“If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, B-schools should be encouraging students to learn the boring, but critically important, discipline of business valuation.”
Warren Buffett

I couldn’t go past this quote from Warren Buffet that so neatly points out the importance of business valuations. The oracle of Omaha definitely has a way with words and getting to the crux of the matter. Having a realistic understanding of the value of your business or the value of your shares in a business is critical to personal decision-making and planning. Of course privately owned businesses don’t have as easy a mechanism to determine market value as do publicly traded companies, however, there are many sound reasons for SME recruitment companies to become aware of their current value.

Why have a valuation done?
There are a range of reasons that business owners require a valuation. These include;

• commencing a sale process,
• resolving shareholder disputes,
• for business planning & future decision-making,
• determining tax obligations,
• for litigation purposes(including divorce)
• to access external sources of funding

While there are a number of accepted methods for calculating the value of a business they can vary substantially in terms of result. We believe an appraisal based on market value is the most relevant in the majority of circumstances. This provides an up-to-date view of the business’ value in the event of a market sale. Ultimately any business is worth what the market is willing to pay at a particular point in time. However well presented it is; a valuation that is well above the market norm is not going to influence experienced buyers to pay more.

Business Sale

Having a market valuation prepared prior to starting a sale process is a key step in understanding your business’ position. If properly undertaken the valuation will give an accurate gauge to the price range you may achieve and is an essential starting point for any future negotiations. It can also be a reality check for those whose expectations are out of line with current market circumstances. In those cases an honest assessment provides the best means for decision-making: continuing with a sale; or take steps to improve the value in your business for a future sale.

Departing Shareholders

There are times when one shareholder wants to move on and exit the business. This may be an amicable parting or arise from months (or years!) of disagreement between the owners. Usually a departure means that one party wants to sell their shares and that is most likely going to be to other existing shareholders. Even in amicable situations determining a price for the shares of a departing director can be challenging. An externally prepared market valuation is a very appropriate starting point to determine the business’ value and those of minority interests.

Business Planning

As part of forward planning any business should be aware of their market value in order to make the decisions necessary for the future. Understanding the current position enables business owners to make choices about the approach they want to take for their business in the future.

Summary

At HHMC we stress that a business valuation for Recruitment companies needs to reflect the industry’s relevant market circumstances and status. Privately owned recruitment companies are affected by a range of determinants that impact on pricing at the time of sale. Analysing the factors that determine pricing requires an intimate knowledge of the Recruitment industry and the comparative values achieved around the country.

This is a guest post by Richard Hayward of HHMC.

Richard is a principal of HHMC Australia, a specialist merger & acquisition consultancy focusing on the recruitment industry. Richard has an extensive background at senior levels in the recruitment sector having worked with international, national and smaller local companies for over a decade before joining HHMC. His clients, as either buyers or sellers, include companies ranging from blue collar industrial, ICT, banking & finance, accounting, business support, and operations recruiting businesses.

Contact Richard at richard.hayward@hhmc.com.au or call  +61 411 488 544

Photo by Bob Jagendorf

Understanding the depth of China’s history seems particularly important as we enter the Asian Century. Winchester, in his entertaining style, takes us on a discovery of  Chinese scientific progress through the ages.

The book was released with an alternative title, The Man who Loved China. It is an apt title as the book details how one of England’s most brilliant academics devoted his life to studying the broad expanse of China’s scientific history.

Winchester uncovers some startling facts and provides us with a riveting account of Joseph Needham’s great research.

Needham was a polygamist, nudist, committed socialist, brilliant scientist, sinophile and morris dancer. He led a life well outside the safety of normal mores.

Startling Facts Revealed by Joseph Needham

The book is far more than an account of an eccentric scientist and China’s scientific prowess over millenia. It is a jolting reminder of the dangers of Eurocentrism.

Needham devoted his life to documenting China’s technology supremacy that lasted millennia and questioning why Europe suddenly leaped ahead. In this age of a reawakened China, an understanding of how the pendulum of global change occurs seems particularly relevant.

Needham ‘uncovered’ amazing findings that the West had never known or had chosen to ignore.

Every schoolchild in the West was taught that Gutenberg invented the printing press when Chinese printers had, in fact, already been in operation for over 500 years before printing was introduced in the West.

Other Chinese scientific advances include:

• Algorithm for extraction of square roots and cube roots: 1 AD;
• Ball Bearings 2 AD;
• Blood, distinction between arterial and venous: 2 BC;
• Compass, magnetic for navigation: 1111 AD;
• Grid technique, quantitative, used in cartography: 130 AD;
• Melodic composition 475 AD;
• Numerical equations of higher order, solution of 13C AD;
• Pi, accurate estimation: 3 AD;
• Printing, with woodblocks: 7C AD;
• Rocket arrow launchers: 1367 AD;
• Soybean, fermented: 200 BC;
• Watermills, geared: 3C AD.

A Brilliant Trilogy of Books

I recommend reading this book as a trilogy. Jared Diamond’s seminal work in Guns, Germs and Steel details how societies form, grow and prosper.

Mix an understanding of those dynamics with this account of China’s scintillating history of research and scientific discovery. Then, top it off with a thorough reading of Civilisation by Niall Ferguson.

In the end, you will have serious reason to ponder the fragility of western dominance and to reassess the shallow foundations of the West’s current economic and scientific lead.

It is one of the great creative moments of life. A lot of satisfaction and fulfilment can be squeezed out of the creative challenge of dreaming up a new business.

The big question though is: What should you do with your business ideas? How do you make it happen? Should you?

This is where a strong dose of reality is required and where it is time to face facts. Evaluating your own ideas is not impossible, but it does help to discuss it with others who are more distant to the idea and probably have a better perspective. Heed advice and listen to opinions.

Of course, they may be wrong. Don’t let yourself be hindered from sailing over the horizon due to the irrational fears of flat-earth believers.

Many great business ideas were derided in their early days and a balance must be found. I often think of the politician who derided the early aviation industry hopefuls and emphatically assured the public that international air travel would never catch on. Carefully choose who you seek advice from, listen to sensible opinions and then evaluate.

Turning an idea into business is a darn hard task. It takes vision, effort, perseverance, toughness and even more effort.

When you analyse the merits of the idea, the first step is to consider where the money will come from to build the idea. If it will not make cash fairly promptly, then there is a very strong chance it is a great idea for a hobby and it isn’t a business.

If you need a hobby, go for it. Invest cash and effort wisely though knowing all your effort still won’t put shoes on your children’s feet next winter.

Think about cash flow

Think prudently about this rudimentary cash flow analysis. If you need to start a business and no cash will readily flow then you’d be wise to cut your losses and move onto other business ideas. It needs to be a candid evaluation of how much money the idea can earn:

• Maybe it is a great idea and there is potential to make a living from it.
• Maybe you can even make a good living from it. Still, that does not mean you should over-engineer or over-complicate the venture.

If the cash flow will only be a moderate trickle, then it might be best to operate as a Lone Ranger or in league with just one or two other people. Why take on extra staff and overheads or get involved with investors if it is possible to also end up with a similar financial outcome and far less stress?

Your brainwave may involve perfectly good small business ideas or home based business ideas. Why take on a lease and staff, payroll, accounting and other costs if they won’t make more money? Small business ideas can be profitable if profits are retained and expenses are trimmed to the bare essentials.

How to implement great business ideas

Let’s assume the idea stacks up financially. It has a strong chance of yielding a steady cash stream that can support a team and provide a solid return to investors.

The next step is to figure out what the product will be and how you will convince buyers. How can you package up your service into an easily understood “must have” proposition? This will require a lot of thought and a fair whack of marketing savvy. If that does not come naturally, then you may have to pay someone to help you refine your offering.

An extension of that work will be to build a brand. What is the purpose of your service, product or company?

Start with why you are doing this. Don’t fall into the trap of promoting the how or the what. Think about why.

As we all know, Apple has mastered the ‘art of why’ perfectly and achieved phenomenal sales success. Just look at any Apple ad and you’ll see how they ignore the tech specs of a new device. They hardly talk about the device itself. They don’t focus on how to use it.

Instead, they sell you on why you need such a device:

• contacting your family;
• making movies;
• listening to music;
• an always handy camera; or
• (god forbid) to make phone calls.

They show the possibilities. It is finely-honed branding and marketing.

Launching your business ideas

Once you have made at least some initial progress in each of these areas, then it is time for further reassessment.

Is the idea still airworthy?

If so, then it is time to launch into the commitments of hiring staff, leasing premises, incurring expenses and establishing administrative systems. That is when the work really begins.

Photo by Katrina Chow

While legions of critics denounced him, there were times when MacArthur was one of the most popular people in America. He had a tendency towards theatrics and was suspected of majestic aspirations. Some hated him for his haughty ways.

But, as one soldier wryly stated, “Would you want to go into battle following a general with an inferiority complex?”

He deserved the confidence of his men. His brilliant strategic manoeuvres saved many thousands of lives. He disagreed with the battle tactics of his contemporaries. He saw them as being wedded to the outmoded First World War thinking that had led to the horrors of trench warfare and mass slaughter of the Somme, Passchendaele and other tragic campaigns.

He considered a head-on attack on an enemy strong point to be a tragic waste of life. The casualty figures support him. He lost far fewer men in the entire Pacific theatre, fighting from Australia to Tokyo, than were lost in one single European battle during the Battle of the Bulge. Many of his men literally owed their lives to his island hopping strategies where he attacked the enemy’s weak points causing massive disruption of the enemy’s communication and supply lines.  Rabaul, Japan’s strongest bastion in the Pacific, was simply bypassed and rendered insignificant.

Inchon was a perfect example of his strategic brilliance in the Korean War. He stunned his enemy and could have brought the war to a swift conclusion. He was prevented from completing the task by political trepidations in Washington and Europe. They feared his actions could spark conflict with both the Chinese and Russians.

Enigmatic Genius

MacArthur belonged to a past age when international struggles were waged on broad battlefields. The new age of limited warfare was alien to his fighting style. He did not know how to wage a restrained war where attrition and stagnation was his greatest enemy. Timidity denied him his greatest strengths. He was a man of decisive action. A commander who always sought to launch a strategic attack that would catch his enemy by surprise, cut their supply lines and encircle their panicked troops.

His life spanned the broad spectrum of warfare. As a child, he sheltered in a fort under his father’s command when it was attacked by Indians with bows and arrows. At the end of his career, he was contemplating the use of nuclear weapons to end the Korean War.

The man revealed by Manchester remains an enigma despite the tremendous research conducted by the author and the copious amounts of detailed information on the General’s life. It seems the more we know about him, the harder it is to fit him into a simplistic category.

Detractors denounced his right wing tendencies in American politics. He was equally derided for the numerous left wing decrees he issued when rebuilding modern Japan. He discarded Japan’s feudal system and under his benign dictatorship America’s bitterest enemy was culturally and politically transformed. His vision for a new liberal national identity established the platform of modern Japan and created a  political and military alliance between Washington and Tokyo.

The Philippines Abandoned

Even the magnanimity and effectiveness of Japan’s reconstruction is a conundrum. Few realise Macarthur was not an American soldier at the time war erupted in the Pacific. He had retired from the US Army in 1937 and was employed at the time of Pearl Harbour by the Commonwealth of the Philippines.

Manila was devastated by the end of the war. Some estimate that only Warsaw suffered more destruction.  After the fighting ceased, aid flowed into Japan and MacArthur completely transformed and modernised Japanese society. The Philippines remained shackled to feudal and colonial legacies that still blight the nation. Filipinos languished in post-war chaos, poverty and political oligarchies while Japan was rebuilt and reshaped.

He was loved, some would even say worshipped, by Filipinos. The respect was mutual. Though renowned for his imperious haughty ways, MacArthur never exhibited racism. Having lived a significant percentage of his life in Asia, he had a deep understanding of the East and its history, traditions and customs.

He was an advocate for female suffrage and he smashed Japanese machismo traditions when he introduced democracy and gave the vote to Japanese women.

Domestic Political Turmoil

His domestic politics were a stark and troubling contrast. He was summarily dismissed from his command of the UN forces in Korea for wilful defiance of Presidential orders. He had aspirations to live in the White House and many of his actions and words during his tilt for office were disconcertingly autocratic. At times it was unclear whether he genuinely believed the military should be subject to political control.

It is an amazing contrast from the libertarian provisions he wrote into the Japanese Constitution. He aspired to a world free from war and enshrined peace provisions in Japan’s Constitution. Yet, he had plans to spread enough nuclear waste along the Korean and Chinese border that the area would have been an impenetrable wasteland for the next 60 years.

How ironic that the master of amphibious encirclement would have thought his enemy incapable of similar tactics.

Life Views

Towards the end of his life he saw war in a different light. He came to believe nuclear war should never be used. The perils to humanity were simply too great.

He was a man of enormous bravery wounded a number of times in WWI. He emerged from that conflict as America’s most competent battlefield commander. He took few protective measures and wore his cloth cap regardless of shells, air raids or bullets whistling past. He was renowned for boldly walking into danger zones with no metal helmet and in sight of enemy snipers. His audacity deeply troubled his staff who had to be by his side at these times when he exhibited almost suicidal tendencies.

Once he was so close to the front line that a junior commander blocked his jeep and refused him passage. Desperate combat was taking place only metres away and his presence was a potentially deadly distraction for the fighting men.

Patton’s biographer tells of an incident in WWI where Patton and Macarthur met on a battlefield. Like two proud roosters they strutted back and forth along the top of a trench. Neither was willing to be the first to duck or seek cover as shells landed close by.

One well placed German shell that day could have denied America two of his greatest military leaders in the subsequent world conflict.

Undeniably Remarkable Legacy

We can only wonder how the Pacific War may have ended or how Japan would have grown as a nation without the guidance of this truly remarkable individual.

For all his faults, contradictions and inconsistencies, this five-star general was one of the most remarkable figures of the 20th Century.

He lived an epic life and literally shaped the course of nations. He protected Australia, liberated the Philippines, conquered Japan, protected Korea and transfixed America.

Without that ray of hope, we’d never dare take any risks.

Buying a business is usually a life-changing event – for better or worse. So, do everything you can to make sure when you take that plunge, it actually improves your life financially and in other important ways too.

Some simple steps for business sales are set out below. They may make the process easier and help avoid some of the stress, wasted time and gut-wrenching mistakes.

Step 1: Get advice
Most business buyers and sellers are new to the process. This can lead to all sorts of complications unless good advice is sought and good processes are followed.

Step 2: Get the facts
The starting point to any purchase is to gather the real facts. This process is known as due diligence and it is a crucial part of the investment decision. It is the process of learning about all the crucial aspects of the business: accounts; contracts; marketing; leases; staff; litigation (hopefully none) and numerous other issues that indicate the risks and opportunities on offer.

Step 3: Know your limits
If it is your first time don’t try to do too much. Get the help you need and most of all make a candid assessment of your own strengths and weaknesses. This is important in not only the purchasing process, but you should also carefully consider whether you have the skills necessary to run the business once you buy it or to arrange business financing if that is necessary. Of course, you can always (hopefully) hire someone with the right skills. But that takes money. Do you have enough?

Step 4: Get real
All business ideas have their flaws. There will be issues that must be fixed and problems will arise. When assessing a potential purchase don’t get caught up on whether the problems exist. Focus on whether they are problems that you have the skills to fix. Find a business that suits your skill and experience. If you can run a business that is something you love doing, then you will be a very lucky person. Regardless of whether it is a small business or a red hot business idea you must personally be convinced and willing to see it through until it is a success.

Step 5: Don’t play games
It’s not really a step, but you get the idea. It is easy to be too clever and some play mind games with the seller hoping ‘strategies’ such as delaying a purchase decision will drive the price down. Sure, it might. It may also mean someone else has time to snatch the deal and the seller may choose them because they’ve lost confidence due to your antics.

Step 6: Sort out the core issues
The key to making a decision is to cut through all the extra data and figure out the really important issues. Analyze the facts, understand the risks you are willing to accept and focus on the things that really matter. If they stack up… buy. If things don’t seem right… cut your losses, move onto the next opportunity. Know when to move on.

Step 7: Do the deal
Once you have done your due diligence and know the risks, it is time to act. Negotiate a good deal and act with certainty.

Photo by Mark Toohey

Disputes rarely depend on the facts. They are often more about the personalities involved.

That is why it is always a tough call to predict how they other party will act. Particularly, if there is a lot of fire in their belly. How that can translate into action is always uncertain.

If the trading relationship ends badly they may simply fade away. Often there is a reasonable likelihood that they may fire a few salvos, either as a means of venting or as a determined effort to claim damages of some sort.

It is usually impossible to clearly know their side of the story. You are not aware of what they have heard or what ‘facts’ they may choose to assert. Still, there is no need to be too shaken by their saber rattling. Even if they are aggrieved about something, they still need to go to that much bigger step of being willing to spend time and effort and cash to do something about it.  Once the costs become clear and the expenses mount, most people’s enthusiasm for a fight starts to fade.

Then, even if they do want to take it to court, it is not an easy task to prove assertions in a court. A high standard of evidence is required. Again, that process can be complicated, time consuming and expensive.

All legal action tends to be complicated, expensive and a huge business distraction. They would have to be very aggrieved otherwise they are not likely to continue down the litigation path.

When Storm Clouds Gather

You can’t always prevent problems once storm clouds gather in a business relationship. It may be possible to manage things though and minimize the damage.

You could hold a meeting with them to clarify things and allay suspicion. If possible, the safest course of action is to genuinely try to rejuvenate the trading relationship. If that fails, then all you can do is ride out the storm… if there is one.

Don’t be tempted to start cowering from their bluster. There is equally no need to aggravate the situation. Most litigation arises from anger rather than any valid assessment of the facts.

Trying to resolve things is not a sign of weakness. It is not a time for macho chest thumping. Aggressive posturing is often the root cause of litigation.

Instead, it is prudent business practice to try to avoid costly distraction from the main game of making sales and earning profits. That is what business is all about. The rest is rather futile.

Proven Solutions

In a number of US jurisdictions there are apology programs that encourage effective apologies and disclosure of mistakes. These programs have dramatically reduced medical malpractice payments.

A University of Michigan Health Service study found apology programs resulted in a 47% decrease in case payments and a decline in settlement time from 20 months to 6 months. Overall there was a 16–18% reduction in the number of closed claims.

This legislative approach is seen as a potential cure from the denial or silence tactics that doctors often felt compelled to use. Doctors were often afraid to apologise in case the apology was later used against them in a law suit.

Yet, research consistently shows patients are willing to accept the reality that mistakes happen. Patients will generally refrain from legal action if they know the mistake was both regretted and acknowledged.

The social benefits are clear: An apology = less litigation, lower insurance premiums and health care savings.

Broader Application

What we know works in relation to medical claims can also work in other commercial areas. Sometimes when people are angry it is because they have valid reasons for their anger. You’ve done a bad job, things weren’t handled right or mistakes were made. We are all human. These things happen.

Facing the music, providing a mea culpa or whatever way you choose to describe the process of trying to sincerely make amends, may be the most prudent commercial response. The cost and time saved by avoid litigation has a clear financial benefit.

100 Apologies

In one somewhat humorous example, Fahmi Fadzil, a Malaysian writer, made some inaccurate allegations on Twitter. He tweeted an apology soon after he’d posted a claim that his pregnant friend was unkindly treated by her employer.

That was not enough for the employer who commenced a defamation lawsuit. In the end a settlement was reached where Fadzil agreed to avoid paying a fine by tweeting an apology 100 times over the course of three days.

Each individually numbered tweet read: “[Number]/100 I’ve DEFAMED Blu Inc Media & Female Magazine. My tweets on their HR Policies are untrue. I retract those words & hereby apologize.”

It was an extreme example, but you get the idea.

If you are thinking of joining Groupon or a similar discount program be wary.

The sales pitch sounds good and the lure of new customers is understandable, but you must get the maths right.

Many businesses have ended up on the rocks because they didn’t understand all the costs that went into the sale of each product.

They discount to the point their product is sold at unsurvivable margin levels or even at a loss.

Your actions may also trigger a price war. You could start a race to out-discount your competitors that will be fatal as a Price War Makes No Cents.

The urge to discount should be continually resisted. Don’t destroy your business in the mistaken belief that higher turnover equals more profits. A slash and burn approach to pricing could led your business to a sad ending.

Before you ever lower a price, get out your calculator and do the sums.

You may be stunned to find out how much extra work will be required to make the same profit.

An Example

A simplistic example may help illustrate the point.

1. Assume I do ten $1,000 jobs where I make a 30% margin on each job and it results in $30,000 net profit from all ten jobs.

2. If the practice of giving a 10% discount on each job became entrenched (or my discounts over the next ten jobs averaged $1,000), the result would be:

* a net profit of $20,000 for the next ten jobs; or
* doing 15 jobs to again have a net profit of $30,000.

What a stark truth! If I regularly give a 10% discount, I have to do 50% more work to make the same amount of money.

Of course, this is all based on a margin of 30%. Discounts pose an even greater threat if you are trading on slimmer margins.

Not only will you have to work harder to maintain profits, but your costs may significantly increase due to the extra work. Not only will staff and equipment costs rise, but numerous less obvious costs may also have an impact. Take the time to work through those hidden costs to see just how much the extra work is really costing and examine just how thin your margins really are.

No company can sustain extended periods of discounting. Well established companies may give the appearance of heavily discounting, but don’t be fooled by their marketing. If the discounts are genuine, they can only offer them because of large buying power, switch selling or they have the rare good fortune to be selling high margin products.

You can be sure that any successful trader long ago learned how to make money and is not in the business of giving it away through uncontrolled discounts.

If a discount is to be offered, use it for a special purpose like clearing old stock. Or, if you are a service provider, link the discount to the job’s margin and not the overall fee revenue. Just imagine how magnified a “little” discount can be if it applies to the whole revenue.

In summary, uncontrolled discounts are commercial poison. Don’t routinely discount unless you ready to enjoy early retirement.

Here are some tips that may help you to pay less to buy a business.

Some of these tips are ways to justify your insistence on a lower price for the business you are considering buying. Others are tactics and strategies that will help you to get a better deal or make a wiser decision.

The process of looking into a business and determining its worth is known as due diligence. It is best to get professional and/or legal advice and assistance to conduct those investigations. A due diligence checklist is always a useful tool.

As I have explained elsewhere, a seller can use due diligence to justify a higher sale price. Equally, an astute buyer can use the same process to unearth facts that support a price reduction. It really is a two-edged sword. So, make sure you get good advice and wield it properly to your best advantage.

Armed with credible information gained from due diligence you can quite reasonably demand a lower price that takes the risks and shortcomings of the business into account.

Here are some methods to reduce the purchase price of a business and to pay less.

1.  Look for indicators of a distressed sale.

• business owner is retiring;
• poor financial position;
• urgent sale schedule;
• been on the market for a long time;
• sale price has been repeatedly lowered;
• disputes between the owners;
• changing legislative conditions; or
• changing market conditions.

2.  Look for performance reasons that support a price reduction.

• declining sales;
• diminished profit margins;
• poor financial record keeping; or
• poor administrative or legal record keeping.

3.  Look for signs of shoddy management practices.

• low returns on investment;
• bad administrative practices;
• bad employment practices;
• threatened or actual litigation;
• high number of customer complaints;
• high refund or repair claims;
• continual discounting;
• poor marketing results.

Key Factors in Buying a Business

Two key factors regarding price are:

1. Knowing what it is currently worth.
2. Knowing what it could be worth in the future.

We’ve now covered the first steps of conducting due diligence and determining the worth of the business you may buy. Once you have investigated things and found the flaws in the business (they exist in every business) you should then have a good idea of the price that should be paid.

Positive Steps

The next step is another investigation, but this time it is with a positive twist. You should next look at what changes could be made to the business to improve its performance or to turn things around. Of course, this involves a frank assessment of your skills and the financial or other resources that you have available.

You should also make a candid assessment of your own strengths, weaknesses and capacity. Assess whether the potential upside is really worth the time, effort, expense and distraction from your current operations.

Analyse the business’ financial position and sales performance and look for ways that you may be able to turn the business around.

Some proven business transformation methods are to:

• cut wasteful expenditure;
• cut staff levels and only keep the high performance staff;
• lease cheaper premises (provided this will not adversely affect sales);
• sell underperforming assets or business units;
• reposition the products in the market;
• release new products.

E

EBIT is simply all profits (before interest payments and income taxes are taken into account).

Accountants like EBIT and consider it to be an important indicator. It measures profits and avoids distortions that result if companies use different capital structures or tax rates. That makes it a handy ratio for comparing profit figures from different businesses.

Because it is useful for profit comparison, it is often used as a way to value a business. If you are about to sell your business or take in investors then you should learn how to improve your EBIT.

There are ways you can improve your EBIT. It is important that you appreciate the importance of these methods. If you work at it you can improve your EBIT and turn numbers into dollars.

It is calculated as:

EBIT = Revenue – Operating Expenses + Non-Operating Income

Some examples of operating expenses are:

• cost of goods sold;
• selling expenses; and
• administrative expenses.

EBIT is also referred to as:

• operating earnings
• operating profit
• operating income

Another common ratio is EBITDA. That equation includes two non-cash items (depreciation and amortisation).

If you are pitching to an investor it is crucial that you understand their concerns and what it will take to convince them to part with their cash.

It is a huge thing to ask someone to back your idea and put money into your business.

While a fool and money may be soon parted, it is hard to get a wise person to have confidence. You must persuade the potential investor that any money given to you will be returned along with a sizeable reward for the risk taken. The reason the investor has cash to invest is probably because there is a history of handling money wisely and making prudent business decisions.

You must know what an investor seeks and provide the assurance wanted. Shape your pitch to answer those valid concerns.

Investor’s Viewpoint

Essentially an investor wants to know three things:

1. What risk is involved and will they ever see their money again?
2. Will there be a significant reward for placing that money at risk?
3. Is there any evidence that the business has a future and the targets can be met?

Risk

• Does the entrepreneur have the necessary experience?
• Have advisors and mentors with appropriate industry and business experience been engaged?
• Is there a credible business plan and has the business concept been proven?

Returns

• Is the exit strategy clearly defined and charted?
• Have potential buyers been identified?
• Is there a strong commitment to meeting the exit time line?

Evidence

• Have growth and performance targets been consistently met?
• Is there a proven market and has this been shown by consistent growth figures?
• Is that growth solidly backed by strategic relationships or signed contracts?