Category: finance & accounting

Sport Chalet is closing

Vestis Retail Group, the parent company of sports equipment and apparel stores Sport Chalet, Eastern Mountain Sports, and  Bob’s Stores has filed for Chapter 11 bankruptcy protection today.

I don’t have the financials for Bob’s Stores or Eastern Mountain Sports, but if the numbers for them looks like that of Sport Chalet, it looks like it’s another victim of passing trends and Amazon.  I wrote about the bankruptcy of Quiksilver and how it can save itself, and about Amazon‘s effect on Walmart.

sport chalet

Mountain sports presents another challenge above its sea-level cousin, surfing.  It costs a LOT more money to go skiing.  Skis, jacket, goggles, beanies, gas, food, etc.  The list goes on and on.  With the slow economic recovery putting Vestis’s holdings on a slower expansion pace, downsizing and keeping only strategic stores in wealthier markets would have slowed the cash flow hemorrhage.  Another factor unique to snow sports is the abnormally warm winters with little snowfall.  This climate factor greatly hurt sales.

Who knows what the boardroom meetings were like when CEO Mark Walsh, CFO Susan Riley, and others were meeting; nonetheless they should’ve listened to the decision-maker that had a closer eye on industry, market, and environmental trends.

In every business plan, I include industry and market analysis that covers the trends, threats, and emerging opportunities for every business.

What is Strategy Consulting?

Strategy

One of the services we offer is strategy consulting.  However, the name is quite vague so what is strategy consulting?  It is a lot of things.  It varies by the needs of the client.  Some clients need help developing an overall strategy for the business.

Say they have a product but not much else.  So they need everything from naming of their product, research on where to sell their product, team building, etc.  Naming might require a psychographic analysis of branding.

If they are a little farther along, it can be an audit of what they’re already doing, or analysis of where to go next.  A business might be looking at weighing the pros and cons of expanding to a new market, introducing a new product, do a product overhaul, etc.  Product overhaul might require a net present value calculation of multiple alternatives.

Every situation is unique so contact us and let’s figure out what you need.

Another happy client!

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I recently completed financial projections for Clear Wave Air. The Clear Wave Air Purifier is a revolutionary microbe killing system. Unlike other purifiers that depend on filtration to block out harmful microbes and molds, the Clear Wave Air destroys these harmful micro antagonist and it does it continuously, quietly, and efficiently.

 

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The Importance of Bootstrapping

The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.

Bootstrap – adjective

A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.

“The business was a bootstrap operation for the first ten years.”

The importance of bootstrapping

Most startups do not have a bunch of cash lying around.  The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have.  We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.

The temptation to abandon bootstrapping is strong, especially when investors come knocking.  One of my clients attracted large investors with a business plan I had prepared for him.  Initially, I budgeted a modest salary for him in the financial projection.  He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself.  I had to tell him to reduce his salary.  I am not alone in emphasizing this sentiment:

  • A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary.  Ultimately, Mark and all the other sharks walk away from the deal.
  • Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.

Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate.  In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.

Launch and Grow Your Business

Contact us today to learn how to bootstrap your business.

Importance of a Financial Plan

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LearnVest CEO Alexa von Tobel talks on HuffPost Live about the importance of having a financial plan with their business plan.

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LearnVest, a financial planning service for women, was acquired by Northwestern Mutual for $250 million in 2015.

Luckily for you, all of my business plans come with a 3-5 year financial plan that includes income statement, balance sheet, and cash flow statement.

Calculating what equity percentage to give

2000px-Cake_quarters.svgMy clients are often in the position of having to offer equity in their company to potential investors.  However, how does one know what percentage to give?

Well, one way is just by gut.  You got a person willing to invest $20,000 into your company but you don’t know want to give up too control so you offer 25%.  Conversely, on Shark Tank we see entrepreneurs be given very little money while giving up a large portion of ownership in their company.

There are other more quantitative methods such as asset-based, comparable, option-based, etc.  However for a start-up without much in assets or earnings per share data, these methods are difficult because there aren’t enough figures to go by.  Also, if the business is truly unique, then comparisons of “similar” companies don’t exist.

One of the more common measurement for valuing public and private companies used by investment bankers is the Discounted Cash Flows Method.  This is useful because with every business plan and financial projection I create for my clients, I create a cash flow statement.  With this I take the total projected cash flows from each year and adjust their future value into their present value.  This is to adjust for interest (i.e. $100 today doesn’t the same as $100 in ten years).  Then I take the discount rate (risk-free U.S. treasury rate is most common) to calculate the present day equity value of the company in X years using this formula:

dcf formula

The amount of investment capital received is the percentage of equity given.  There is obviously room for negotiation because forecasted cash flows is debatable and the amount of involvement (i.e. sweat equity) the investor wants to put in is also a factor.  Nonetheless, it is a gauge one can use to make sure they’re not giving up too much.

 

Work 100-hour weeks to not work 40-hour weeks

Work 100-hour weeks to not work 40-hour weeks

“We work 100 hour weeks to not work 40 hour weeks,” says Nihal Mehta, a serial entrepreneur and venture capitalist. Mehta has created five start-ups and now uses the lessons from two failed companies to be a more effective investor. However, at one point in his career, Mehta found himself with $400,000 in debt. The lessons he learned through his many failures before finding success are very common in entrepreneurship.

His first startup, Philly Tonight an online city guide website for the Philadelphia, Pennsylvania, was a very doctom 1.0 company. The office was a typical well-funded startup with high ceilings, nerf basketball hoops, and a ton of energy. What they had in focus for growth, they lacked in concern for revenue. They racked up $400,000 in debt and no way to raise additional money.

The one thing that would have changed everything was if we focused on profitability [instead of growth] the business would have survived.

After learning the painful liquidity lesson. Mehta changed his outlook on business development. This resulted in his next startup being a success.

The difference in mentality was we started it as a cash flow positive business. We grew it and never hired ahead of revenue.

One cause of failure was poor cash flow management.  Good thing for our clients, a cash flow analysis comes with every business plan!  It can tell in which month/quarter you will be cash-strapped, what your break-even point is, even down to how much you can budget for rent.  It can also tell you how much to ask, in either debt/equity and what interest rates and payment duration will work for you.

Nihal has since found Eniac Ventures, a a seed-stage Venture capital firm with offices in San Francisco, California and New York City.

See his insightful interview at:  http://cnb.cx/1MyP7Kj.

Launch and Grow Your Business

Contact us today for a business plan or a financial projection for your business.

Walmart hits the slumps

sad walmart

Walmart lost $21 billion in market value after it forecasts drop in 2017 earnings resulting in the steepest decline of the company’s stock in 25 years.

In layman’s terms:  Because Walmart said it’s expecting to earn less in 2017, lots of their shareholders sold their stock and lots of potential buyers said they weren’t willing to buy unless the asking stock price is lower.

Why

  1.  Amazon.

Amazon is crushing pretty much every retailer (except some custom designers; however with Amazon Local they are partnering with may of those product/service providers).  Amazon sells practically everything you can put in a box and ship.  At extremely competitive prices.  Free overnight/2-day shipping in some cases.

Walmart offers very very competitive prices and has locations pretty much anywhere in the US.  However, they are still a brick and mortar business so there is a limitation on floor space thus a limitation on product offerings.  I say brick and mortar instead of ‘click and mortar’ because even though they have an online store, it sucks.  Last year, I purchased a product online and selected in-store pick-up.  5 days later it was available for pick-up at he Walmart that is down the street from my office.  Walmart’s supply chain management system is one of the best in the world.  However, somewhere down the road there was an implementation issue of the online business with the existing business.

Walmart’s situation has similar elements to that of Blockbuster.  They have a size and first mover advantage.  However, over time they lost their position.  I doubt Walmart will face the same fate as Blockbuster but with a $21 billion dollar loss, it is not nothing.  You can read about Netflix/Blockbuster here.

2.  Other competitors

  • Dollar stores:  Walmart is known for low prices but no one goes lower than dollar stores.  Furthermore with the long-going Great Recession and great income disparity dollar stores enjoyed great profitability.
  • Grocery stores:  Walmart has Neighborhood Market stores in some markets and super stores (all encompassing stores) in other markets.  Nonetheless, companies that are just grocery stores are a big and aggressive competitor to Walmart.

Other Factors

Walmart is also facing PR issues:  1)  It is considered low-class.  There is a search term “people of Walmart” which shows rather uncouth individuals shopping in Walmart stores.  2)  Also, Walmart is criticized for killing off small, independent stores.

Walmart is doing many things to try to turn their path around.  We’ll see how effect these efforts are.

How Quiksilver (and surf brands in general) can save it/themselves

Last week I highlighted aspects about Quiksilver’s bankruptcy.  So this is what Quiksilver and other surf brands do should to save themselves.

Sector downturn

Looks like the other big surf brand, Billabong is also hurting too with diminishing revenues and net losses from 2012 to 2014.

billabong financials

Recently Billabong also sold its other assets: DaKine, Swell.com and Surfstitch to enhance liquidity.

Billabong also thought about selling RVCA but didn’t.  I’ll get to that in a bit.

As I discussed in my previous post, Quiksilver bankruptcy is partly due to surfing not being as cool as it used to be.

So what is cool?

If extreme sports was cool in the ’90s and ’00s, extreme athletics is cool now.  MMA and CrossFit is cool.

In March 2015 WWE announced a 50/50 joint venture partnership with MMA brand, TapOut.  Founded in 1997, the brand had $200 million in revenues in 2010.   Later that year the founders sold it to Canadian company Authentic Brands Group LLC for an undisclosed sum.

CrossFit had 8,000 affiliates in October 2013.  As of January 2014 the company had 9,000.  In May 2014 it hit 10,000 affiliates.

As shown by strategyandanalytics.com’s graph featured in Fast Company’s article, CrossFit’s popularity growth is amazing.

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Of course, most people don’t actually want to do WODs and armbars.  They only want to dress like they do, much like surfing and snowboarding.

This is why it’s no coincidence that Reebok (doing well financially with 5% growth in 2014 and seven consecutive quarters of growth) has its hand in the UFC and CrossFit.

Under Armour is so popular.  Under Armour which also makes products for MMA and CrossFit enthusiasts were named as one of the most valuable American brands by Fashionista and as one of the top 10 MMA brands by FightState.

Heck, even Adidas (Reebok’s parent company) makes judo gis!

But Reebok isn’t a surf brand!!  Quiksilver isn’t an MMA/CrossFit brand!!!

So going back to RVCA.  RVCA, is a popular surf brand that is also popular amongst the brazilian jiujitsu crowd with its sponsored athletes such as MMA star BJ Penn amongst BJJ stars.  RVCA recently did a collaboration gi with uber popular gi brand Shoyoroll.  Billabong decided to keep this brand.

As RVCA has shown, it is possible for a surf brand to do a brand extension into other lifestyle activities.

So what should Quiksilver do?

Change their marketing communications.  Surf ads right now are blondes in exotic tropical locations.  Unfortunately for Quiksilver and other surf brands is that demographics are changing:  wealth discrepancy is large also Hispanics and Asians are the fastest-growing minorities in the US.  This growing market segment might not have the money or time to travel to exotic destinations nor do they even look like a pro surfer such as Alana Blanchard.

So abandon their existing surf model?  No, look at the other elements of surf.  The aspects of the lifestyle that are more relatable to this large, young, and growing market segment:

  • Surf spots:  Urban surf spots such as old Huntington Beach (it wasn’t always the gentrified “Surf City USA” it is now), Long Beach, Rockaway Beach NY, San Pedro, etc.  Even urban Honolulu can be a little edgy.
  • Embrace their connections with the skate world.
  • Athletes:  Add famous MMA and/or CrossFit athletes that also surf.  Especially with the Reebok-UFC deal, lots of MMA fighters are looking for more sponsorship money.  UFC middleweight contender Luke Rockhold surfs in Santa Cruz.
  • Other lifestyle images:  Tattoos and asphalt instead of sunsets and palm trees, turntables instead of ukeleles.
  • Diversify:  Buy or strategic partnership with boxing/muay Thai brand Fairtex/etc. or Brazilian jiujitsu brand Gameness/etc.

We’ll see what the future brings.

Business terms

A couple weeks ago I sent my business partner in one of my projects a list of indirect competitors.  He, a television producer without a business background, replied that they are not competitors.  That made me realize that the many terms used in business are very confusing and their subtleties are unclear.  So I put together a little glossary of some terms that are often misused/mistaken.

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Direct competition vs. Indirect competition:  Direct competition is pretty clear but what about indirect competition?  For example Netflix’s direct competitor is Hulu.  They’re both streaming video platforms.  An indirect competitor can be the simple antenna TV or something that can be a technology that is still in R&D.  Over the air TV broadcast isn’t necessarily a streaming on-demand platform but it is a substitute video entertainment/content delivery system.  So a competitor can be something that is obvious or something that is not so conspicuous.

Industry vs. Market:  Industry is what your company is in.  It is your competitors, your supply chain, and related companies.  They are essentially the parties that sell to the market.  The market is your customers.  They are the buyers of your product or service.  When industry publications write “market size” they are talking about the amount of money that can be made from the customers.

Sector vs. Segment:  Sector is a subsection of an industry.  The “telecommunications industry” for example is made up of thousands of sectors; the router sector, the ground wire/cable sector, the GPS tech sector, etc.  Industry term is only as broad as the scale of your analysis.  If you are analyzing just the GPS sector, then you can say “GPS industry” and then breakdown the relevant sectors within that industry.  Segment is a subsection of a market.  A segment of the “millennial market” is tween girls, etc. (when a segment is referencing a group of people, then it can also be called demographic).  A segment of the “restaurant market” is Mediterranean restaurants.

Revenue vs. Profit (income):  Revenue is the money that is coming in before costs, expenses, taxes, depreciation, etc. are taken out.  Once those pesky things are taken out you have profit.  There is gross profit which is revenue – expenses, and and net profit which is revenue – expenses – taxes.  Then there is retained earnings, which is another step!

There are many many more (branding, PR, etc.) so if you are unsure, please feel free to ask!

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