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We face a lot of discussions like this with our clients and it is sometimes hard to get a good pulse on what the “market rate” is for a given hypothetical small business equity transaction, mainly because every business is different and market conditions have been changing so rapidly. We serve the role of bridging the gap between the business owner and the financing community which is the supplier of capital.

LINK to ARTICLE

Allen

Link:

http://www.businessweek.com/news/2010-01-07/u-s-initial-jobless-claims-rose-1-000-last-week-to-434-000.html

WASHINGTON – The number of newly laid-off workers seeking unemployment benefits fell last week to the lowest level since early July, evidence that job cuts are slowing.

The Labor Department said Thursday that initial claims for unemployment insurance dropped to a seasonally adjusted 545,000 from an upwardly revised 557,000 the previous week. Wall Street economists expected claims to rise by 5,000, according to Thomson Reuters.

The decline was the third in the past four weeks. The four-week average, which smooths out fluctuations, dropped 8,750 to 563,000. Despite the improvement, that’s far above the 325,000 per week that is typical in a healthy economy.

Commentary:

Continuing drop in initial jobless claims is further positive sign that the economy has bottomed out and is poised for recovery, barring any unforeseen shocks.

“The US sought to ease Chinese Premier Wen Jiabao’s concern about the security of his country’s investments in US government debt,

reiterating pledges to cut the budget deficit in half in four years.”

(Link to Economic Time article)

About 8.31 million properties had negative equity at the end of 2008, up 9 percent from 7.63 million at the end of September, according to the study, released Wednesday by First American CoreLogic. The percentage of “underwater” borrowers rose to 20 percent from 18 percent.

Another 2.16 million properties could go underwater if home prices fall another 5 percent, the study shows.” (Link to Reuters Article)

Commentary:

This is a leading indicator for how deep the banking crisis will get. With so many people underwater in their mortgages, the banks essentially own the homes and are relying on the homeowner to continue making payments. Many homeowners are throwing in the towel, pitching their keys onto the living room floor and walking away. Housing prices got way out of control in the last 7 years in many of these markets. There is still a lot of air to be taken out of home prices. This thing could get much worse before it gets better. –Allen

Intel had developed very effective methods for valuing, structuring and managing their acquisitions based on the McKinsey approach to valuation.

CFO has adapted a similar process for evaluating and managing acquisitions for its clients that we feel is extremely powerful.

In essence the methodology involves establishing the value drivers of the deal, basically those things that were critical determinants of why you were doing the deal, what you were paying for and what you had to accomplish with the combined entity after the deal was done.

We build up a valuation model before the deal is done around those value drivers to help you get comfortable with the cost of the deal (which would include operating losses going forward). The idea of course is to quantify the value of the deal vs. the cost.

This methodology might also suggest more effective ways to structure the deal to enhance value or minimize risk of value destruction. For example, you may install performance payouts over time to the key employees aligned with the value drivers.

Going forward the same model used to value and structure the deal is used to become the operating model (and budget). This assures that you have a seamless process for value creation and harvesting.

As you likely know, more than 50% of acquisitions are subsequently determined to be failures. This inefficiency is due to errors in estimating the value of the deal, structuring the deal and most importantly with integration of the deal.

In short, with CFO Network you’d have a powerful partner on board who could seamlessly help you develop your acquisition capability as a core competency… even a secret weapon.

–Allen

What is the answer? The key to managing anything is to first shine a light on the situation. Companies who carry inventory balances need proper systems in place to maintain control of their inventory. And yes, you need good people from purchasing to sales to ensure relevant information is available to make good decisions. For each SKU, a manager needs to understand not only the velocity of sales, but also the variability in sales. Higher variability dictates higher average quantities. Higher margin products cost more when you stock out. Parts that may be key to selling other parts (i.e. products that are correlated to sales of other products) dictate carrying higher quantities. These are just a few considerations. The key is developing good reporting so management can make the right calls.

One final thought: it is important to know the carrying cost of your inventory. What is the total cost of keeping inventory? This includes all direct costs, i.e. warehouse and fulfillment costs, but also the cost of financing the inventory. There is a cost of capital implied in every business. The objective is to ensure that the margins earned on each SKU are greater than the cost to stock the inventory and fulfill the order. There is a lot to this analysis, but as they say, awareness of the problem is the first step.

Here is a great article about Managing Inventory for Profitability

Employee fraud — from check-forgery schemes to petty-cash theft — tends to rise during tough economic times, when workers are feeling financial pressure in their personal lives, experts say. And small companies are especially vulnerable because they often lack stringent internal controls to prevent fraud. Sometimes, managers at affected companies attribute lost funds to lower sales — never even suspecting foul play. (Wall Street Journal Small Business)

Comments: This is an excellent article highlighting a major problem for small business. It is a problem that is surprisingly common and potentially catastrophic. It has a good breakdown of the frequency of various employee fraud schemes. I have personally heard stories with alarming frequency from business owners. Each said they ‘absolutely trusted’ a person who they subsequently found to be stealing from them. –Allen