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What is Strategy Consulting?

Strategy

One of the services I 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 let’s talk and figure out what you need.

12 businesses you can start now

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Here’s an interesting article from Inc. Magazine about businesses that almost anyone can start.  The reason why many people can do these is that they can have low barriers to entry (e.g. startup costs, regulatory hurdles, etc.), moderate competition, and decent industry growth potential.  The list is:

1. Meditation studio

2. Consulting

3. QA testing

4. Online research

5. Virtual assistant

6. Corporate cleaning service

7. Dog walking

8. Lawn care and snow removal

9. Homemade gourmet foods

10. Green consulting

11. Assembling Ikea furniture

12. Personal organizer

The article misses the most important thing:  Passion.  That is why entrepreneurship is NOT for everyone.  If you’re going to start a business you have to be willing to work very very hard at it.  So if dog walking is a calling for you, go  out there and make some money!

The Importance of Bootstrapping

Bootstrap – adjective

A situation in which an entrepreneur starts a company with little capital. An individual is said to be boot strapping when he or she attempts to found 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.”

Dr_Martens,_black,_old

 

Most startups do not have a bunch of cash laying around.  So businesses have to make due with what little they have.  I often tell my 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 me to consult on how to manage her own marketing campaign; then she 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 KISSmetricsreflects 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.

I advised my 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.

Another Happy Client!

Congratulations to Bible LA!
Bible LA is a hot new Christian clothing brand that I had the pleasure of doing a business plan and marketing plan for.

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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.

 

Maximum efficiency for your effort

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A lot of my clients (and generally all people) have difficulty juggling work, life, and starting up their business.

I find for me, not watching TV helps.  I do other activities (surf, Brazilian jiu-jitsu) for relaxation/stress relief.  I get my news online, eat clean/take vitamins to keep my energy up, and stay focused while working by listening to music that helps me zone in.

Of course everyone is different so you gotta find a schedule/method that works for you.

Here are a list of other things you can do to be more productive with your time.

How founders equity works

A few months ago, a client was looking to expand their company by bringing in more partners.  However, his partners were unwilling to give up equity.  This is fine, however in order to grow while maintain one’s shareholding amount within the company, the shareholders needed to put more money into the company. Either by hiring more workers/consultants or purchasing more assets.  They did not want to expand through labor or capital expenditures.  So they had to bring in new equity partners that were willing to invest money or sweat equity into the company.  But, as mentioned earlier, they didn’t want to give up equity.  The founder ended up leaving the company and starting anew.  Sad but a necessary step when working with partners that could not agree on how to move forward.

In reality, founders almost always have their equity positions reduced over time.  Pretty much every founding CEO you can think of will have a lower % than what they started with.  I will explain why.

Hypothetical Scenario

Typically, when Company A is formed there are a specified number of shares.  Let’s say 100 shares (in reality it’s more like 1 million or more, but for simplicity).  Founder 1 has 40%, Founder 2 has 35% and Founder 3 has 25%.  So that means Founder 1 has 40 shares, Founder 2 has 35, and Founder 3 has 25 shares (assuming all shares are out and none are held as treasury stock).  The founders decide to grow the company by seeking $50,000 (for hiring a consultant).  They can take a loan and keep their respective positions or bring in someone that can invest or do the $50,000 worth of work.

Equity Reduction

So in the hypothetical above for Company A, the board of directors (the three founders in this case) can decide to either 1) issue more shares say 9 more to the new shareholder or 2) give some of their own shares (to keep it at 100 shares).  Either way Founder 1-3 will have a reduction in their equity positions.

  • In option 1 (109 outstanding shares):  Founder 1 will have 36.69% (40/109), Founder 2 will have 32.11% (35/109), Founder 3 will have 22.93%, and New Guy will have 8.25% (9/109).
  • In option 2:  Say each founder gives up 3 shares; Founders 1-3 will have 37% (37/100), 32%, 22% respectively, and New Guy will have 9%.

Equity Maintenance

Let’s say the Founders do not want to give up any position.  They would have to divvy up the $50,000 proportionally so that their respective positions aren’t diluted.  However, in the hypothetical they do not have an extra $50k to invest into the company.  If outside money is not brought in through a loan, then the only way they can maintain their positions while giving up equity is to have a combined ownership of anything less than 100%.  This is because mathematically it is impossible to give more if there is nothing else to give.  So, let’s adjust the hypothetical to say Founder 1 has 39%, Founder 2 has 34%, and Founder 3 has 24% (a 1% reduction for all) for a combined total of 97% and 1,000,000 shares.  That means there are 30k shares available (without having to issue new stock) for New Guy to claim.  If new shares are issued, then New Guy can be given any number of shares as long as Founders 1-3 have 97% of the total amount of shares.

Company Growth

As the company continues to grow it will have to issue new shares (unless it takes on debt, which companies frequently do both).  At some point, the Founders will not be able to or unwilling to keep pumping money into the company to maintain their position.  Hopefully, at this point they won’t have to because the dividends that they may receive will be enough to satisfy their return on investment (ROI) needs.

This is why founding members rarely have the same percentage as the company grows.

For those that like pictures, check out this great infographic from FundersandFounders.com

how-funding-works-infographic

SBA website improvement

The Small Business Administration is a great service for entrepreneurs. They connect you with a wide array of lenders and will guarantee up to 85% of your loan. Loans can go as high as $5 million and rates can be as low as 4%.

Sometimes navigating the site was difficult and before you had to contact an SBA representative to get the ball rolling. Now they have LINC, an online referral tool that connects borrowers with participating SBA lenders.  You answer a short online questionnaire and SBA lenders will contact you within 48 hours.

sba linc

I filled one out for my client yesterday and got three bank emails already.  Check it out once you are ready to start looking for financing.

The power of a good team

Yesterday I was watching the documentary Supermensch:  The Legend of Shep Gordon.  Shep Gordon is an ubermanager that managed Alice Cooper, Blondie, Groucho Marx, helped create the celebrity chef with his management company ‘Alive Culinary Resources’ (subsidiary of Alive Enterprises), and many others.

It reminded me how much entrepreneurs need a strong team around them to make their vision a reality.  In Shep’s case, his entrepreneurs were the musicians.  They were talented people that were passionate about what they were creating but in order to continue to create it and eventually profit from it, they needed a manager.

A lot of times an entrepreneur just has a vision.  An idea and little more than the passion to make it come to reality.  However, there are lots of technical skills that have to be utilized to make an entrepreneur’s vision come to life.

Lots of my clients have the same issue.  They have a great product but don’t have a team to make it happen.  I advise them to find all the areas in which they don’t have the knowledge/skills to make to launch their business.  Then hire the necessary person or hire/outsource that task.

If you don’t have the funds to hire someone, then you will likely have to offer equity within the company.  This is MUCH easier said than done.  Most people cannot afford to go without a steady paycheck for long periods of time in the hopes of future revenues.  That is why you gotta go through lots and lots and LOTS of candidates to find the right match; in skill sets, temperament, and even personalities (if you bring on the wrong person you will suffer, like one of my clients).  You have to sell yourself and your business to this individual.  You have to convince him/her to take this chance on your business.  Being persistent and persuasive is once of the most important skills an entrepreneur can possess.  You’ll need persistence and persuasiveness when finding partners, getting financing, negotiating rental terms, the list goes on and on.  In business school, I took a negotiating course and one of the themes was “You don’t get what you deserve.  You get what you negotiate.”  How right it can be.

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No one said starting a business will be easy.  It is not for the timid.  Nonetheless, for those that make it, the rewards are tremendous.

 

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