Used-Book Case Study

This is a case study to sharpen your skills at forecasting and break-even analysis.

Dwight Payne and Gary Heap reside in Santa Barbara, CA, where they attend college and pursue their mutual hobby of science-fiction book collecting. They pooled their book collection of over 4,000 volumes, and sci-fi magazines going back over twenty-five years. All neatly cataloged and indexed, they estimate it would cost $20,000 to assemble the collection today.

Payne and Heap decided that, at the end of this school year, they will dedicate the summer to getting a used-book store started in Santa Barbara as a means of supplementing their income year-round. Heap’s uncle owns a storefront near the University, and agreed to rebuild it as a used-book store. He also co-signed an inventory loan for $4,000 for some start-up working capital. In exchange he gets 25 percent of store sales for two years.

In addition, they bought a collection of over 10,000 paperbacks, magazines, and comics for $3,500, and some used shelving for $1,500. These purchases required borrowing the money from some fraternity brothers.

Provide business strategy planning advice to Dwight and Gary (There is no one right answer).

Decide on days of the week and hours the store will be open. Estimate staffing required and hourly salary costs. Do Dwight and Gary really work for free? What is a reasonable expectation of customers per day? Average purchase per customer? What are pessimistic and optimistic values of these estimates? How much will they have to spend on advertising and promotion to meet these estimates?

What will they pay, on average, for each book? How much can they get, on average, for each book?

Put together a projected (often referred to as pro forma) income statement. Relate the estimates developed above to monthly sales (pessimistic, expected, and optimistic), cost of goods, and expense amounts for wages and promotion. We should add 25% to wages paid for the payroll estimate, to account for taxes, sick days, etc. Debt service payments may be assumed to total $400 per month. Estimate rent and utilities and any other expenses that you feel might be incurred.

Conclusions: Find a break-even sales estimate, that is, the value for sales that produces a Gross Margin just equal to Total Expense. When gross margin generated equals expenses, profit/loss is equal to zero; this sales level is called the break-even point.

Would you do it if you were they? Why or why not? What kind of a test is this where you can’t look up the answer? It’s an entrepreneurship test; learn to be comfortable with your best estimate. If you are not comfortable with this seek consulting services for small businesses.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Using Break-Even Analysis

A significant advantage of some business ideas is that the venture can break even at what seems to be an easily achievable volume. A technique for quantifying that volume, called break-even analysis, examines the interaction among fixed costs, variable costs, prices, and unit volume to determine that combination of elements in which revenues and total costs are equal.

This article is drawn from our Entrepreneurship Knowledge Services series.

Fixed costs are those expenses necessary to keep the business open, and are not impacted by sales volume. They will include such things as rent, basic telephone expenses and utilities, wages for core employees, loan or lease payments, and other necessary expenditures. An entrepreneur should also include a living wage for himself/herself as a fixed cost.

Variable costs include those expenses that change as a result of sales volume. This can be a relatively simple relationship, as in cost of goods sold, where for example the variable cost of baked goods sold at a coffee shop is what we pay the baker for them, $0.30 each. Variable costs can also be very complex; for example, higher sales in one area of our business may increase long distance charges. Labor costs may be fixed for full-time employees, then, as sales increase, some overtime is incurred until additional personnel can be justified.

Generally, an initial break-even analysis focuses on a relatively narrow range of sales volume in which variable costs are simple to calculate. The variable cost in a coffee shop is simply the cost of goods sold. For a pizza delivery operation, it might be the cost of ingredients, and some cost allocated for operation of the delivery vehicle. A general term often used for the difference between selling price and variable cost is “contribution margin,” or the amount that the unit sale contributes to the margin available to pay fixed costs, and generate profit (we hope).

Now let’s take a look at how break-even analysis can be helpful to us. For this example, let’s assume we have determined that the level of fixed costs (salaries, rent, utilities) necessary to run a coffee shop on a monthly basis is $9,000. In addition, a cup of coffee that we sell for $1 costs us $0.25 for the bulk coffee, filters, and water.

The contribution margin of a cup of coffee is, therefore, $0.75. We can now calculate how many cups of coffee we have to sell to cover our fixed costs:

Break-Even = (Fixed Costs) / (Contribution Margin)

= $9,000/$0.75 = 12,000 cups of coffee per month

Let us say, further, that the fixed cost estimate was based on being open 6 days a week, 8 hours a day. This converts roughly to 200 hours a month, so we have to sell 60 cups an hour. This is a cup a minute for every minute we are open.

Does this seem feasible? Let us assume not, and evaluate some options.

(1) Cut expenses

Remember that we are still in the planning stage here, and experience has shown that prospective entrepreneurs almost always underestimate expenses. Let’s pass on this approach.

(2) Raise prices

We could plan on charging $1.25 per cup from the beginning, for a contribution margin of $1 per cup. The arithmetic is easy; to cover $9,000 in fixed expenses we need to sell 9,000 cups of coffee per month. The most important factor here is what the competition is charging.

(3) Broaden our product line

For the sake of clarity in demonstrating relationships between price, cost, and sales volume, we have considered a simplified version of how a real coffee shop might operate. The market severely constrains the amount we can charge for an ordinary cup of coffee, and a one product shop would have limited appeal. Perhaps we could also offer gourmet coffees, which cost us $0.50 per cup to brew, at $2.00 per cup. We could also offer baked goods, which cost us $0.30 each, at $1.30.

Suffice it to say that the break-even calculation now becomes a bit more complex, and outside what we are trying to accomplish here. Feel free to try it on your own.

This has been a very brief overview of how break-even analysis can be used in helping the entrepreneur better understand the relationship of the financial factors involved in measuring the feasibility of a proposed venture.

From a preliminary analysis of selling prices that the market will bear, prevailing costs, and reasonable expectations of sales volumes, the entrepreneur can avoid making serious mistakes and may discover significant opportunities.

If the business is feasible but beyond the entrepreneur’s reach the challenge becomes raising entrepreneurial capital.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Venture Research Service Provider

If you are considering buying or selling a service industry business you need to start with an evaluation. This can be very complex and the use of a venture research service provider can often give you a value that you can easily defend. The following article outlines the process, and is extracted from FBB Group Ltd: https://www.fbb.com/company-information/recentarticles/how-to-value-a-service-business.

Service businesses run the gamut, from accounting firms, to drycleaners, to janitorial services, engineering, public relations firms, and many other options. Despite their disparity, they all have one thing in common: offering a service to clients.

Valuing a service business involves many factors – a tidy, one-size-fits-all formula doesn’t exist. That being said, sellers should recognize that buyers will be particularly interested in certain characteristics for most service businesses. This, again, is where a venture research service provider can come in.

Normally, valuation is based on several criteria, including: history of profitability, cash flow, overhead, intellectual property, company reputation, number of years in business, opportunities for further growth and added profits, stability of key employees/management team, and customer diversification.

Crucial areas for valuation include intellectual property, ongoing relationships with clients, and having a good team in place – ensuring the company will retain its competitive edge, even when the seller (who typically drives new and repeat business) leaves.

Without significant capital assets, key customers and employees are critical. A strong management team adds to the value of a service business (often more so than in manufacturing) and, conversely, it can detract from value when there’s a poor or inexperienced team.
Another measure of value may include the amount of market share. Companies that provide a niche service and don’t have much, if any, competition will command higher multiples of value.

Cash flow is “king,” so the primary consideration for bankers is a buyer’s ability to stay current on loans for acquisitions and working capital. Banks focus heavily on reliable cash flow for service businesses, given that there is little, to no, collateral within the service business itself.

Whether you’re in the market to buy or sell, understanding the various considerations of valuation for a service business will make the process smoother and increase the probability of a more successful transaction.

Dr. Vinturella, has over 40 years experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site https://www.jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business. “ See https://www.jbv.com/8steps, available on Amazon.

Adventures in Self-Publishing

Do you have an idea for a book? Unless you can find a traditional publisher to fund it (no small feat) your only alternative is to self-publish. There are essentially no standards to what can be self-published. Of course, you fund the project yourself. For an overview of self-publishing see http://www.sfwa.org/other-resources/for-authors/writer-beware/pod/.

There are several companies that offer packages for on the order of $4,000. I used iUniverse out of Bloomington Indiana. For one’s investment, one gets the book ID (ISBN), the style of the book and delivery of a print-on-demand (POD) copy. An alternative is to print offset, a process that runs in quantity. With this you get into the inventory management business.

Few authors get by with the standard package. The publisher’s marketing resources all cost extra and it seems to me that they were a total waste. With offset there are also warehouse fees. The average self-published book sells 250 copies over its lifetime. In addition the eBook competes with the hard copy.

I made a terrible mistake, aided by misinformation about royalties from my book representative at iUniverse, and printed 2,000 copies of my book. For information on the book see https://www.jbv.com/8steps. This site also contains a link to purchase the book. After I realized the mistake I tried to back out, and the vendor was extremely uncooperative. I took them to small claims court and got close to half of my purchase returned.

So, what advice would I give? Don’t print offset. Live with the POD even though the return is less. Do more research than I did; there are less expensive alternatives, particularly if you are comfortable managing your own marketing. Choose an underserved topic; mine is about business startup and the selection is huge.

Entrepreneurial Career Consulting

The following is excerpted from Careers in Entrepreneurship, http://careers-in-business.com/en.htm. If you find it overwhelming, consider entrepreneurial career consulting. There are sources of free consulting such as SCORE, http://www.score.gov.

Entrepreneurs start new businesses and take on the risk and rewards of being an owner. This is the ultimate career in capitalism – putting your idea to work in a competitive economy. Some new ventures generate enormous wealth for the entrepreneur. However, the job of entrepreneur is not for everyone. You need to be hard-working, smart, creative, willing to take risks and good with people. You need to have heart, have motivation and have drive.

There are many industries where wealth creation is possible be it the Internet and IT, personal services, media, engineering or small local business (e.g., dry cleaning, electronics repair, restaurants).

But there is a downside of entrepreneurship too. Your life may lack stability and structure. Your ability to take time off may be highly limited. And you may become stressed as you manage cash flow on the one hand and expansion on the other. Three out of five new businesses in the U.S. fail within 18 months of getting started.

It’s important to be savvy and understand what is and is not realistic. The web is chock-full of come-ons promising to make you rich. Avoid promotions that require you to pay up front to learn some secret to wealth.

Look for inefficiencies in markets. Places where a better idea, a little ingenuity or some aggressive marketing could really make a difference. Think about problems that people would pay to have a solution to. It helps to know finance. It’s a must to really know your product area well. What do consumers want? What differentiates you from the competition? How do you market this product?

A formal business plan is not essential, but is normally a great help in thinking through the case for a new business. You’ll be investing more in it than anyone else, so treat yourself like a smart, skeptical investor who needs to be convinced that the math adds up for the business you propose starting.

John B. Vinturella, Ph.D. has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Franchise Business Consultant Service 2

A franchise is a continuing relationship between a franchisor and a franchisee in which the franchisor’s knowledge, image, success, manufacturing, and marketing techniques are supplied to the franchisee for a consideration. This consideration usually consists of a high “up-front” fee, and a significant royalty percentage, which generally require a fairly long time to recover.

Here are some statistics about the industry (http://www.azfranchises.com/quick-franchise-facts/):

• There are an estimated 3,000 different franchisers across 300 business categories in the U.S. which provide nearly 18 million jobs and generate over $2.1 trillion to the economy.

• Franchises account for 10.5 percent of businesses with paid employees; almost 4% of all small businesses in the USA are franchises.
• It is estimated that the franchise industry accounts for approximately 50% of all retail sales in the US.

• The average initial franchise investment is $250,000- excluding real estate; the average royalty fees paid by franchisees range from 3% to 6% of monthly gross sales.

Franchising offers those who lack business experience (but do not lack capital) a business with a good probability of success. It is a ready-made business, with all the incentives of a small business combined with the management skills of a large one. It is a way to be “in business for yourself, not by yourself.”

Franchises take many forms. Some are simply trade-name licensing arrangements, such as TrueValue Hardware, where the franchisee is provided product access and participation in an advertising cooperative. Some trade name licenses, particularly in skin-care products, are part of a multi-level marketing system, where a franchisee can designate sub-franchisees and benefit from their efforts.

Others might be distributorships, or manufacturer’s representative arrangements, such as automobile dealerships, or gasoline stations. It could be Jane’s Cadillac, or Fred’s Texaco; the product is supplied by the franchisor, but the franchisee has a fair amount of latitude in how the business is located, designed and run. The franchisor will frequently specify showroom requirements and inventory level criteria, and could grant either exclusive or non-exclusive franchise areas.

The most familiar type of franchise, however, is probably the “total concept” store such as McDonald’s. Pay your franchise fee, and they will “roll out” a store for you to operate.

The advantages can be considerable. The franchise fee buys instant product recognition built and maintained by sophisticated advertising and marketing programs. The franchisor’s management experience and depth assists the franchisee by providing employee guidelines, policies and procedures, operating experience, and sometimes even financial assistance. They provide proven methods for determining promising locations, and a successful store design and equipment configuration. Centralized purchasing gives large-buyer “clout” to each location.

The large initial cost can be difficult to raise. The highly structured environment can be more limiting than it is reassuring. Continuing royalty costs take a significant portion of profits. You may wish to use a franchise business consulting service. Several small business periodicals evaluate and rank franchise opportunities. There are now several franchise “matchmaking” firms who can assist in the evaluation process.

How do you choose among all the available franchises? Does it complement your interests? Even if you hire someone to manage the business, expect to spend a lot of time with the operation. Is the name well known? If not, what are you paying for? Is the fee structure reasonable, and all costs clearly described?

Is the franchisor professional? Evaluate them on the clarity of the agreement, and how well your rights are protected, the strength of their training and support program, and their commitment to your success. Be sure to talk to current franchisees about their experiences. Beware of a franchisor committed to a rate of growth that exceeds their ability to manage; they may not be sufficiently interested in the sales they have already made.

Is a franchise a sure path to instant riches? Is it the only hope for independent firms in today’s market? Can Jerry’s Quick Oil Change compete with SpeeDee? Does the franchise deliver business that we might not have gotten anyway? Is it really entrepreneurship; did I go into business or did my money?

This is excerpted from “8 Steps to Starting a Business.” See https://www.jbv.com/8Steps

Franchise Business Consultant Service 1

Franchising provides a way for franchisors to grow their businesses more quickly than they could on their own. For franchisees, it reduces the probability of failure. Substantial personal resources are required to pay the franchise fee and all the other costs associated with start-up. The franchisor may or may not provide assistance with financing.

Often entrepreneurs engage a franchise business consultant to help evaluate and select the best fit to the buyer. Franchise models, investment, and requirements vary widely, so it is imperative that the potential franchisee conduct thorough due diligence before proceeding.

Franchising provides the entrepreneur with an opportunity to enter the world of small business without all the risks usually associated with starting a business from scratch. In most cases, the costs of entering a franchise are less than the costs of buying an existing business. If dealing with a reputable franchisor, buying a franchise represents the acquisition of a proven business model, thus reducing the odds of failure considerably. Franchises are big business. Franchises are very important to commerce accounting for 45% of retail sales, or $1.55 trillion in total revenue in 2010, according to American small business counselors at SCORE. One in 12 businesses is a franchise, across 75 industries and numerous subfields among them. Just a few of the well-known franchises are Krispy Kreme, Burger King, McDonald’s, Taco Bell, Baskin Robbins, Ben & Jerry’s, The Body Shop, and Motel 6.

Franchises exist worldwide. The European Franchise Federation estimates that 8500 distinct franchise brands are operating in the European Union, compared to about 2500 U.S. brands (2009). The franchise industry is particularly strong in the United Kingdom, with the number of franchise units increasing by 44% over the last decade. Franchising accounts for 10.8 billion annually in sales. The personality type of the successful franchisee is that of a person somewhere between an entrepreneur and an employee. The hard work and drive associated with the entrepreneur are still needed for a successful franchise, but the typical franchisee neither needs, nor typically has, the vision and constant pursuit of new ideas that are typical of most entrepreneurs.

Excerpted from “Raising Entrepreneurial Capital,” by Vinturella and Erickson.

Business Strategy Planning Advice

The following is excerpted from “Tips for Better Strategic Planning,” By Erica Olsen. It is part of the Strategic Planning Kit For Dummies Cheat Sheet, http://www.dummies.com/business/strategic-planning-kit-for-dummies-cheat-sheet/

Before you get too far into your strategic planning process, check out the following tips — your quick guide to getting the most out of your strategic planning process:

• Pull together a diverse, yet appropriate group of people to make up your planning team. Diversity leads to a better strategy. Bring together a small core team — between six and ten people — of leaders and managers who represent every area of the company.

• Allow time for big-picture, strategic thinking. People tend to try to squeeze strategic planning discussions in between putting out fires and going on much needed vacations. But to create a strategic plan, your team needs time to think big. Do whatever it takes to allow that time for big-picture thinking (including taking your team off-site).

• Get full commitment from key people in your organization. You can’t do it alone. If your team doesn’t buy in to the planning process and the resulting strategic plan, you’re dead in the water. Encourage the key people to interact with your customers about their perception of your future and bring those views to the table.

• Allow for open and free discussion regardless of each person’s position within the organization. (This tip includes you.) Don’t lead the planning sessions. Hire an outside facilitator, someone who doesn’t have any stake in your success, which can free up the conversation. Encourage active participation, but don’t let any one person dominate the session.

• Think about execution before you start. It doesn’t matter how good the plan is if it isn’t executed. Implementation is the phase that turns strategies and plans into actions in order to accomplish strategic objectives and goals. The critical actions move a strategic plan from a document that sits on the shelf to actions that drive business growth.

• Use a facilitator, if your budget allows. Hire a trained professional who has no emotional investment in the outcome of the plan. An impartial third party can concentrate on the process instead of the end result and can ask the tough questions that others may fear to ask.

• Make your plan actionable. To have any chance at implementation, the plan must clearly articulate goals, action steps, responsibilities, account abilities, and specific deadlines. And everyone must understand the plan and his individual role in it.

• Don’t write your plan in stone. Good strategic plans are fluid, not rigid and unbending. They allow you to adapt to changes in the marketplace. Don’t be afraid to change your plan as necessary.

• Clearly articulate next steps after every session. Before closing the strategic planning session, clearly explain what comes next and who’s responsible for what. When you walk out of the room, everyone must fully understand what he’s responsible for and when to meet deadlines.

• Make strategy a habit, not just a retreat. Review the strategic plan for performance achievement no less than quarterly and as often as monthly or weekly. Focus on accountability for results and have clear and compelling consequences for unapproved missed deadlines.

• Check out examples. Although you can’t borrow someone else’s strategy, you can find inspiration and ideas from the examples of others. Here is one website with a catalog of example strategic plans by industry: OnStrategy, http://onstrategyhq.com/samples/ . Check it out for quick access to ideas.

Market Research Plan Consultant

Market Research Plan Consultant

From an ad for Ground Floor Partners (https://groundfloorpartners.com/market-research/ )

Accurate market research is the foundation for every business or marketing plan (https://groundfloorpartners.com/marketing-plans/) Ground Floor Partners can help you gain a much deeper understanding of:

• market opportunities

• existing customers

• prospects

• competitors

• employees

• industry trends

• environmental or regulatory risks

We Help You Focus

Large market research firms research specific industries and generate standardized industry reports. The problem for most small businesses is that very few of them fit neatly into these industry categories. That’s where we come in. Instead of generating canned industry reports, everything we do is customized for each client.

• Effective marketing is all about targeting and focus. Better targeting means less waste, lower expenses, and higher profits. Some more examples of the kinds of market research we do for our clients:

• Conduct a comprehensive market opportunity assessment – Assess your markets and current market positions (market size and share of market, channels, growth trends, threats, and opportunities)

• Identify customer needs and determine which market segments hold the most, and least, attractive profit potential.

• Find out what customers and prospects think about your new customer service procedures, your sign-up process, your newest product, your new tag-line, your invoicing process, etc.

• Identify regulatory, political, and demographic trends that could create problems – and opportunities – for your business.

• Develop a thorough understanding of competitors – Who leads and who follows in this space? How much market share does each player have? What are their strengths and weaknesses? How do they differentiate themselves? How does their pricing strategy compare with yours? How do they market their products and services? How does their brand equity compare to yours?

• Identify opportunities to use your strengths and exploit competitor weaknesses.

Business Valuation Service Industry

If you are considering buying or selling a service industry business you need to start with an evaluation. This can be very complex and the use of a consultant can often give you a value that you can easily defend. The following article outlines the process, and is extracted from FBB Group Ltd: https://www.fbb.com/company-information/recentarticles/how-to-value-a-service-business.

Business Valuation Service Industry

Service businesses run the gamut, from accounting firms, to drycleaners, to janitorial services, engineering, public relations firms, and many other options. Despite their disparity, they all have one thing in common: offering a service to clients.

By their nature, service businesses don’t have much in the way of tangible assets, making EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), for larger businesses, or SDE (Seller’s Discretionary Earnings), for smaller businesses, multiples typically lower than manufacturing businesses. Generally, the smaller the service business, the lower the SDE multiple.

Valuing a service business involves many factors – a tidy, one-size-fits-all formula doesn’t exist. That being said, sellers should recognize that buyers will be particularly interested in certain characteristics for most service businesses.

Normally, valuation is based on several criteria, including: history of profitability, cash flow, overhead, intellectual property, company reputation, number of years in business, opportunities for further growth and added profits, stability of key employees/management team, and customer diversification.

Further consideration goes to whether the company can add more services. Value increases when a service business offers something unique, especially in a growing industry or market. These industries include rapidly growing service sectors, such as: internet/web-based or cloud-computing services and information technology. Relocatable, internet-based businesses with low overhead are particularly attractive due to scalability. Also, the ability for a business to be operated from anywhere increases the number of prospective purchasers – which increases the business value due to higher demand.

In addition, companies with a large recurring monthly revenue stream (for example, when a high percentage of clients are signed up for automatic bill pay each month) will command more value. Examples include alarm companies or website/email-hosting companies that have monthly auto bill pay from clients. Such a consistent revenue stream impresses both buyers and lenders alike.

Other crucial areas for valuation include intellectual property, ongoing relationships with clients, and having a good team in place – ensuring the company will retain its competitive edge, even when the seller (who typically drives new and repeat business) leaves.
Without significant capital assets, key customers and employees are critical. A strong management team adds to the value of a service business (often more so than in manufacturing) and, conversely, it can detract from value when there’s a poor or inexperienced team.
Another measure of value may include the amount of market share. Companies that provide a niche service and don’t have much, if any, competition will command higher multiples of value.

Within the industry, B2B (business-to-business) companies generally command more value than B2C (business-to-consumer). For both, however, client-base diversity commands value – more medium- or small-sized clients being preferable to a few large clients. With low customer concentration, financial risk is reduced. If one client, for instance, cancels a contract or goes out of business, the service business remains financially viable.

Although contrary to an owner’s instinct, businesses command higher value when they’re not dependent on the owner’s personal relationship with clients. If the owner generates a substantial amount of revenue versus the other employees in total, the business could be at risk after the sale. Service businesses are more valuable when customer relationships are readily transferrable: as customers of a drinking-water delivery or HVAC service business don’t usually care who the company’s owner is, for example. Also, keep in mind that seasonal businesses, due to their cyclical nature, have lower value.

Cash flow is “king,” so the primary consideration for bankers is a buyer’s ability to stay current on loans for acquisitions and working capital. Banks focus heavily on reliable cash flow for service businesses, given that there is little, to no, collateral within the service business itself.

Whether you’re in the market to buy or sell, understanding the various considerations of valuation for a service business will make the process smoother and increase the probability of a more successful transaction.

John B. Vinturella, Ph.D. has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

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