The Business Model Canvas – A Very Helpful Tool

During some interactions with my local Innovation Center, I was introduced to the book Business Model Generation by Osterwalder & Pigneur. This book is full of useful information and powerful graphics and helps business owners and managers capture the essense of their business graphically using the “Business Model Canvas.”

The book goes on to describe various patterns of business models and providing several examples of business models used by some well-known and successful companies (e.g. Google).

I would highly recommend this book to any business owner. If you’d like to get a taste of what this book provides, here is a short PDF with the Canvas and some expcerpts from the book that explain how the Canvas works.

How to use the Business Model Canvas

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Is it time to buy/sell a business?

The economic crash of 2008 did more than simply cause economic and employment problems, it also made business owners and prospective buyers stop and think about the timing of a business transaction. Particularly, business owners deferred listing their businesses for sale because the market price for healthy businesses took a hit as a result of the overall economic conditions.

If we ignore the puffery of the election year, there are still valid questions regarding whether or not the economy is moving in the right direction. Consequently, there are still questions lingering in the minds of business owners regarding the timing of a business sale.

Remember the Fundamentals

No matter what is happening in the economy at large, the value of a business and the price it can fetch is always driven by its ability to create value for customers as measured by profits.

There are different general rules for valuing a business. Variables include the industry and type of the business. A good business intermediary can help you apply the appropriate rule and determine what your business is worth to an average buyer. Likewise, a good business intermediary can help a potential buyer establish a price range to be expected for a particular target business profile.

Are you Trending the Right Direction?

My family watched The Voice this past spring. As a result, we were introduced to the concept of “trending” on Twitter. When a particular identified topic or entity is mentioned by enough different Twitter accounts, it is said to be trending.

In business, the trending that really matters is in the area of profits. When you chart out your gross sales, net income and EBITDA, you want to see a line that is gradually moving higher. This positive trend will communicate value to a potential buyer and support a price on the higher end of the range for that particular business profile.

Many business owners that are ready to sell are wanting to retire and are no longer putting as much energy and innovation into the business as they used to. This often results in a downward trend from a peak. If this describes your business, the you may want to do some planning and implementation before you are really ready to list your business for sale.

Do you have a Plan?

Many business owners simply decide one day to contact a business intermediary and list their business because it’s time to move on. Unfortunately, the business is not ready for an ownership transition and the actual sale can be negatively affected.

In order to maximize the value of your business in the eyes of a buyer, you should strongly consider developing an exit plan (also known as a succession plan) that provides 3-5 years of preparation for the ultimate sale of your business. You can use this time to get your sales moving in the right direction, your employees trained and empowered to carry on without you, and your business systems prepared for the next phase of your business’s life.

A good exit plan will involve all your key advisors, consider where you are now and where you want to be on the day of closing, and map out an action plan to get you to your desired destination. Planning with a business intermediary helps to avoid the silo effect that often occurs when you go to each of your Key Advisors asking for advice about transitioning your business. The business intermediary can keep all of your Key Advisors informed and communicating with one another while compiling all the relevant information and planning into a master exit plan that will serve as your road map to an optimal exit from your business.

Anthony Wayne Business Exchange provides business succession planning as well as business brokering services for businesses of all sizes. Contact Jim Hanson for more information about business succession planning or general information about Anthony Wayne Business Exchange.

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The Great Debate – Supply Side or Demand Side?

Small business owners generally have little time to debate economic and political theories. They’re too busy actually working to create value (and profits).

Meanwhile, politicians and cronies spend millions fighting over who has control of the levers of governmental power.

Well…in an attempt to lighten things up a bit, here are a couple entertaining (but very informative) videos I found on YouTube today.

The Fight of the Century

Fear the Boom and Bust

Bonus: An Italian college student that knows more than Paul Krugman.

Enjoy!

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Me thinks the Gentlemen doth protest too much!

Like many of my fellow Americans, I waited with bated breath for the much-anticipated decision of the Supreme Court on Obamacare. I believe most of this law to be unnecessary, bad policy and counter-productive. With that said, you can imagine my disappointment when I saw the headlines.

However…unlike most, I went directly to the US Supreme Court website and downloaded the draft opinion. I guess being a lawyer makes this step more comfortable, but I like to know exactly what the Court ruled and on what rationale before I start screaming “treason” from the rooftops.

Sadly, during an 8-hour road trip to pick up my kids from Grandma’s house, I subjected myself to at least two hours of The Greatly Deluded One, Mark Levin, as he railed against Chief Justice Roberts. Just today, I read a much more reasonable but also misguided analysis of the opinion by Jim Blasingame. All the empty rhetoric and hot air prompted me to post an accurate and analytically sound explanation of the opinion here.

In this post, I will address only the decision with respect to the “individual mandate” provision.

The Mandate

The most hotly contested provision in the Affordable Care Act (a/k/a ObamaCare) is the “individual mandate.” The Chief Justice explains that the Government advances two theories that justify the “individual mandate.”

First, the Government argues that Congress had the power to enact the mandate under the Commerce Clause. Under that theory, Congress may order individuals to buy health insurance because the failure to do so affects interstate commerce, and could undercut the Affordable Care Act’s other reforms.

Second, the Government argues that if the commerce power does not support the mandate, we should nonetheless uphold it as an exercise of Congress’s power to tax. According to the Government, even if Congress lacks the power to direct individuals to buy insurance, the only effect of the individual mandate is to raise taxes on those who do not do so, and thus the law may be upheld as a tax.

Commerce Clause

The Chief Justice foreshadows the real reason for his decision under the “tax and spend power” early in his analysis of Congress’s Commerce Clause power. He summarizes the Government position as follows: “Because state and federal laws nonetheless require hospitals to provide a certain degree of care to individuals without regard to their ability to pay…hospitals end up receiving compensation for only a portion of the services they provide.” In other words, poor policy and poorly drafted legislation with respect to mandatory emergency room care has created a financial problem for hospitals that we should now address by even worse policy. I can’t imagine a more exaggerated wink from the Chief Justice. The question of the “individual mandate” is primarily a political question that is to be resolved in the Legislative Branch rather than by the Judicial Branch as a consequence of the separation of powers required by the Constitution.

Foreshadowing notwithstanding, the Chief Justice thoroughly and squarely confronts the real problem with relying on Commerce Clause power to compel the purchase of health insurance.

[I]t is now well established that Congress has broad authority under the [Commerce] Clause….Given its expansive scope, it is no surprise that Congress has employed the commerce power in a wide variety of ways to address the pressing needs of the time. But Congress has never attempted to ely on that power to compel individuals not engaged in commerce to purchase an unwanted product.

The Constitution grants Congress the power to “regulate Commerce.” Art. I, §8, cl. 3 (emphasis added). The power to regulate commerce presupposes the existence of commercial activity to be regulated. If the power to “regulate” something included the power to create it, many of the provisions in the Constitution would be superfluous.

The language of the Constitution reflects the natural understanding that the power to regulate assumes there is already something to be regulated….As expansive as our cases construing the scope of the commerce power have been, they all have one thing in common: They uniformly describe the power as reaching “activity.”

The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals preciselybecause they are doing nothing would open a new and potentially vast domain to congressional authority.

The Chief Justice helpfully provides an illustration of the absurdity of the individual mandate if justified under the Commerce Clause.

To consider a different example in the health care market, many Americans do not eat a balanced diet. That group makes up a larger percentage of the total population than those without health insurance. The failure of that group to have a healthy diet increases health care costs, to a greater extent than the failure of the uninsured to purchase insurance. Those increased costs are borne in part by other Americans who must pay more, just as the uninsured shift costs to the insured. Congress addresses the insurance problem by ordering everyone to buy insurance. Under the Government’s theory, Congress could address the diet problem by ordering everyone to buy vegetables.

People, for reasons of their own, often fail to do things that would be good for them or good for society. Those failures–joined with the similar failures of others–can readily have a substantial effect on interstate commerce. Under the Government’s logic, that authorizes Congress to use its commerce power to compel citizens to act as the Government would have them act.

The Chief Justice concludes his analysis of commerce power as it applies to the individual mandate as follows:

The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to “regulate Commerce.”

Tax & Spend Power

With clear and logically sound precedent set keeping Congress on a leash with respect to the Commerce Clause, the Chief Justice then transitions to the more troublesome question of Congress’s power to tax.

Where nutters like Levin and other more reasonable but inadequately informed persons get derailed is in the role of the judiciary in our republican form of government. The Legislative Branch is, and has always been, the place where the truly political questions are resolved. In effect, the framers of the Constitution told us we can elect whomever we like but then we have to live with our decision. In this instance, the Chief Justice quite properly applied precedent in order to “save” the Affordable Care Act from being stricken as unconstitutional and invited the public to participate in the on-going political debate on the propriety of this “tax” next November.

Under the mandate, if an individual does not maintain health insurance, the only consequence is that he must make an additional payment to the IRS when he pays his taxes…Under that theory, the mandate is not a legal command to buy insurnace. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income….The question is not whether that is the most natural interpretation of the mandate, but only whether it is a “fairly possible” one. Crowell v. Benson, 285 U.S. 22, 62 (1932). As we have explained, “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality.” Hooper v. California, 155 U.S. 648, 657 (1895).

[I]t is abundantly clear the Constitution does not guarantee that individuals may avoid taxation through inactivity.

We do not make light of the severe burden that taxation–especially taxation motivated by a regulatory purpose–can impose. But imposition of a tax leaves an individual with a lawful choice to do or not to do a certain act, so long as he is willing to pay a tax levied on that choice.

The Affordable Care Act’s requirement that certain individuals pay a finanical penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.

The Moral of the Story

The claptrap arising from both sides of the aisle regarding this historic opinion illustrate the truly political nature of the controversy and underscore the wisdom of Chief Justice Roberts and his opinion.

The separation of powers required by the Constitution forces citizens to be responsible for their decisions in the ballot box. If we, as citizens, elect irresponsible or corrupt individuals as our representatives and our governors, then we have only ourselves to blame for the consequences of that decision. We may rely on the Constitution to maintain the boundaries of governmental power, no matter who holds office, but we cannot expect the judiciary to intervene when we dislike the outcome of the political process.

As for Mark Levin and his supporters, it is irresponsible to resort to ad hominem attacks on Chief Justice Roberts when he properly exercises his authority within the bounds set upon the judiciary by the Constitution. It is inexcusable to resort to name-calling and mis-characterization of the issue simply because you are disappointed with the outcome of a case or the reasoning of a particular jurist.

The moral of the story is simply this: Do your homework and vote responsibly!

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Defining “Weak”: Is it time for some new economic metrics?

An article posted on the Small Business Trends website had an interesting take on the current condition of small business in America. The article proposes that the small business sector may be weakening based on some current data.

Let’s examine each point in the post to see how Small Business Trends is defining “weak”.

Revenue growth has flattened. The Intuit Small Business Revenue Index, which uses data from users of QuickBooks Online to measure small company sales, increased by only 0.01 percent in April, a significant decline from the 0.4 percent the measure increased last December.

I have to admit, I would consider stagnant sales to be an indication of weakness. I’m encouraged that there was at least a little growth in the sector. I’d be really concerned if small business was actually losing sales.

Small business employment growth is slowing. The percentage of respondents to the NFIB survey who increased employment over the previous three months declined from a net of positive 1 percent in December 2011 to a net of negative 4 percent in April 2012.

I think I understand why employment is considered a metric of strength. Common sense would tell you that rising employment indicates increased activity. Unfortunately, it is all too possible to hire new people even when you don’t need them. Also, small business in the Post-Wal Mart world have made efficiency an art form. Efficiency generally increases productivity, but almost always reduces employment.

Small company employees are working less. The Intuit Employment Index, which measures employment-related activities at companies with fewer than 20 employees who use Intuit Online Payroll, shows that the number of hours worked by hourly employees has dropped 2 percent since December 2011.

If hours worked is lower because of decreased sales, then I can see this as a sign of weakness. However, if hours worked are decreasing due to effective use of technology or other efficiencies, then I’m not sure that this metric is entirely helpful.

Fewer companies are borrowing. The Thomson Reuters/PayNet Small Business Lending Index, which measures the total amount of small company credit, is 15 percent below where it was last December.

This one really gets me. Since when do we measure the strength of a business or a sector by how much debt they are carrying around. It’s like arguing that an obesce individual is healthier because they get more exercise from lugging around all that extra weight. I understand that this metric assumes that businesses borrow when they expand or when operations are booming, but that assumption is likely to be off for small businesses in the post-2008 economy.

Small business owners are more reluctant to expand. The NFIB survey indicates a decline in the share of small business owners who think the next three months are a good time to expand their businesses from 10 percent in December 2011 to 7 percent in April 2012.

This one makes sense to me. We are (hopefully) starting to pull out of a really bad recession and a rather large portion of the small business market is owned and operated by Baby Boomers who are thinking about winding down rather than ratcheting up. This actually makes me think that it is a good time for small business transitions. For current owners, potential expansion is a carrot to add to the sales presentation as a value enhancement for the business. For buyers, unrealized potential in current businesses means that the new owner will be getting their dollar’s worth out of the purchase. Far from being weak, I see this trend as an indication that we are priming the pump for what will be the largest transfer of wealth in history.

So I guess “weak” is in the eye of the beholder. Don’t let pundits or bloggers (yes, even me) distract you from the business fundamentals. For small business owners, “weak” is not an industry or sector issue. Your business can be strong and valuable even when times are tough.

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Value Creation…The ONLY Thing That Matters

The news is full of doom and gloom about the economy. Politicians from all quarters are promising that they can turn things around. Talking-head economists on the TV try to explain why spending more money that doesn’t even exist right now will make everything better. And the hardworking people who either own or are employed by a small business shake their heads and get back to work.

Small business gets it. They see what Fortune 500 companies routinely miss. They live in reality while ivory-tower academics pontificate about a theoretical world that doesn’t actually exist anywhere.

So what do small businesses get? SUCCESS IN BUSINESS IS THE RESULT OF VALUE CREATION…PERIOD!

I admit that “success” is defined differently by different people. So, let’s talk about three common definitions.

Profits

The most basic and universally held definition of “success” in business is profit. For any business to continue existing, it must take in more revenue than it pays in expenses. The margin doesn’t have to be huge, but there has to be a margin.

This is true, oddly enough, with all organizations. Non-profits have to take in more receipts than they pay out in expenses. The basic family unit must take in more income than it pays out in expenses. And, for those entities that fail to make more than they spend, someone else in society has to chip in to make up the loss…out of their profits!

So how does a business generate profits? How does a non-profit keep receipts larger than expenses? How does a family keep income larger than expenses? Of course, it is always a good idea to minimize expense as much as practicable, but at some point you hit the minimum load and you have to focus on gross income.

The simple answer to the profits question is VALUE CREATION. A business (or other entity) must do something with its available resources that make the resulting product or service more valuable as a unit than the sum of the components. For a retail business, the sum of purchasing power, access to wholesale pricing, cost of facility, benefit of convenience to customer, etc., must be less than the customers’ are willing to pay for the purchase experience as a whole. For a manufacturer, the sum of production capability, cost of materials, cost of labor, etc., must be less than the customers’ are willing to pay for the finished goods. You get the picture.

Peter Drucker has written that the goal of every business is to create a customer. He also points out that profits are a success metric that helps measure the health of the business. Lurking behind this practical explanation is the necessity for the business to create value. Customers will not buy and profits will not exist if your business is not creating more value than it is consuming.

Employment

Everyone seems fixated on employment in the current political cycle. The politicians are all explaining how they will wave their magic wand and create jobs (if elected). Mitt Romney surely understands that this is all rhetoric. As a private equity fund manager, he most certainly knows that businesses create jobs…not government. In fact, the small business sector makes up about 75% of the US economy, making them the most important players in the employment game.

So how does a small business “create jobs”? Simple answer: increase the amount of value created so that demand requires more labor to keep up.

Let’s say that Joe wants to be a good citizen and help out the economy. So Joe hires 5 people that he doesn’t really need. Over the course of a couple of years, this increased burden causes Joe (for any number of possible reasons) to either downsize his business by more than 4 employees or to go out of business altogether causing everyone to lose a job.

But what if Joe does some market research, invests in some new technology, and then offers new or improved products or services to the community? Existing customers continue to buy (possibly at a higher amount than before). New customers start begin to buy. Before long, Joe has to hire 4 new employees just to keep up.

If Joe isn’t offering something to the public that is worth more to the customers than it costs Joe, then there is no point in even talking about Joe’s employment figures. Value creation is the real key to increasing employment.

Business Value

Another measure of success is the value of the business. We see this most often in publicly-traded companies with Wall Street’s fixation on share prices and a variety of ratios. For small business, the value of the business usually becomes imporant to the owner about the time the owner decides to retire or sell the business for some other reason. When it comes to business value as a success metric, the higher the better.

Unfortunately, business owners that finally start thinking about the value of their business a year or two before retirement are late to the party. The value of a business is synonymous to the value created by the business. Put another way, the value of a business will be evaluated by a potential buyer or investor in terms of how much value the business will create in order to return the initial capital required to buy the business and then to show profits on the investment. Small business owners should be thinking about the value of their business EVERY DAY!

For most small businesses, the source of value creation is in a handful of key assets. Either the business has a key piece of equipment or a key body of knowledge usually housed in the skull of a particular person. If the value creation of the business rests on an asset that is not properly maintained or may become obsolete, the value of the business is discounted. If the value creation of the business depends on the knowledge or skill of a very small group of people that may leave the business or be incapacitated in some way, then the value of the business is discounted. Business valuation is all about sustainable value creation.

No matter what measurement you use, your business is only as good as the value it creates. Your task as a business owner or manager is to constantly look for ways to increase the value created by your business. Thankfully, you are not alone. There are legal, financial and consulting professionals available to provide the value of their expertise to help you find ways to increase the value created by your business.

Anthony Wayne Business Exchange, a leader in the business intermediary profession, offers you expertise for your varied business needs. Formed in 1987 with a vision of providing unparalleled business services to owners and entrepreneurs, AWBE provides professional assistance to business leaders in the areas of succession planning, funding growth, selling a going concern or accomplishing a merger or acquisition.

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