Not long ago we (Rough Air Associates) formed a joint venture with another small firm to seek out investment opportunities in small business. Part of my vision with Rough Air is to create an investment arm that acquires small businesses, in my areas of interest, and helps take those businesses to the next level. My new partner and I created 4 Iron Development Group to do just that.

My partner is new to the entrepreneurship world, but not the business world. He is a savvy executive who has been fighting the corporate wars for more than twenty years, and today he and I will close a deal on our first investment opportunity. Late last night I was thinking through all of the things we needed to get done in the next few weeks in regards to our new acquisition, and reminding myself of the principles that have always guided me in running a business. I would like to say these guidelines are something that I came up with on my own, but I am not that smart. These guidelines are really a compilation of things handed down to me by my mentors, and today I wanted to pass them along to my partner and our readers, for what is worth. Always remember, free advice is worth what you pay for it, so here are my guidelines.

1. Have a vision – No matter how large or small your business is make sure you have a long-term view of where you want your business to go. Dream big, don’t allow the doubts of others to weigh on your desire to tackle those big dreams. Grab a vision, focus on it, and keep moving forward. Every day you will run into roadblocks and challenges, but don’t let them stop you from getting to your vision.
2. Treat everyone well – I always worked hard at ensuring every stakeholder (employees, customers, and vendors) knew how much I appreciated their efforts. It is important to treat everyone well. This does not mean being a pushover. There are times when you will need to make tough decisions, and you will have to take a firm stance. Taking a firm stance does not mean being a jerk. You will catch more flies with honey!
3. Be honest – You need to be honest with yourself about your business, and with everyone around you. At the end of the day so much of your business’s success depends upon your reputation. If you lose the trust of any of your stakeholders, you set your business on a path to failure.
4. Keep your promises – My dad always told me he was successful in banking because he always delivered more than he promised. People need people they can depend on. If you can develop that reputation for your business you will go a long way.
5. Never stop selling – I never stop talking about my business. I know some folks have heard it before, and they are probably getting tired of it, but the more folks you tell, the more the word will spread. I am not great salesman, but I never stop selling!
6. Have fun – On occasion people will ask why I just don’t retire, maybe take a teaching job, or get a mid-level management position at some other business. I always tell them what my father-in-law taught me, I do it for the “fun of the run.” I love everything about being engaged in small companies and helping them grow. Whatever your are doing always make sure you are having fun, life is too short to do otherwise!

  I realize my “sage advice” may not work for everyone, but if you follow these simple guidelines I believe you will put your business on a path to success.

One common challenge that many new business owners have is they have created a great idea, but have no capital to move it forward. Many entrepreneurs take their idea all the way to point where all they need is money, and they fail to convert.

Since most banks are not overly fond of providing start-up capital many business owners find themselves in search of an angel investor. An angel investor will take the investment risk in a start-up in hopes of a strong potential return, sometimes that return may be years down the road. Most angels are focused on areas of interest rather than investments of opportunity.  Although most investors look at many deals, they typically only invest in 2 percent of the opportunities that are pitched to them. Here are some tips for how you can improve your chances for being part of that 2 percent.

• Have a plan – The first thing any investor will ask for is a business plan. The plan only needs to be as long as it takes to make the case that yours is a solid investment. Having a well written business plan indicates to the angel investor that you are not an amateur, and can demonstrate your knowledge of the market, and opportunity. This is something you must get done before you even schedule your first appointment.
• Have a story – Angel investors are looking for returns that can beat traditional investments in markets that interest them. Your story must demonstrate how you believe the investor can garner the returns they are looking for, and needs to be targeted to the right audience. The story has to be believable and verifiable. If you paint an unrealistic picture your target will pick up on it pretty quickly.
• Know what you can live with – Most investors are going to want a piece of the action. I would never say never; however, if you approach an angel investor with an opportunity, and all you can offer is to pay back a loan, then you will probably not get far. If someone is going to bet on your opportunity then they will likely want a piece of the action.
• Stay upbeat – Finding the right investor will take time. Be prepared for a long haul and don’t give up your search too easily. This is a game where persistence will pay off.

Here are some links from Inc. Magazine for angel investor information.

The U.S. Federal Reserve announced this afternoon an additional one-half point cut in the prime lending rate on top of last week’s three-quarter point rate cut. The announcement comes on the heels of this morning’s GDP report which indicates the economy slowed significantly in the fourth quarter of 2007. The Fed is taking an aggressive stance to pump stimulus into the economy sooner rather than later.

The U.S. Department of Commerce released their estimate for fourth quarter Gross Domestic Product this morning. GDP grew an anemic .6 percent in the fourth quarter confirming what many already suspected, the U.S. economy has slowed significantly. The poor results from the last quarter of 2007 come after the incredible 4.9 percent growth in the third quarter of 2007. Although the economy did not retract in the final quarter of 2007, the slowdown does have many analyst wondering what rough air may be just ahead.

Someone once told me that business valuations are an art, not a science, and most every entrepreneur I know believes the value of their business is much higher than it really is. So if you are business owner that is ready to sell your business, you need to understand the difference between fantasy and reality when trying to understand the value of your business.

The fantasy is the story we hear about from our colleagues or we read about in Inc Magazine. The entrepreneur starts a new business, the business grows, he or she sells it for hundreds of millions of dollars, and retires to some remote carribean island. This is the high multiple fantasy. The market may only be paying 5 time earnings for a business in your segment, but yours is worth 50 times earnings. Often entrepreneurs will base the value of their business on what they are earning from that business today. They will calculate what they make from the business now, then they will calculate how much cash it will take to earn the same from investments. In their minds that number becomes the value of their business.

The reality is much different. Quite simply the value of your business is what someone is willing to pay for that business. A prospective buyer looks at the business from an investment return standpoint. There are generally two pieces to forecasting an investment return, one is financial and one is strategic. The buyer will start with the financials and do a simple cash flow analysis, plug in some growth rates, and create a model that indicates how much the business is worth as it stands today. If the buyer is more strategic, they may plug in additional sales and potential cost synergies that can drive the value. There are things an entrepreneur can do to drive the perceived value of their business, we suggest the following.

1. Have a growth story – The bottom line is usually the bottom line. If you have a track record of revenue and earnings growth and can help the buyer rationalize an aggressive forecast you can drive the value of your business. If your revenues are stagnant and earnings are going down don’t expect an unusually high multiple. You need a growth story.
2. Display market segment leadership – Buyers, especially large corporate buyers, love to buy the market leader. If possible establish leadership in your market, if you cannot be the leader in your market, create a new market where you can be the leader. Market leadership will get you a premium.
3. Don’t be the business - If the buyer believes some portion of the revenue or earnings are at risk if you walk out the door, they will reduce their perceived value. Make sure you have a management team in place that seems to run the business autonomously from the ownership. A strong management team that is going to stick around helps the buyer rationalize continued strong performance.
4. Invest in intellectual property – The value of your business will go up if you have a series of solid patents or a strong brand. The value of intellectual property is pretty arbitrary, this favors the seller. A strong intellectual property program helps the buyer rationalize revenue security.
5. Image is critical – When the buyer shows up to tour your facility make sure things look great. This means the facility is clean, organized and well kept. This also means your business appears as though it is governed well. Strong planning systems, processes, and infrastructure will give the buyer that warm and fuzzy needed to get to your value.

If you are planning to sell your business, don’t make the classic mistake of assuming the value is whatever resources you need to sustain your lifestyle. Understand the value of your business, the realities of selling it, and how you can increase the value. This will help you get top dollar for your business. For more information check out our podcast on our resources page. Also, here is an article with some tips on increasing the value of your business.     

Durable goods orders rose in December after drops in both October and November. December’s number was a surprise to many analyst as the 5.2 percent jump was much stronger than expected. 

The Conference Board reported this morning that consumer confidence fell this month. January’s reading came in at 87.9, just below December, but above consensus. Consumers continue to worry about a slowing economy, slowing job growth, and higher energy prices. Although the durable goods data was welcome news, the consumer confidence data points to a slowing economy, something that has been reaffirmed by the efforts going on with the U.S. Federal Reserve and policy makers in Washington to help hold off a severe downturn.

One of the things that I help many small businesses with is creating an advisory board. An advisory board can give a business owner the objective advice they need to run their business better. Many times, business owners can get to a point where getting true objective advice from their teams becomes difficult. Employees may respect the owner, they may even fear the owner, and they may be afraid to give the owner objective feedback.

An experienced advisory board can also help guide the new business owner. Whether it is a start up business, or a business that is acquired, an advisory board can help the business owner get over many humps, and prevent them from making some common mistakes. Keep in mind, just because it is a start up business does not mean prospective advisers will not be interested in serving on the advisory board.

For a family business, or any business with multiple partners, an advisory board can be the objective influence all of the owners need to keep them working together effectively. I have been in more than one situation where the advisory board has been the critical force in keeping a business moving forward, despite friction among the owners or the family.

The process we use for helping small business owners create an advisory board is pretty straightforward. We have three major steps:

1. Identify business needs – We work with business owners to help them identify the strengths and weaknesses of the management and the owners. It is also important to understand the direction the owners hope to take the business. The goal in the first step is to create a profile of what type of advisers will be best for the business.
2. Identify candidates – Once you have an idea of what expertise the business may need in the long run, you can begin to put together a list of prospective candidates. What backgrounds will be most important? Do they need to be a financial expert, a marketing expert, a technical expert, or a generalist? Don’t be afraid to approach someone about being on the board, most people will be flattered when you ask.
3. Create a system of governance – This includes setting boards terms, board compensation if any, and managing board meetings. Poorly run meetings where the board members are not prepared in advance, agendas are not created, and information is not shared will result in a board that is not effective. Like most things in business, execution is the key to being successful.

Here is a quick article I found that gives some good tips on creating an advisory board. 

New home sales fell again in December after a 9 percent drop in November. Sales of newly constructed homes were down 4.7 percent in December and fell an astonishing 22 percent in year over year data. Inventory remains the major concern as inventories rose 9.6 months. The market for new homes won’t start expanding again until we bleed off the inventory of unsold homes. Over the past year the problems in the housing market and the fallout from the credit crisis have spilled over to other areas of the economy. Hopefully the recent action by the U.S. Federal Reserve and the stimulus package on the table will help jump start a slowing economy.

According to Brian Wesbury in an Op-Ed in today’s Wall Street Journal, our economy is fine. If one ignores the fact that we generated almost 1,000,000 fewer jobs in 2007 than we did in 2006, that manufacturing is soft, consumers are gloomy, and housing is in the tank then sure the economy is fine. Although the current economy is not the end of the world, it is not “fine.” We do have some challenges and the sooner we recognize those challenges and try to do something about them the better off we will be. Someday (probably not in my lifetime) people will rise to a level where they realize the economy is not so much a reflection of the party in power as it is a reflection of our collective actions. When that happens we will come to the realization that slowdowns happen, and we will work together to deal with it!

A question we posted recently in regards to service was, “What makes some companies great at customer service, and what makes others appear lost?”

During the service revolution we heard about those that are great like the Ritz Carlton, and Nordstrom. Both of these companies are considered premium players in their market segment, they also tend to be the highest priced in their segment. So, is their service great because they charge more, or is their great service giving them the opportunity to charge more?

I remember a story about Nordstrom’s extraordinary service. An executive I know was on a business trip. When he got to the airport to hop on the company plane he realized there was a problem. All of his colleagues had on suits and ties, he was dressed business casual. The signals had gotten crossed and he had not gotten the message about the change in dress code for the meeting. When he arrived at his hotel, he noticed that his hotel was in a downtown area near a Nordstrom. He ran into Nordstrom, told them his problem and an hour later he had a suit and tie, altered to fit.

Another story is about a friend of mine who was staying at the Ritz Carlton. He was sitting outside by the pool having cocktails with some friends. It was in the afternoon and he suddenly decided he was hungry for cereal. Most hotels would have let him know they were no longer serving breakfast, not the Ritz Carlton! The waitress promptly asked what type of cereal he would like!

So do they give this service because their prices are high? Our view is that great service cannot be bought, you must earn it. Most companies that have great service have two important elements, they trust and they verify.

Employees at both of these companies have management’s trust. They can make decisions for the customer on the spot. They do not have to go through layers of paperwork or approvals. They have the authority to make a decision and resolve the customer’s issue. Both companies, through customer feedback programs, ensure the process works, they verify!

Recently while traveling in London and Paris, I saw the perfect example of poor customer service. During our trip everywhere we went we had great service. The restaurants in Paris were outstanding, and the service was always top notch. One afternoon while strolling up the Champs Elysees my wife and decided to stop for coffee. I wanted espresso, she wanted a traditional American style coffee. When our coffees came we had two espressos. My wife tried to explain to the waiter in her broken French/English that she wanted a regular coffee. A kind French couple sitting next to us even got into the act, explaining to the waiter that she wanted a café ole. The waiter gave up on us, never returning to our table, and literally ignoring us as we tried to speak with him. I wonder if that is what the owner of this restaurant, Monte Cristo, on one of the most international streets in the world, had in mind when he hired this fellow. Were his instructions, “Ignore the customers you do not understand, they will go away eventually.”

I doubt these were his instructions, and had the owner known his employee’s actions would be documented for thousands to read about on the Internet he likely would not have been happy!

Always remember, trust, but verify!