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Business Risk

How to Control Business Risk

Business expenses can be categorized as either fixed expenses or variable expenses.

  • Fixed expenses are expenses that your business must pay regardless of any sales it makes. For example, fixed expenses include the monthly rent you pay on your equipment, building, phone bills, as well as any indirect staff such as a manager or cashier. So, fixed expenses are the expenses that the business incurs each month regardless if the business makes $0 or $1,000,000 in sales.
  • In contrast, variable expenses are expenses that are incurred only if you make a sale. For example, if you sell a product, your wholesale cost of the product is a variable expense. Also, direct employees or contractors hired to deliver a service and who could be cut loose if the work is not there are examples of a variable expense. So, variable expenses are the expenses you would not incur if you never made a sale.

A business with low fixed expenses but high variable expenses has less risk. If sales during the month are poor, the business incurs most of its expenses only when the business make sales. Therefore, a business with low fixed expenses but high variable expense business has less downside risk. However, these same businesses are generally less scalable because if the business makes lots of sales, profits will be small because each sale incurs a high variable cost.

On the other hand, a business with high fixed expenses but low variable expenses will suffer greatly if it experiences lower than expected sales volumes. However, because its variable expenses are low, profits will be higher if sales are higher than expected. Therefore, business with higher fixed and lower variable expense are far more scalable than businesses with low fixed expenses and higher variable expenses.

Would your business benefit from lower downside risk with higher variable expenses or higher upside with greater fixed expenses?

This article originally appeared at www.SteveBizBlog.com.

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Crowdfunding – Community Building

Now is the time to send the influencers on your list an email and asked them for advice about your campaign. Be sure to mention that you read their post/article/book. If you mention that you enjoyed reading it, you will increase the likelihood they will reply to your request. Prioritize your list of influencers and focus on sites and people that are the most active. Read and share information in your topic area to build trust with them before also asking them to support your campaign. Even if you do all the right things, expect about a 10% return rate on your cold contacts. However, with a few good social shares, some campaigns have been able to boost their return rates to 15-20%.

Start sending out emails to your list as you count down to the launch to build momentum. Now is the time to try to get committed backer support prior to your launch date. If necessary, make their pledge contingent on reaching a specific funding level. For example, you might say, “Can I count on you to support us at the platinum level if we raise 20% percent of our goal?” If they are not receptive, ask, “How about supporting us at the gold level?” If necessary, go all the way and ask, “Will you at least support us at the $10 High-Five level?” If you don’t ask, most people will not pledge because this is the point in the campaign where you begin to ask for their pledges. Based on successful campaigns, your goal should be to get about 20% of your target amount in pre-launch pledges from your network.

Another effective way to build a community is to have a launch party. The best launch parties build enthusiasm for the campaign and have a creative twist to make them memorable. Perhaps you can buy a canvas and some paint from an art supply company and encourage everyone at the launch party to contribute to a painting you will post on the blog and giver away as a reward after the campaign. Don’t be afraid to be creative and don’t forget to ask for pledges at the launch party.

Your list of committed backers is different from the ideal backer since your committed backers at this point likely include family and friends. Drew Johnson, a colleague of mine that ran a successful reward-based crowdfunding campaign for TechWears shared the following advice. If he had it all to go over again, he would have scrubbed his look-a-like list when he used a Facebook ad campaign to find backers. Drew had collected a list of about 500 people who signed up at his various demos and craft fairs where he demonstrated and sold his unique TechWears products. His initial thinking was that since the 500 on his list stopped by his booth, engaged with him in a discussion about his product, and were willing to sign-up for his mailing list that they were all potential backers. Unfortunately, many on the list were “tire kickers” who signed his list more out of politeness rather than genuine interest. When he used his list in a Facebook look-a-like ad campaign, the demographic he targeted was not the audience that was actually looking to buy geek-wear as he calls it. In the end, it cost him more money and did not get him the conversion rate he was hoping for from the ad campaign. Therefore, if you plan to use a Facebook ad campaign and use look-a-like list, you should scrub your list to remove those people not likely to be your ideal backer.

What are your plans for building a community for your next campaign?

Note: this post originally appeared at www.SteveBizBlog.com.

Exit Strategy

How to Structure the Exit Strategy Transaction

Exit Planning

To position your business exit for success, you must understand the implications and importance of alternative transaction structures that can help maximize transaction value. There are many ways to transfer ownership; the most common are sales or transfers of ownership within the family or employee group and sales to a third party. Other options include minority sales and recapitalizations, variations that can allow for retention of partial ownership or management control, as well as IPOs (initial public offerings) and MBOs (management buy-outs).

Selling or passing control within your family

Many owners want to see family members or other heirs enjoy the fruits of their labor. But, non-family managers and employees can be suspicious of plans to transfer management control to a family member, and often family members who are not actively involved in the business will voice objections as well. Key employees and family members alike may have concerns about who controls the business. The earlier and more openly you consider these issues, the greater the likelihood of a satisfactory resolution.

Selling to a partner or co-owner

When partners or co-owners buy or start a business, ownership agreements usually include restrictions regarding the circumstances of transfer such as only by gift or at death; the potential transferees such as only the entity itself, family members or other existing owners of the business; the transfer price which is usually of formula approach or independent expert valuation. These restrictions are often coupled with a right of first refusal in the hands of the co-owners or the company.

Selling to employees, management buy-out (MBOs)

Sometimes the logical successor is an existing employee or group of employees. Where certain employees are key to the business or closely involved in day-to-day operations, you must take steps to ensure that these people want to remain in the business after you’ve gone. If they leave, the value could be significantly affected.

Sale to a third party

The simplest way to transfer ownership is through a sale to an outside party. Sales to larger companies are common as are sales to private equity buyers. This option creates an opportunity to diversity a concentration of wealth in the business. However, the outside sale of assets or stock can have complications and unintended consequences. In the context of a family business, the family may lose its identity or be unable to find a career path for family members associated with the business. A sale to outsiders may also change relationships with key employees, vendors and customers.

Initial public offerings (IPOs)

The expression ‘going public’ describes the process of offering securities, common or preferred stock or bonds, of a private company to the general public. This is often considered when the funding required to meet business growth has exceeded its debt capacity. Under the right circumstances, going public can be very attractive, but the costs are significant, and there is often a misconception about the amount of control that can be retained. The decision to list requires in-depth analysis, and its advantages and disadvantages must be weighed carefully.

Note: this article was originally published at http://www.poewolfpartners.com. Follow Renita on Twitter: @RenitaWolf.