Monthly Archive for May, 2017

Remember America’s militia on Memorial Day

This is Jim’s traditional Memorial Day column.

Reasonable people disagree on the exact origins of what is now called Memorial Day.  But most accept that the practice of decorating the graves of Americans who died defending their country began in earnest by women of the South during and following the Civil War.

On May 5, 1868, General John A. Logan, National Commander of the Army of the Republic, was the first to make Memorial Day official with General Order No. 11, which stated in part that, ” … the 30th day of May, 1868, is designated for the purpose of strewing with flowers or otherwise decorating the graves of comrades who died in defense of their country …”

Since then, other than Congress making it a national holiday and changing the date to the last Monday in May, America has honored its fallen heroes from all conflicts in pretty much the manner that General Logan anticipated with the language of his order, whereby  “… posts and comrades will in their own way arrange such fitting services and testimonials of respect as circumstances may permit …”

When America issued its first call to arms - before it was a country, before there was a standing professional army - that call went to the militia, which was identified as, “all able-bodied men.”   Calling themselves the “Minutemen,” because they could be ready to fight on a minute’s notice, they were primarily shopkeepers, craftsmen, farmers, etc.  Today, we call them small business owners.

From as far away as Scotland, America’s Minutemen were impressive. Writing about the colonies’ quest for independence from England in his classic work, The Wealth of Nations, Adam Smith predicted America would prevail thanks to its militia which, ” … turns from its primary citizen character into a standing army.”

By the 20th century, state militias had become part of the National Guard. And by 1916, the National Defense Act created another layer of citizen soldiers, the Reserves.

Prior to the war with Spain in 1898, latter-day Minutemen served only on American soil. But ever since, including two World Wars and four major conflicts, America has deployed citizen-soldiers around the world alongside regular forces. Indeed, in Iraq and Afghanistan, Guard and Reserve members accounted for one third of U.S. forces, as well as a comparable percentage of casualties.

Whenever they’ve been called, small business owners and their employees have left the marketplace to demonstrate their courage - and die, if necessary - on the battlefield. So this weekend, as we honor all who paid the ultimate price in service to this country, let’s also remember the long tradition of America’s small business volunteers who’ve answered the call, and served faithfully in harm’s way on behalf of a grateful nation.

Write this on a rock … America owes much to the sacrifice of those heroes who’ve turned from their, “primary citizen character into a standing army.”

Nine first questions to ask when you’re buying a business

So, you’re planning to buy a business and think, “Hey, I’ve made big purchases before – a sofa, a car, a house – this can’t be that different, right?”

Paraphrasing Mark Twain, the difference between making a large consumer purchase and buying a business is like the difference between lightning and a lightning bug.

Every business sale is a totally unique transaction, which is the opposite of buying a commodity, like a car. And besides being the most complicated transaction you’re likely to ever undertake, with all of the components that make up any business, there’s one more, huge factor in buying a small business: it’s someone’s life. Consequently, the education process for such a transaction is quite involved.

To help you get started, consider a few questions to ask a prospective business seller, suggested by my friend and business-buying expert, Russell Brown, each followed by my thoughts. And while I’ve numbered them, you aren’t likely to ask them in this order.

1. Why are you selling?
This isn’t abrupt or inappropriate as long as you work it in at the right time. Regardless of the answer, it’s information that may contribute to your decision about whether to buy, and how to negotiate.

2. May I see the last three years of financials?
You’ll use their numbers as a base from which to “recast” and project your future business, adjusted for how you’ll run it. If the seller refuses, either he doesn’t have any, doesn’t want you to see how bad they are, thinks you aren’t a credible prospect, or you’ve asked for them too soon.

3. What are the industry trends and greatest future challenges?
The answer will inform you, and/or tell you how much the seller understands the current marketplace. In the 21st century, market challenges and competition comes in many forms and from many directions. You’ll need both pieces of the puzzle to determine how much unclaimed opportunity can be realized.

4. How can I increase sales/profits?
You might think if the seller knew he would just do it. But often he knows the answer, but doesn’t having the expertise, capital, or even desire to take that next step. This would be especially true regarding new technologies and 21st century marketing strategies.

5. Will you finance part of the purchase price?
Russ says that 80% of all small business sales in the United States involves seller financing. Even if you don’t need it, ask for it and use it if availble. Any terms from a seller will usually be better than the bank. Plus, it shows how confident the seller is about the business’ viability. Do not be afraid to ask this question.

6. Will you stay with the business for a while?
In most cases, you want the owner to agree to help you make the transition, which could range from a couple of weeks to months. Be cautious of any deal where the seller won’t spend any time with you. The proper amount of time is the day after the seller goes from being helpful to getting in the way.

7. Who knows the business is for sale?
Mishandling the news of any business being for sale can harm its viability, especially with key stakeholders: employees, customers and vendors. The trick is timing the breaking news with closing the deal so that gap doesn’t create problems.

8. Who will I negotiate with, and who will make the decision?
In selling or buying a business you must know who’s the decision maker. Otherwise you can waste a lot of time dancing around with a surrogate who can’t pull the trigger. As a business buyer you need to be talking to the real decision-maker as soon as possible.

9. What’s your timetable?
One of the biggest impediments to putting a deal together is when the buyer and seller are on different time frames. When you ask this question listen for the time AND the reason – they usually travel together.

Notice that most of these questions have a dual purpose: to get specific information and find out how savvy, sophisticated, and motivated the owner is. When buying a business, ask lots of questions and listen for the six interrogatives: who, what, when, where, how and why. In time, you’ll start noticing what isn’t said.

Write this on a rock … This is the equivalent of your first hour of class on the way to acquiring a four-year business-buying degree.

The power of building customer communities

Incredibly, in 2017, here’s a question many small business owners ask: “We have a website, do we need a social media strategy, too?”

The answer is the same as for why you have an email address even though you have a phone.  It’s not either/or, but rather both/and. Because as outstanding and handy as your website may be, there’s one increasingly important capability you need that most websites aren’t good at: community building.

Once customers find you, returning to that beautiful website of yours will be of decreasing interest to them. It’s not that your new stuff - products, how-to information, order status, special offerings, etc. - is no longer of interest to customers. It’s just that they don’t want to have to come back to your website to get it. More and more, customers are saying to businesses, “I like what you offer, but I won’t be returning to your website much, because I’m very busy. Why don’t you follow me home with the new stuff?”

This is what customers and prospects mean when they join your community by giving you permission to connect with them and send them offers and helpful information by email, text messaging, Twitter, Facebook, etc. They just want the new stuff, including updates to your website. Even when they return to buy something on your e-commerce platform, they expect to enter your website through the offer page you sent them, not from your homepage.

Building online customer communities - and getting permission to follow customers home - is how a small business transcends being competitive and achieves the pinnacle position: relevance. As you may know, I define a business social media strategy as building customer communities. But by my definition, social media is much older and more comprehensive than the online platforms, like Facebook, Twitter, etc. Your customer community strategy includes everything you do to build, connect with and serve those communities, including: email marketing, customer loyalty programs, the new social media activity, and, of course, the original social media: face-to-face.

In the old days - way back in 2003 - your customer list was just names on an accounts receivable report or sales forecast. Today, those customers are part of your business’s community, which also includes prospects who’re just becoming interested in you. But unlike the passive customer list of old - and visitors to your website - this community is functioning and dynamic, with fast-evolving expectations you have to meet or they’ll defect to another community.

Another important component of building customer communities is allowing prospects and customers to see your corporate values. Increasingly, prospects will turn into customers, and customers will become loyal, because they’re attracted to what your company stands for, which is evident in the values you demonstrate, including online. For example:

1. Are your brand elements - brand promise and image - all about you and your stuff, or do they sound like something that would benefit your customer community?

2. When delivering information, is it all about you, or does it contribute to the community?

3. What’s the tone of your marketing message? “Tone” is how brand messages are incorporated as you serve the community, from crassly commercial to almost subliminal. You should strike a tone balance between serving the community and making a sale.

Notice all of these demonstrate values that favor relationships more and transactions less.

In a world where everything you sell is a commodity, value - product, price, service - is the threshold of a customer community, but values are the foundation. Value is easy to find these days. But when community members are attracted to your values, they keep coming back and bring their friends.

Write this on a rock … Build and serve customer communities with a website and social media strategy that demonstrates your values.

Making tax reform fair for small businesses

General Motors Corp and Georgia’s Motors, Inc. are alike in many ways. Both go to market representing themselves to the world as corporations, legally formed entities standing on their own, capable of entering into contracts and being responsible for themselves and their activity. But while both corporations are required to report business activity for the previous year on a tax return to the IRS, only one actually pays taxes.

In addition to filing a return, General Motors Corp, structured as a “C Corp,” the apex legal business entity, is the one that pays federal taxes at the business rate, currently one of the highest in the world. Georgia’s Motors, Inc. was formed as a Subchapter S corporation, aka “S Corp,” one of the pass-through entities established by law to make being incorporated easier for small firms. Any taxable income reported on its return passes through pro rata to the shareholders, to be added to their personal return and taxed at each one’s individual rate. In our story, Georgia Smith is the founder and sole shareholder of Georgia’s Motors, Inc., one of millions of American small businesses.

Lately, the term “pass through entity” has been used more frequently in news reports about the tax reform proposed by the Trump administration. The increased frequency is because a significant reduction in the business tax rate is being proposed which could put GM’s corporate rate below Georgia’s personal rate, unfairly causing her to pay more per dollar of business income than GM.

The good news is the Trump tax reform drafters recognized this inequity to pass-through entities like Georgia’s. As currently proposed, shareholders of Sub S Corps and other pass-throughs, like a Limited Liability Company (LLC), would still accrue the income of their businesses. But what’s new is that business income would be taxed separately, at the newly reduced, single rate paid on all business income, rather than at the personal rate of the shareholders.

These proposed tax reforms are very important for small businesses because of how their taxable income manifests. Let’s say Georgia’s Motors, Inc., produces $100,000 in business income, which passes through and is applied to Georgia’s personal return. Because of how that income is accounted for, it can create a taxable event typically associated with investments, called “phantom income.” This is when the loss of an investment results in taxable income, but produces no cash to pay the associated tax.

When you hear a small business owner tell you they had a very profitable year, but had to borrow money to pay their taxes, they just described what is tantamount to phantom income. But unlike true phantom income, that $100,000 hasn’t been lost. It actually exists, but in the form of inventory, accounts receivable, equity, etc., but maybe not in enough cash to pay the tax bill when due. And it could get worse: That business income added to Georgia’s personal income could push her into the next higher rate bracket.

By allowing small business owners of pass-through entities to pay a lower business tax rate, in a separate calculation from their personal income, they will have more working capital to invest, and be less likely to experience phantom income.

The small business sector is very excited about the prospects of tax reform, both at the personal and business level, as long as pass-through entities are treated the same as big corporations.

Write this on a rock … Unleash the animal spirits of America’s small businesses with tax reform that includes lower rates applied to all business income.




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