CEO Success Report -
August 2002
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CEO Success Report
- August 2002
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Increasing the Effectiveness and Enhancing the Lives of CEOs
and business owners.
Contents of this issue...
.. Welcome - A few words from the publisher, Gary Lockwood
.. Thought-Starter - "Developing your Verbal Logo"
.. Guest article - "Business Valuation"
.. CEO Resources
.. Quotes to use in your staff meeting this month
.. Humor to lighten up the executive suite
.. Contact the publisher
.. Subscribe and unsubscribe instructions
See past issues of the CEO Success Report at:
http://www.CEOSuccess.com/archives
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WELCOME to this issue of the CEO Success Report!
=============================================
Hello again. I'm Gary Lockwood, President of CEO Success.
Welcome back once again to the CEO Success. I know you have
no shortage of material to read and I thank you for choosing to
read our newsletter.
We work hard to provide practical ideas, thought-provoking concepts
and useful information for you.
You (and about 1000 of your CEO peers), have honored me by
being a loyal subscriber. For that, I appreciate you.
My Thought-Starter today shows you how to develop a "Verbal Logo".
What do you say when someone asks, "What do you do?" In this
faced-paced, mile-a-minute world, you have only a few seconds to
get your message across. Mini-messages are ideal for networking
meetings, trade shows, interviews, investor meetings, sales calls
or anytime where you need to quickly promote your business.
Today's Thought-Starter guides you, step-by-step, through the
process of creating a 30-second verbal logo.
May I ask a small favor? Please forward this issue to other CEOs
and company presidents who may be interested in receiving
these messages. Thank you.
And now for our guest article this month...
A business valuation determines the estimated market value of a
business entity. The valuation, which is part art and part science,
estimates the price that hypothetical informed buyers and
sellers would negotiate at arms length for an entire business or
a partial equity interest.
Our guest article this month is from Michael Hoffman. In his article,
Michael contends, "It is very difficult to determine what a privately
held business is worth in the marketplace." Michael describes, in
detail, the complex process, and offers his ideas on establishing
a value for your business. Read more about Michael at the end
of his article.
I hope you enjoy receiving these articles and ideas to
help you sharpen your thinking about being an effective CEO.
My wish is that you use the ideas in the CEO Success Report to
get the results you really want. If you want some help in putting
them into practice, or if you have questions, email or call.
As you know, our specialty is Increasing the Effectiveness
and Enhancing the Lives of CEOs and business owners.
Enjoy this issue with my compliments.
Sincerely,
Gary Lockwood
CEO Success
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This month's THOUGHT-STARTER
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Developing your Verbal Logo
The next 30 seconds may determine whether you get your funding,
make the sale or establish your point-of-view!
In this faced-paced, mile-a-minute world, you often have only a few
seconds to get your message across. Most modern television and
radio commercials are no more than 30 seconds. Where could
you use an effective 30 second commercial message about your
business? These mini-messages are ideal for investor meetings,
networking meetings, trade shows, interviews, sales calls or any
situation where you need to quickly promote your business.
How do you develop these messages effectively? Think in terms of
"sound bites". Prepare your brief message just like a speech, with
an opener, the content and the closing. Let's examine each of these
in more detail.
The Opening
The purpose of your opening is to grab attention. You must assume
that your audience is generally as busy and preoccupied as you are.
So you need to first get their attention with a question, "grabber"
words, humor or an interesting visual.
Using a question as an opener causes the listener to stop and
think. "Do you want to change the world?" "How many new
pros-
pects do you want today?" "When do you want to feel good
again?"
Once you have their attention, your message can help them answer
the question.
Grabber words are designed to startle, shock or at least cause
your listener to want to listen to what's coming next. The first
sentence of this article is an example.
A funny comment or an eye-catching visual are always effective
ways to get the attention of your listeners in a hurry. Obviously,
any of these openings must be relevant to your message, or
they will confuse your listeners.
The Content
Once you have their attention, relate your main message. Since you
usually have only three or four sentences, you need to craft this
message carefully. The most effective message is the one that
states what your business can do for the listener. In other words,
talk about the benefits to be received by using your product or
service. Don't say "I'm a dentist". Say "I improve the health and
well-
being of my clients. Healthy teeth help you look good and feel good".
The bottom line is that your listeners don't care what you do. They
care about what you can do for them. Talk in terms of results,
feelings, benefits, outcomes, ideas. Imagine your listener with a
sign on their forehead that reads "So What? What's in it for me?"
Remember, you only have 30 seconds. There will be time later to
explain how you do these great things.
The Closing
Here is where you ask for action. As a result of your 30 second
commercial, you want your listener to do something or think
something. Ask:
"When can we meet?"
"Give me your business card".
"Call today".
"When you think of shoes, think of The Shoemaster".
Also appropriate is your catchy tag line. The closing may be the
only part of your message that your listener will remember. What
do you want them to remember?
So, there it is. Your miniature speech takes only 30 seconds. And
it has a beginning, a middle and an ending. What can you do to
make all this come out sounding and looking smooth, confident
and compelling? Prepare and practice. Prepare by writing out your
message, thinking through the key elements and deciding exactly
what you want your listener to be doing or thinking at the end of
your message.
Practice by saying your message aloud. Rehearse this brief
speech. Saying it aloud causes you to pay attention to the sound
and cadence. Practice in front of a mirror and you will see the
gestures and body language that make up such a large part of the
communication. Remember, it's not just what you say, it's how you
say what you say that makes the difference.
For your 30 second commercial to really be effective, you must act
like you mean it, sound like you mean it and look like you mean it.
How do others realize that you really mean what you say? They
notice your enthusiasm, your mannerisms, your tone of voice,
your posture.
Part of your preparation is to be consciously aware of your non-
verbal communication. If possible, video yourself giving your
message. Replay the tape several times. Once to listen and
observe the overall effect of your message. Watch it again without
sound. What are you telling the audience by your posture, body
language, facial expressions and your gestures? Do you look and
act like you really mean it?
Replay the tape again with your eyes closed. Listen for distracting
sounds such as "uh", "ah", "ya know" or sighs. All
these things
subtract from the effectiveness of your main message.
In our MTV-world of excessive sights and sounds and experiences,
make your point and get your message across in a well prepared,
well rehearsed 30 second commercial. Think of it as a brief speech.
Mix preparation with inspiration and you'll get a standing ovation.
About the Author...
Gary Lockwood is Increasing the Effectiveness and Enhancing the
Lives of CEOs, business owners and professionals.
Get the Free BizSuccess newsletter -
http://www.bizsuccess.com/newsletter.htm
or send any blank email to mailto:subscribe@BizSuccess.com
==================================
Guest Article
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Business Valuation
by Michael Hoffman
What is a Business Valuation?
A business valuation determines the estimated market value of a
business entity. A valuation estimates the complex economic
benefits that arise from combining a group of physical assets
with a group of intangible assets of the business as a going
concern. The valuation, which is part art and part science,
estimates the price that hypothetical informed buyers and
sellers would negotiate at arms length for an entire business or
a partial equity interest.
Valuation vs. Appraisal: How Do They Differ?
Valuation and appraisals are similar, but they are not
interchangeable. Most people are familiar with appraisals in
their personal lives. Often times people will have appraisals
performed on a house, a car or a piece of jewelry. The key
difference between a valuation and an appraisal is that a
valuation includes both tangible and intangible assets, while an
appraisal just includes tangible or physical assets.
Business Valuation: Art or Science?
A business valuation combines quantitative financial techniques
with qualitative analysis of the business, the industry and the
economic conditions in general.
Why Do a Valuation?
Lack of an Efficient Market
Despite the commonly held belief that markets are efficient, an
efficient market does not exist for privately held businesses
and certain fractional equity interests. Unlike the NYSE or the
NASDAQ there is no place to buy and sell privately held
businesses aside from the business brokerage community, which is
small in scope. As a result, it is very difficult to determine
what a privately held business is worth in the marketplace. This
lack of an efficient market presents a critical need for
valuation services.
Exit Strategy
The business owner needs to develop a strategy to enable him or
her to obtain value from the company when he or she decides to
sell. If a potential buyer is able to invest fewer dollars on
his or her own and duplicate the seller's business the potential
buyer would obviously be better off starting a new business than
buying an existing one.
Business Valuations are Usually Performed for Five Primary
Reasons
To establish a price for a transaction
Business planning
Attract capital
Aid in estate and gift planning
Meet governmental requirements
Establishing a Price for a Transaction
Valuations help business owners in the sale of a business by
determining a reasonable asking price. A valuation can also be
used in a merger/acquisition transaction as a due diligence
consideration.
Business Planning
Often times a valuation can help business owners negotiate
buy/sell agreements. A sound valuation can become part of the
actual buy/sell agreement. A valuation that is prepared prior to
the occurrence of a liquidation event can save both time and
money.
Business owners can also use a business valuation as one of the
cornerstones of a long-term financial plan to enhance the value
of their business. Business owners often use management
consulting to improve strategies and tactics through a
particular function (e.g., marketing, operations.) Business
valuation consulting focuses on how strategies and tactics
create value for business owners.
Attract Capital
Valuations are often an important part of obtaining debt or
equity financing.
Estate and Gift Planning
If an interest in a closely held company is material to a person's
net worth a valuation of that investment should be an integral
part of the person's estate planning. When a person dies a
posthumous valuation of a closely held business is often done as
part of the estate's tax return. These valuations are important
because the IRS audits most estate tax returns even if the value
of the closely held business is of modest value.
Also, if an owner of a closely held business wants to make a
charitable gift of a business interest the IRS requires a
valuation.
Governmental Requirements
The IRS requires a valuation for employee stock ownership plans
(ESOP's) and in conjunction with the conversion of a C
corporation to an S corporation. Many states also require
valuations in divorce proceedings or minority shareholder
actions.
The Components of a Business Valuation
IRS Revenue Ruling 59-60 states that valuations should address
the following issues:
The nature and history of the business
The general economic outlook and the conditions of the specific
industry
The book value of the stock
The financial condition of the company
The earnings capacity of the company
The dividend paying capacity of the company
Whether the company has goodwill or other intangible value
Previous sales of stock
The market price of publicly traded companies who are engaged in
the same or similar lines of business
Historical Performance
The past and future earnings power of a business is often the
single most significant factor in the valuation of a business.
The quality and completeness of the company's accounting and
financial records also have a significant impact on the
valuation. An incomplete set of financial records will cause the
valuator to have to make significant "normalized" adjustments to
reflect the true financial position of the company.
Company Management
The quality and depth of management is obviously a critical
factor in the value of a business.
Company Ownership
The size of the ownership interest being valued has a
significant impact on the valuation. A minority interest in a
business might have to be adjusted for a lack of control
discount, while a controlling interest may be given a premium
for having control.
Conditions of Operations
The physical aspects of a business are important as well. A
company with current systems and new equipment will have a
higher value than a company that has deferred investment in
infrastructure and equipment for several years.
Proprietary Products and Services
Proprietary products, services or processes add significant
value to a business. These legal rights can insulate a company
from its competition and allow it to charge higher prices in the
market.
Industry
The macroeconomic condition of the company's industry is also an
important consideration in a business valuation. A company in a
high growth industry will have a higher value than a company in
a mature industry.
Competition
As all business owners know, the company's position in the
competitive marketplace has a significant impact on the overall
financial performance of the business. Valuators put a great
deal of stock in market share and on the basis in which the
company competes in the markets that it operates in.
Government Regulation
As laws change so do their effects on businesses. Unfortunately
many laws and regulations are designed for Fortune 1,000
companies. As an example, General Electric may be able to easily
comply with certain environmental laws, but these same laws may
be a significant burden to a small business. The valuation must
consider these regulatory roadblocks.
How is a Business Valuation Conducted?
The business valuation process can be broken down into four
components.
Engagement process
Research and data gathering
Analysis and estimate of value
Reporting Engagement Process
There are several issues that must be addressed at the start of
the business valuation process.
Definition of the legal interest to be valued - (e.g., 100% of
the company's common stock)
Valuation date - the date of the estimate of value
Purpose of the valuation (e.g., estate tax, sale of a business,
business planning, etc.)
Define standard of value: Fair market value - the value in an
exchange between a willing buyer and a willing seller with a
reasonable understanding of the facts. Fair market value is the
most common standard of value and the IRS requires it;
Investment value - the value to a particular investor based on
individual investment requirements. This standard is often used
in merger transactions.
Define the premise of value: Value as a going concern - this is
the value of a business assuming it will continue to operate as
a going concern; Liquidation value - this is the value of a
business that is not operating as a going concern, but has
commenced an orderly disposition of its assets.
Form and content of the report
Research and Data Gathering
At this point the valuator will request certain information from
the client. This request may include the following.
Financial statements
Tax returns
Accounts receivable, accounts payable and inventory detail
Contracts/leases
Budgets/forecasts
Board of directors' minutes
Organization chart
Marketing material/price lists
While this information is being gathered the valuator will be
performing industry and comparable company research.
Analysis and Estimate of Value
During this phase the valuator puts together and analyzes all of
the internal company information in conjunction with the
industry and comparable company research. This analysis will
then enable the valuator to synthesize an estimate of value.
Reporting
In the reporting phase the valuator will issue his or her report.
There are three basic types of reports.
Oral report - issued when time does not permit a written report
to be issued
Limited scope report - provides a well-documented estimate of
value that can be used for many purposes, while taking into
consideration the cost of the report preparation.
Full scope report - the most detailed and costly estimate of
value. This type of report is often used for litigation purposes.
At the end of the valuation process the valuator will ask the
client to sign a client representation letter that states, in
effect, that everything that the client supplied to the valuator
is true and accurate to the best of the client's knowledge and
abilities.
Role of the Valuator
Unlike legal counsel who is ethically obligated to be the client's
advocate, the valuator is independent. In the past valuators
were often hired by legal counsel to support a particular
preconceived position. Although this practice still exists it
occurs less frequently today. In the long run, the advocacy bias
creates tension between parties trying to reach a good faith
agreement on the value of a business. Even if the valuator has
to provide expert testimony in a court proceeding the valuator's
ultimate responsibility is to document and support his or her
estimate of value. The IRS, AICPA, SEC and the DOL all have
various rules regarding independence and the advocacy position
of the valuator.
As a general rule our firm will not accept a valuation
engagement, in which the valuation report will be used by a
third party, or for a client for whom we do audit or tax work.
Role of the Client
The key to a successful valuation is establishing a relationship
of mutual trust among the valuator, the client and the client's
professional advisors. It is in the client's best interest to be
open and forthcoming with the valuator in order to avoid errors
and reduce costs.
What a Valuation is not
A valuation is not an audit or review. The valuator is not
providing any form of assurance, as defined by the AICPA, on his
or her estimate of value. The valuation is also not a strategic
plan or a long-term financial forecast.
What Affects the Price of a Valuation?
The three biggest factors that affect the price of a valuation
are the type of report to be issued, the availability,
completeness and organization of the company's financial records
and the purpose of the valuation. As an example, a valuation
prepared for estate planning purposes with a limited scope
report will cost significantly less than a valuation prepared
for a high net worth divorce case that requires a full scope
report and expert testimony in a court proceeding.
How to Reduce the Price of a Valuation
There are four key steps that a client can take to reduce the
cost of the valuation engagement. The two most important steps
for the client are to be open and honest with the valuator
during the engagement and to keep detailed and organized
financial records. Clients should also consider having
valuations done on a periodic basis. This will significantly
reduce the time spent by the valuator in the research and data
gathering phase. Finally, like any other significant purchase,
the client should do comparative shopping and get at least two
or three quotes for the assignment.
About the Author.
Michael Hoffman is the principal of Hoffman & Company, CPA's. He
draws upon 10 years of diversified experience serving emerging
and middle market businesses. Mr. Hoffman is a licensed CPA in
the state of New York and he holds an MBA in corporate finance
from Fordham University. He is also an adjunct professor of accounting
at St. Thomas Aquinas College in Sparkill New York.
Please feel free to call or e-mail Michael for a free consultation.
e-mail: mhoffman@hoffmancompanycpa.net
Phone: (914) 413-9725 Address: PO Box 63 West Nyack, NY 10994.
Also visit http://www.hoffmancompanycpa.net
for more information.
Copyright 2001 by Michael Hoffman. All rights reserved
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RESOURCES for CEOs
=============================================
Marketing Teacher http://www.marketingteacher.com
Brush up on your marketing knowledge at Marketing Teacher, which
provides some very good free online marketing tutorials. Each
lesson comes equipped with exercises and answers, and takes 15
to 30 minutes to complete. Introductory, intermediate and
advanced marketing topics range from segmentation, targeting and
positioning to PEST Analysis, SWOT Analysis, Ansoff's Matrix,
the Boston Matrix and Bowman's Strategy Clock, which considers
competitive advantage in relation to cost advantage or
differentiation advantage.
The site also includes marketing PowerPoint slideshows and a
good collection of marketing resources.
Check it out at http://www.marketingteacher.com
* this resource brought to you by Larry Chase's Web Digest.
Visit http://wdfm.com
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QUOTES to use in your staff meeting this month
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"A journey of a thousand miles begins with a single step."
-Confucius
"Our Age of Anxiety is, in great part, the result of trying to do
today's jobs with yesterday's tools."
-Marshall McLuhan
"We never know the worth of water 'til the well is dry."
-English Proverb
"The real measure of your wealth is how much you'd be worth if
you lost all your money."
-Anon
"Pretty much all the honest truth-telling there is in the world is
done by children."
-Oliver Wendell Holmes
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HUMOR to lighten up
the executive suite
===============================================
Crazy Laws
-----------
In Temperance, MS, you can't walk a dog without dressing it in
diapers.
In St. Louis, a law on the books makes it illegal to park your
car without turning off the engine. This was to avoid scaring
horses.
In Kansas City, KS, saying the name "George Washington" without
adding the phrase "blessed be his name," can land you with a
fine of up to fifty cents.
In California, selling a gold piece without tooth marks in it is
considered forgery.
An old statute in Flint, MI, compels dentists to offer a slug of
whiskey with no additional charge to said patient.
The city of San Francisco holds a copyright on the name San
Francisco. It is illegal to manufacture any item with the name
without first getting permission from the city. Since the Supreme
Court upheld the copyright; San Francisco has had an annual
$300 million surplus every year.
In Raleigh, North Carolina, before a man asks for a woman's
hand in marriage, he must be inspected by all the barnyard
animals on the young woman's family's property, to ensure a
harmonious farm life.
In Salzburg, Germany, any child born on August 18th must be
tested for possible witchcraft. This is due to a local legend that
an evil warlock was born on that day in 1638.
***excerpts from: http://www.joker.org/ ***
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CONTACT CEO Success
=================================
Gary Lockwood is the publisher of the CEO Success Report.
Email: mailto:Gary@CEOSuccess.com
Office: (800) 272-1575 (USA) * (909) 739-7444
Fax: (909) 494-4314
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Your Comments, please?
========================================
I appreciate feedback, corrections, and comments about the
CEO Success Report. Please send your thoughts to:
Gary@CEOSuccess.com mailto:Gary@CEOSuccess.com
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