The Business of Business

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I began posting entries here at EliteTrader somewhere around August of 2018 and found this practice to be invaluable in that it helped me further develop a Forex day trading system until I eventually had enough material to begin relating the approach in explicit terms in my own private notes, which I think I have subsequently refined to the point that losing money using its methodology is virtually impossible.

This has freed me up to turn my attention to other interests, among which are business and finance. My thought is that perhaps I can take advantage of this online repository of thoughts and ideas with respect to commercial enterprise in much the same way as I did concerning the buying and selling of foreign currency pairs. Since I saw no specific ET category for Business and Finance, I will be approaching this subject as a hobby.

Personally, my preference when it comes to self-education is to use a mastery learning approach in which I do not introduce any new material until I have memorized the information already covered. Accordingly, I am only going to take on a little bit of substance at a time.

Given past questions I've had about market valuation, I going to begin here by memorizing that: "A good valuation of a company takes into account certain factors, such as…"

1. Present value
2. Future value
3. Value of similar companies
4. Risk

 

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Given past questions I've had about market valuation, I going to begin here by memorizing that: "A good valuation of a company takes into account certain factors, such as…"

1. Present value
2. Future value
3. Value of similar companies
4. Risk

Determining a company's current market valuation using the present value method can be accomplished by comparing a given business to similar publicly traded companies and sectors or industry average financial ratios (since every sector and industry has financial metrics that are easy to find).

More specifically, a market capitalization value can be derived based on the shares outstanding and the stock price. Common financial metrics such as price-earnings (P/E), price-sales (P/S), earnings per share (EPS), sales and income growth rate can be useful in determining a reasonable valuation.

For instance, if an entrepreneur were to seek an individual or group to invest in their clothing brand with $1 million in annual sales and $100,000 in profits, the entrepreneur could apply the metrics of the specialty retail apparel sector by using data to determine that, for example, the sector presently has an average P/E of 20.17.

Earnings of $100,000 × 20.17 (the sector’s P/E ratio) would value the business at two million seventeen thousand dollars ($2.017 million). Based on this current valuation, the entrepreneur could justify a deal for a 10% stake in the business for a $200,000 investment.

 

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Future value

Determining a company's market value using the future market valuation method strikes me as kind of stupid based on the example given in the article I read, where an entrepreneur forecasts 100% annual earnings growth for the next three years, which is not hard to do with small numbers.

This would be based on estimates that include $400,000 in net income in year three at 14.75 times forward earnings, putting the future valuation at $400,000 × 14.75 = $5.9 million.

However, I don't understand from where the entrepreneur got the 14.75 figure, and even if I did, if a business owner wanted an investment based on what the company will be worth in three years, then it would seem to me that the individual should wait three years before asking for the money. If an entrepreneur wants the money today, then I would think it should be based on what the company is worth today! Who knows what might happen between now and three years from now? It could be anything!

 

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Value of similar companies

Determining a company's current market valuation using the peer-based valuation method can be accomplished by starting with the P/S (price-sales) ratio of a similar public-traded company, possibly a figure like 0.65.

Applying this ratio to the same $1 million in annual sales used in the previous examples would place a current valuation on the small business at $650,000. Potential investors might then apply a three- to five-year sector annual EPS (earnings per share) growth rate of 11.94% to derive a year-three income of (equal to) $100,000 (annual earnings mentioned earlier) + ($100,000 × 0.1194) × 3 = $135,820.

From there, the investors might apply the forward P/E (price-earnings) ratio for the public-traded company (let’s say 9.36, for instance) to derive a $135,820 × 9.36 ≈ $1.271 million future valuation.

Based on this valuation, a $200,000 investment would roughly equate to a 15% stake in the business.

But of course, one cannot really apply the same valuation metrics based on how a publicly-traded company is valued since there are massive distinctions between a small business and a public corporation.

For one thing, the publicly-traded company might be an established retailer with thousands of stores worldwide, whereas the small business might only have a few locations. And though the growth rate is justifiably higher for the small business, the risk is much greater as well due to the odds of failure, not to mention liquidity risk in terms of an exit strategy. For instance, shares in a publicly-traded company can be liquidated in the stock market in seconds, whereas this would be impossible with stakes in a private small business.

 

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Risk

When it comes to Adjusting Valuation Based on Risk, I'm not seeing a lot of hard numbers or any concrete guidelines as to how to go about doing this. It seems to me like this is an area that can be rather subjective. What I want to begin doing now is learning from businesses that have failed and noting what factors led to their initial successes.

 

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Learn Your Elevator Pitch

Investors work with people who know what they have to offer, and can quickly explain the benefits and rewards. Here are two key areas your pitch should cover…

Who your business serves: You must know your customer intimately, and understand why they need your product. If you haven’t done so, create a customer persona to help you develop a clear and concise picture of your target audience.

Why your product or service is important: Even the silliest products and services have a certain level of importance, which you’ll need to quickly convey. Think about your customer and their needs. Does your entertainment product help bring families together? Does your accounting software help small business owners save money on high-cost accountants? Knowing this information offhand is key to quickly landing an investor, partnership or other business opportunities.

 

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Be Unique With Your Pitch
By Kaitlyn Petro

First thing’s first: NEVER start your sales pitch with, “Our product is the best because…” You will be ignored and forgotten about instantly.

The traditional sales pitch has evolved quite a bit over time, and in today’s world of marketing and selling, people don’t want to know that your product is the best; they want to know what it’s going to do for them. With that said, make sure your sales pitch is very well thought-out. The following elements are key to a successful sales pitch:

• Be honest with your prospect. Lying will get you into a bunch of trouble right from the start. Tell them the truth about everything, and if they don’t buy your product or service, ask them for their feedback. You’d be surprised what you can take away from someone who is not interested in buying from you.

• Use facts and statistics. If you’ve done your research (and you should have) present it in a positive way. Just make sure the information you’re giving resonates with the prospect’s pain points and isn’t irrelevant to their situation.

• List the benefits, not the features. People don’t care that you invented a car that can fly. They care that it will help them avoid that daily hour of traffic they always get stuck in. And if you have multiple types of prospects, make sure you know the different benefits for each.

• Connect with your prospect. Robert Herjavec gave some great advice when he said, “Buying and selling are not rational decisions; they’re emotional decisions. And anytime you can appeal to someone on an emotional level and make a connection, you’re halfway there.”

• Be ready to deal with objections. Prepare for some common objections you may receive. Great salespeople love responding to objections.

If you remember and practice this small handful of elements, you’ll be much more prepared during your next sales meeting with a prospect. However, if you’re well-versed in inbound marketing, you already know that some of the best sales pitches aren’t sales pitches at all. Sometimes, all it takes is one very well-written blog article or the proper search engine optimization to attract the perfect prospect and have them asking you to do business with them.

 

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You need to be able to tell anyone (especially investors) what makes your business different (i.e., unique or better) than all of your competitors.

 

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To start a successful business, you have to be tenacious. You need to personally gather your information and samples, get in your car, drive to every place in the region that might stock your product, and hang around until you find and speak to the person who can actually put your product out on the shelves.

But, a successful company not only takes passion and persistence, it also takes being clear on the three W’s of business—on who is doing what by when? Then you get on and do it. You deliver on things. You put your word to things and you take responsibility for them.

 

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ONGOING ARCHIVE OF QUESTIONS YOU NEED TO BE ABLE TO ANSWER...

1. How much (what percentage) of the business do you yourself own personally?
2. How do you acquire customers and how do people find you?
3. What does it cost you to acquire each new client/patron?
4. What is your conversion rate?
5. How much traffic do you get each day, week, month, year?
6. Who is accountable for the technology and the quality of your user experience?
7. Have you brought a technology co-founder onboard?
8. What kind of transaction level are you at and what sort of revenue are you generating thus far?
9. What is your valuation and how did you arrive at that figure?
10. What are you projecting the business will do over the next three years?