Book Club #6: The Lean Startup, by Eric Ries

/in /by

The Lean StartupDisruption seems to be a constant in the “you economy” of today.  Taxis and even public transport are being disrupted by Uber and Lyft. Hotels and motels are being disrupted by Airbnb.

Billboards are being disrupted by the one device most people are likely to be looking at when they aren’t driving a car (and even if they are): their mobile phones.

Eric Ries and the movement he kicked off when he authored The Lean Startup is disrupting a very old idea: that you need a business plan to build a successful business.

Why the traditional business plan helped

If you talk to most business owners and asked to see their business plan, they might go to some corner of their office or filing cabinet, dust it off, and hand it to you. It hasn’t seen their eyes or hands since it was first written ages ago. Others will tell you they never had one.

We know that business plans aren’t necessary for success, but it was the process of building a business plan that could help crystallize ideas about what kind of business you were building and how you would do it. More importantly, for bank financing, the buyer will be required to furnish their  business plan.

Why a business plan is often irrelevant today

In one word?  The internet.

In a world in which you can start a business in 60 seconds…through a crowdfunding project…or by turning your car or spare room into a revenue stream…or by using instant broadcast capabilities that can be monetized through something like YouTube…a business plan is, at best, a starting point, and one that’s going to use significant time and energy to, at best, guess at the market.

The MVP

Ries advocates for the MVP: the minimum viable product.  What can I get out there as quickly as possible to find out if the market even remotely cares about my product and/or service?  Once you’ve validated your business idea via customers willing to give you money for what you’re offering, you can poll them to find out what features they liked/disliked in order to “pivot” and make your offering better.

This makes business much less like opening a restaurant and much more like making one dish well over and over until you can start to build a series of dishes, which may in time lead to opening a restaurant. Or not. What matters is a relentless laser-like focus on viability and profitability from the jump, which makes starting a business a lot less intimidating and a lot more craft-oriented.

A hybrid approach

At Apex we advocate a hybrid approach. Obviously if you’re bootstrapping and starting a new business from scratch, Ries’s approach is both affordable and logical.  But as any business grows into maturity, you will need to create a business plan built on all your pivots and iterations. This should be done not just as a way to track your progress, but also to have a document for traditional funding should you ever want it to grow your business, or to give to a potential buyer to make their path to financing easier.

The thesis of the book is not a simplistic assertion. It’s backed up by case studies, examples, and evidence.  You can find a copy of it here.

Case Study #6: What You Don’t Know Can Absolutely Hurt You

/in /by

hurtToday Erik Huberman runs Hawke Media, which is an outsourced digital CMO agency that works with the likes of Bally Total Fitness, Verizon, and Red Bull.

But the opportunity to build that company came from settling debts from previous startups and a bit of cash from selling a company called Swag of the Month.

The Beginning

We live in a world in which a monthly subscription product aimed at men sold for $1B (Dollar Shave Club to Unilever).

But before companies like Harry’s or Dollar Shave Club even existed, there was Swag of the Month, which was simply an idea of Erik and a friend’s: how to find a better way to sell t-shirts, without the hassle of retail shopping.

They created a quiz which allowed men to share what they were looking for in a t-shirt and then they mailed out a new shirt to that customer each month.  Over time they built confidence by delivering exactly what their customers wanted.  The brand got a lot of prestige from being written up in all the major men’s magazines.

Then, the wall

Unfortunately, Erik had built his company right into a wall.  They had 5 employees and thousands of customers, but the only way to grow was going to be to raise money or sell.  They were simply doing too much work on a day-to-day basis and not making enough money.

Selling, and the two big mistakes in hindsight

One of the vendors of the company was interested in using the platform that Erik and his team had built to push more sales of their own. They were familiar with the brand and, over the course of an afternoon, learned how the business worked, made an offer, and wrote a check.

Mistake #1

The pain and stress was great enough in Erik’s life that he walked into that afternoon meeting with a number in his head.  That number recovered all the investment in the current business, paid off debt from previous businesses, and took a little off the table for themselves.  It was, by no means, life-changing money.  He made the mistake of blurting out this number when asked and hence blew all his leverage.  The buyer clearly had no problem with that number and wrote them a check immediately.

Mistake #2

The reality is that many competing firms at the time had poorer systems, no profitability, and no brand recognition, but they were still awash in venture cash.  Erik had no confidence or connections to enter this world, so he simply folded his cards.  In retrospect he realized that a bit of networking, a bit more asking, or a bit more willingness to look foolish as he started to pitch VCs would have changed everything.

The new owners went on to quadruple the topline revenue in the 2nd month after taking over from Erik and his team.  

Moral of the story: What you don’t know can hurt you in a business sale. With that in mind, know you can trust a team like Apex, which has more than a century of business ownership and sales between their brokers.

Offer to Purchase: An Apex Signature Service That Saves Time and Money

/in /by

We’ve written about Letters of Intent here on the blog before in an effort to make sure our readers are well educated about the hows and whys of business sales, but truth be told, 90% of our deals here at Apex start with our proprietary Offer to Purchase (OTP).

What is it?

This is a proven, easy to complete, easy to understand document that standardizes and simplifies the buying process by taking 17 years of experience in buying and selling businesses and distilling it into a form that can be adapted to nearly any type of business (as we have language compiled from all the deals we’ve ever been part of).

time and moneyAdvantages

The major elements of an offer are covered and we can very easily amend the offer with additional details as needed.  Having a form like this ready to go ensures that both parties know there is actually a deal on the table before spending more time and expense on it.

A big advantage is cost savings.  Instead of having to contract with a lawyer to draw up an LOI, and the revisions that follow, you can sit down with one of our advisors and put together all the necessary provisions in a much shorter time frame.  There’s no charge for this service.

Our OTP also has sections that take into consideration financing, as well as a good-faith deposit against the sale of the business, usually at least $5000.

Finally, whether you’re a buyer or a seller, you know that speed will be a component of the transactions we engage in, as we are working with a streamlined s better as we do more deals.  

Final Thoughts

Three things to keep in mind…

First, the real work really begins after the OTP is signed.  That’s when all the due diligence and paperwork flies back and forth (literally and digitally).  

Secondly, having our OTP doesn’t eliminate the need for lawyers, it just reduces the amount of time they’re needed for this part of the process.

Finally, we almost always see LOIs on larger and more complicated transactions: our OTP doesn’t cover every situation and business, but it does cover the vast majority of them, and in those exceptional cases we can just as easily work with an LOI as our own OTP.

Want to experience our signature OTP service?  Give us a call at 913-383-2671 or send us an email today!

What is a Letter of Intent? Part 3 of 3: Stories from the Trenches

/in /by

trenchIn the second part of this Letter of Intent series, we focused on the structure of an LOI (Letter of Intent).

As we wrap up this series, we’ll discuss some recent stories “from the trenches” which stopped an LOI from occurring or severely damaged a deal in process.

It’s Too Late Now

Despite the fact that an owner was elderly and dealing with illness, he continued to delay selling the business.  With literally weeks left to live, the family finally reached out to move towards a sale.

While this meant we would have to deal with the estate, a more complicated process than dealing with an owner, it was doable…until we found out that no taxes had been paid for nine years.

Even if they wanted to fix this problem, it would mean filing nine years of taxes, which would automatically trigger an audit, which would be even more cost and paperwork, not to mention no buyer would go anywhere near a business or an owner who had managed to evade taxes for so long.

The only probable option left to this family is a sale of the equipment, which wouldn’t even recover 1/20th of what the business could have been worth if they’d done things right in the first place (apart from not waiting until the knock of death to sell).

Killed by Kindness

It’s well known that some kind of employee participation in profit sharing or stock options is a great tool for morale and retention.  But, it should never, ever be something done during or near a sale process.  In a recent case that we dealt with, the seller blindsided everyone in a meeting by letting all parties know that not only had he recently introduced a 25% profit sharing program, but that he had already paid out the profits for that year under this new scheme.

It hadn’t dawned on the seller that he’d just voted himself a massive reduction not just in the value of the business for sale, but in the amount of profit the buyer could gain, now that the buyer was locked into a program that had precedent with the employees.  Surely, the seller’s heart was in the right place, wanting to do right by his employees. But he failed to consult with his own circle of advisors, and even with someone who he’d engaged to help him sell his business, his own broker.

We’ve managed to rescue the sale by making sure there are no new surprises, but this is a kindness that ended up being a great cruelty…and it didn’t have to be that way.

Short-term Thinking

If the business you’re selling is location-based, it’s important to make sure you have favorable lease terms not just for yourself, but contingencies in place for whomever will take over your lease if you ever sell.

The reason is that some landlords have short-term thinking and see a sale as a way to extract concessions and more money from someone (the buyer), who really doesn’t have much of a choice and is already spending a lot of money anyway.  They don’t realize that behavior like this ensures that among the first things the new owner does is start looking for a new place to move to once the renegotiated lease is up.

Don’t want to be blindsided by challenges like these?  

Having a broker is going to help you avoid many problems, but the way to avoid 99% of problems is to tell your broker everything.  He/she can then make sure to guide the deal to a successful conclusion for all.