortunately working in your business, like answering the phone, writing bills, doing the wages, talking to customers and so on is all that most business owners do. Research shows that most believe that this is all their is to do! That is very wrong and also the reason why many businesses fail.

Working on your business means to looking at it from the outside, remembering all these little customer comments, imagining a new type of technology to be employed in the business, changing the way you advertise, in other words making changes to the business, the whole business:-

• that will improve performance,
• enhance external communication with clients,
• improve the clients experience,
• cut costs out of your business,
• and many other aspects of your business.

That is in reality the most important part of what a business owner should do - plan the future. Working in your business, will make sure you you can pay your bills next week or even next month. Working on your business is all about still having a business next year or the years after that - that has to be the most entrepreneurial thing you can do.

Have a vision for the future - work on your small business - have a future! ST.

It is fair to say, that the only constant in life is change. While I always caution people, that change is not necessarily progress, it is also correct that change is what is creating new business opportunities every day.

It is living with this change and realizing the opportunities change generates that is the important process here. So how could a small business and start-up business, like SOHO-, SME, SMB-, Micro-, Lifestyle-, Home-, DIY-, Hobby-, Boomer- or Personal business, like professional, contractors, freelancer, self-employed, sole-trader and virtual assistants go about seeing these opportunities?

The answer sounds easy, but requires patience, you need to look at your chosen market segment from the out-side. You have to become a judge, not a participant. Look at all the trends and judge them, find ways to improve upon techniques and find out what people are talking about.

Don’t be blinded by your own business, if you already have one. You must realize, that you can ignore or unfairly discredit someone else’s idea today, only for them to come back and kill your business tomorrow. Fighting a trend is futile and a wasted opportunity.

If something you see is better, appropriate it, in business that is called “best practice sharing” or “benchmarking” - within reason of cause! ST.