Wednesday, January 20, 2010

Recession, Economy and the Future of Small Business

A few weeks ago we closed out Pinnacle's year of exit planning education with a special call with Rob Slee. Rob is the founder of Midas Nation (www.midasnation.com) which is a community that is dedicated to increasing the value of businesses. Rob is also the author of three books ‘Private Capital Markets: Valuation, Capitalization and Transfer of Private Business Interests’, ‘Midas Managers” and ‘Midas Marketing”. In addition, Rob is the Managing Director of Robertson & Foley, a middle market investment banking firm.

In short, Rob is a small business guru who is making dynamic changes to the way in which owners view their businesses and gain access and insights towards being more competitive. This, of course, ties into an owner's exit plans. After a stage of value-creation comes the logical next step of value-realization - i.e., an exit.

Pinnacle Members provided rave reviews of this call and how it will alter the message that they carry to business owners in 2010. Accordingly, we wanted to share the hightlights with you in order to encourage you to pay careful attention to how this new global economy will shape small business in the future, empowering you, the advisor / consultant, to deliver more valuable advice to your exiting owners.

The Title of our December Spotlight Call was:

Recession, Economy and the Future of Small Business

We offer below the salient questions and answers that were covered on this call:

1. What is the impact of globalization on the small business?
The majority of US small businesses are primarily focused on U.S, not foreign, distribution, so when the US market is in a recession there is no where else to focus the business. In order to be competitive, small business owners need to incorporate a global diversification plan. Understand that globalization is not a fad.

Comment: Rob likes to use a term for this behavior, he calls it the 'matrix of denial'. Similar to the movie, The Matrix, many owners are living in a world where they do not know that they are asleep (in this case, at the wheel). There has been a seismic shift in how business is conducted yet many owners are reluctant to engage in understanding these changes and the long-term impact they will have on their small business. Globalization is one of the largest of the 'denials' of small business owners and their failure to adopt their business models to address this demand leaves them more vulnerable to recessions and competitive forces.

2. How have the economy, and its meltdown, impacted small business?
In the fall of 07’ all sectors of asset classes were under-reserved and out of balance. This lead to the economic situation we’ve been working through the past few years. As a result, banks are still not lending and until they can get the toxic assets off the books and rebalanced they will not open their small business lending. For business owners who require revolving credit to operate, we’ve seen a lot simply shut down and walk away as a result of lack of funding.

Comment: Small businesses create the majority of jobs in this country. We are now talking about 'recovery' for the U.S. [and world] economies. One needs to ask the logical question, 'how will the sector of the economy that produces the majority of the jobs provide for new employment without access to capital'. Moreover, it is easy to observe that, although most owners are resilient, many are second guessing their expansion plans in the absence of stronger evidence of economic prosperity in the near future. It is simply too painful to be ahead of the demand curve and experience the discomfort of cash-flow constraints on the heels of this recession. Without the proper amounts of capital available for small businesses, this recession could be protracted.

3. How and when will the US jobless recovery resolve itself?
Rob believes it can take up to 3 or 4 years to work through the rebalancing of the asset classes. Add to that the fact that the companies that are prospering in the current economy are structured with minimal employees – they are not adding the mass number of jobs to the market.

Comment: There are two (2) relevant points here:

Point #1, amongst the major assets classes that are out of balance, there is a lot of work yet to be done. One only needs to listen to speculation on the near-term impact of commercial mortgage failures and credit card defaults to see that we are not quite out of the woods yet. That being said, the worst still appears to be behind us, although our next point illustrates what the future of small business will look like.

Point #2 is that today's businesses that 'add value' are the ones that leverage their intellectual property and make efficient use of resource partners. What does this mean? Simply stated, we are less in the 'own and control' economy and more in the Aggregation Age. This means that the businesses that will be successful are working smarter, not harder, at identifying the intellectual and other property that is in demand and finding cost-effective ways to leverage, or distribute, this content, service, or offering. Unlike the 'days of old', businesses that will do well in the future are not labor or capital intensive. Rather, they possess various 'assets' that can be licensed, distrubuted, franchised, repackaged, joint ventured, and / or merged with other 'channel partners' for maximum effective market penetration.

As Rob likes to say, the new business world is mostly about owning but not controlling your market / distribution channels. This is a market reality that many of the 'old line' business owners are not adopting to. Moreover, this model does not require many new employees.

4. How can these insights help business owners?
First, business owners need to think about what their business is worth today – they can’t get stuck thinking about what it was worth a few years ago. The compelling message for baby boomer business owners is to think about this recession and its impact on you, your family and your business. If they do not plan accordingly and plan for their exit now, they may hit a subsequent recession when they are in their 70’s.

Comment: There is a rather predictable trend that can illustrate 'windows' for an owner to exit their business. And, with the right advice and guidance, owners can be well-prepared on a personal and business level to meet the market during the optimal exit time periods. Despite this predictability, most owners will not be prepared for their exit. This is where we as advisors and consultants can be most helpful. We can raise the awareness of owners and help them see that without proper planning and preparation, they are leaving themselves exposed to the risk of another recession and further loss to the illiquid wealth that they need for their post-exit goals and lifestyle.

5. What is Midas Nation?
The idea behind Midas Nation is to improve the value that small businesses add to our nation – for our generation and for generations to come. Behavior modification is a two year program that takes trades people and trains them to be value architects where they provide value to the marketplace. Midas marketing is leveraging your intellectual capital – learn how to do this in your own business before you can talk to your clients about their business.

Comments: We as advisors should look at how we are adjusting our own businesses to the new market realities. Are we, too, stuck in the Matrix of Denial? Perhaps the idea of bringing more value to your relationships and developing a deeper understanding of business owners and how to deliver the solutions within an exit plan is what you should be focusing on for the development of your practice. That is what Pinnacle offers.

If you want to follow Rob, this small business guru, to see what he has to say about small business and its future, you should go to midasnation.com and read about his recent comments. These insights are very timely and valuable and can assist in bringing your advisory practice to a new level as you help owners see more of what the future holds in store for them and their businesses.

For now, make a note to keep abreast of these fast moving changes in 2010. Both you and your clients will prosper from this additional focus.
These insights can be 'mined for further gold' as you reflect upon them in your next conversations with owners.

Specializing in Business Exit Strategies, John M. Leonetti, Esq., M.S. Finance, CM&AA founded Pinnacle Equity Solutions to provide advisors with the tools they need to incorporate Business Exit Planning into their advisory practices. To learn more about John's Exit Strategy Services and to receive a FREE copy of his special report, "How To Incorporate Exit Strategies Into Your Advisory Practice", visit www.PinnacleEquitySolutions.com

3 comments:

Liz said...

I was particularly interested in your remarks on access to capital and exit strategies. I know Rob Slee has written several books and he undoubtedly knows of this one, too, which will also be of value to people reading this post: "The Handbook of Financing Growth," by Kenneth Marks. It goes into the volatility of the credit markets which provides capital for emerging growth and middle-emarket companies, and has been newly updated to take into consideration the recent unpredictable money environment that's causing many problems for many businesses. The new edition includes positioning a business for value creation before the transaction, and how your financing strategy fits into not only the overall plan for how to finance growth -- growing and raising capital as well as creating an exit. It's a practical guide to help you adapt to changes and put you in a better position to succeed in building your business and creating value.

Liz said...

And I know this is completely off-topic, but you have the same name as a well-known ENT at Loyola Hosptial near Chicago -- he operated on my inner ear twice. Gave me pause for a moment -- I thought he'd changed occupations!

日本的夢想 said...

與其期盼別人疼你,不如自己疼自己。 ....................................................