Where is Your Business at?
THREE STAGES OF BUSINESS
Where is Your Business at?
Lecture adopted from Christian Entrepreneurship Program, an online Biblical Entrepreneurship program developed by the Center for Christian Business Ethics Today and Fellowship of Companies for Christ International (FCCI) Written by Philip J. Clements Published by the Center for Christian Business Ethics Today, LLC
www.cfcbe.com
TABLE OF CONTENTS
What are the Three Stages of Business? Why are the Three Stages Important? What is a Hobby? What is a Practice? What is a Going Concern? How Does This Apply to the Entrepreneur? Actions Items Next Steps About the Program
1 2 3 4 5 6 8 8 9
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHAT ARE THE THREE STAGES OF BUSINESS?
The three stages of business are frameworks to help the entrepreneur develop his strategy for his business. The three stages of a business are: 1. Hobby 2. Practice 3. Going Concern
1
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHY ARE THE THREE STAGES IMPORTANT? 1. By knowing the three stages, the entrepreneur will be able to better assess the current status of the business. 2. With this assessment, the entrepreneur can better determine what the next step needs to be and whether it should or can be taken. 3. As the entrepreneur develops additional activities in a business, these three stages can be used to evaluate each activity and its effectiveness in the overall business. a. Many times the serial entrepreneur suffers from not understanding the stage of the business. b. This can cause the entrepreneur to start another activity before the current activity has moved to a viable stage. c. The result can be failure of both the current and the new activities, because the scarce resources are too divided to be effective for either activity. d. This is often viewed as the curse of the entrepreneur – never completing or building any viable company.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
2
WHAT IS A HOBBY? 3
1. A hobby is an activity that is not consistently profitable and the entrepreneur is not compelled to cause it to be consistently profitable. a. In most cases the activity is being done because of a passion of the entrepreneur. b. But the determination of making the business a systematic activity, such that it is systematically profitable, does not exist. 2. Often we see hobbies within families, where one family member wants to do an activity and the other member(s) supply the capital. a. There is no accountability. b. There is no need for the family member to make a profit for support. c. There is no likelihood that the current track record means the hobby will become more than a hobby. 3. The risk of doing only what we are passionate about, is that it can be a justification of creating a hobby. a. Most commentaries on entrepreneurship say you have to be passionate about the business. But passion alone does not create a business. b. Business requires passion, but business also requires discipline that is systematically applied for the long term. c. Hobbies get passion, but do not get the discipline to determine to do what is needed to be profitable. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHAT IS A PRACTICE? 1. A practice is an activity that produces systematic profits that allow for people to live off of the profits. 2. The key distinctions from the hobby are: a. Profits. b. Systematic nature of the profits. c. Someone counts on these profits for livelihood. 3. A practice means the entrepreneur is vested in its success, for his livelihood. 4. The practice can be the next step of the hobby. a. The passion and activity begins to generate a reoccurring activity. b. The activity is refined to be profitable. c. The profits are scaled to be supportive of some one’s life. i. For some entrepreneurs, the employees become the supported group first. ii. But in all cases, the entrepreneur needs to experience regular flows of profits for either his own support or as a return of and return on investment. 5. Practices tend to be invested in the entrepreneur. If the entrepreneur stops, the practice stops. a. This does not mean the employees will not go to another entity. But it does mean that the employees do not carry on the existing entity. b. The entrepreneur’s practice may not be small, but it does mean that the practice depends on the entrepreneur.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
4
WHAT IS A GOING CONCERN?
1. The going concern is an activity that is no longer dependent upon the entrepreneur. If the entrepreneur stops, the activity will keep going. 2. Moving a practice to a going concern is a decisive step for the entrepreneur. a. The dependence on the entrepreneur has to be dissipated by the systems and staff of the company. b. The branding needs to move beyond the practice and not be bound to the entrepreneur. 3. Some key elements of a going concern are: a. The ability to regenerate customers. b. The ability to regenerate staff. c. The ability to produce the needed profits to allow reinvestment for the growth of the business. i. The key systems tend to be adequate financial systems to see where the company is. ii. Adequate training systems to bring new people to productive state. iii. Adequate marketing connections to allow for consistent revenue development, either from a stable customer base or from a market.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
5
HOW DOES THIS APPLY TO THE ENTREPRENEUR?
1. Entrepreneurs should start a company with an exit plan in mind. a. Therefore, the entrepreneur should understand what it takes to exit various stages of business. b. It is important to note that business value has to have two attributes: be identifiable and be transferable. i. Identifiable means that the business has the systems to show where the profits come from and how much the profits are. ii. Transferable means the activity and its profits can be transferred to another and that other can operate the business to achieve the same level or greater profits. iii. The various stages of business have different levels of these two attributes. 2. The exit factor at various stages: a. Hobby i. Has no operating value, because it is not reliably profitable. ii. Therefore, hobbies will exit either by shut down, give away or liquidation sale (this is the net asset value.) b. Practice i. Has consistent profits, so has some value. ii. The transferability is always a limitation, since the practice is dependent on the entrepreneur. iii. Often practices are excited by giving another the practice. In effect the buyer of the practice is buying a job. Thus it has serious value limits, because the income to cover the job piece is not profits. It is the profits above the job piece that is the value. This means that the practice can only pay to the entrepreneur the amount of cash left over after the new worker/owner has made enough to cover his compensation. This cash stream will be only for a limited time, such as two to five years. Generally this cash stream will be about 50% of that which is currently there. iv. Another exit is selling to another practice, where the entrepreneur’s costs are mostly eliminated. Such an exit is like a going concern exit, below, because the practice will carry on without the entrepreneur. c. Going concern i. The going concern has consistent profits and is not dependent on the entrepreneur. This makes the business fully sellable. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
6
3. An a.
b.
c.
ii. The value will be the profits of the business. iii. Because the profits are consistent, the value of these profits can be multiple years. a) Often this is a 3 to 5 times the profits. b) EBIT (earnings before interest and taxes) can be another way to describe the profits. c) EBITDA (earnings before interest and taxes and depreciation and amortization) is generally viewed as a proxy for cash flow. The big issue is that cash flow needs to address working capital. iv. The range in values of early stage companies also varies by the industry, where technology companies can be a multiple of revenue, where manufacturing will be based on cash flow. exit plan needs to have a buyer, identified value and transferrable value. The buyer is the seller’s responsibility. i. The seller should know to whom the company would be of interest. ii. Many times the future owner is recruited to be a partner. After a period of time, the new partner will buy out the founder. iii. By designing the exit, the focus in building the business helps make the value creation focused and efficient. iv. The risk is that for the entrepreneur, focus on exit will generally mean loss of passion for the customer and the innovations in aiding the customer. The result is the entrepreneur becomes focused on the “money.” Focus on the money means the entrepreneur can become greedy with all of the problems that creates. Identified value means that the buyer can see the value. i. Usually this will start with financial statements that document the profits and cash flow. ii. The business customer base is the next value proposition. Good customer base documents is essential. iii. The business processes and IP rights is the third source of value. Proper intellectual property protection creates value. iv. Note that in most cases the fixed assets do not create the key values of a going concern. The fixed assets create the value of a liquidation exit. Transferrable value means that the value components can be transferred to the buyer and that buyer can get the future value from the business. i. Clear title to the assets is important. Too often ownership in the assets and even the company is not clear. Where title is not clear, then little or no value can be placed on the asset. ii. Messy company ownership structures with minority interests also creates transfer issues. This means a deal may not be doable. If this worry exits, then the value goes down. iii. Brands and dependence on key people who are selling and not staying with the business means that the business is not transferrable.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
7
ACTIONS ITEMS 1. Evaluate the stage of your business using the Stage of Business Quiz here (goo.gl/ D5v07y). 2. Determine whether you strategically want to build the next stage business. 3. Evaluate your business plan to see if it is consistent with your goals. 4. Pray for guidance in these decisions and God’s peace for the plan.
NEXT
STEPS If you • • • •
need a business plan have questions about starting a business, want to learn more on how to run a better business, or want to learn how to apply your faith to day to day business operations,
please visit the Christian Entrepreneurship Program (www.cfcbe.com/cep-fcci) website to see if the program could help you figure out whatever you are stuck on and have the opportunity to walk alongside you for part of your entrepreneurial journey. If you have any technical questions about running your business, schedule a 15 minutes free consultation phone call with Certified Small Enterprises Advisor (CSEA, cseainstitute.org). Send us an email at [email protected] and tell us you’d like to talk to one of the CSEA Advisors, and we will set up a call for you. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
8
You want to start a business, or you’ve started a business...
...but now what? CHRISTIAN ENTREPRENEURSHIP PROGRAM The program will incorporate real-time applications of Christian faith principles to business operations – featuring Biblical material connected to business principles. The courses will have a technical nature, to teach how to run a business, not just theory behind business practices. Each course will consist of lectures, recommended reading lists, and printable worksheets and handouts. Case studies and supplementary reading materials will be woven throughout.
I. WHAT IS BUSINESS
Entrepreneurs live out God’s cultural mandate through the ownership and production of private property. Starting a business is equal part vision, technical skill, and ability to implement. By growing your technical skills you glorify God.
1.1 God and Business 1.2 Structure of Business 1.3 Speed of Business 1.4 Roadmap 1.5 Case Study II. WHO ARE CUSTOMERS
How should we interact with and treat our customers and clients? Is the customer always right? Biblical commandments and parables show that we are our brother’s keeper and that we are to love our neighbor as ourselves. This course focuses on engaging clients by understanding how and why customers buy.
2.1 God and Customers 2.2 Market Position 2.3 Marketing Basis 2.4 Case Study
9
III. WHAT IS CAPITAL
What are the resources needed to start a business? How do investments affect a company? Capital is the sum of assets an entrepreneur uses to fuel their business and is both a responsibility and a blessing. This course explores how to acquire capital and deploy it wisely.
3.1 God and Capital 3.2 How Much Capital is Needed 3.3 How to Get Capital 3.4 Case Study IV. HOW TO BE ACCOUNTABLE
Who holds entrepreneurs accountable? In short, we are answerable to God for our work on earth. Entrepreneurs have the responsibility of how understanding concepts such as profit and loss and economic calculations to better allocate resources and make wise decisions.
4.1 God and Accountability 4.2 What are Financial Reports 4.3 Financial Statement Process 4.4 Case Study V. HOW TO BE LEGAL
How does political and economic liberty affect business? Scripture makes clear our responsibility to abide by the governmental order. During this course learn the implications that the law has on business.
5.1 God and Law 5.2 What Organization to Select 5.3 Why Pay Your Taxes 5.4 Case Study VI. HOW TO TREAT EMPLOYEES
Should a Christian employer have a unique relationship with his or her employees distinct from a secular employer? The Bible has much to say about the interactions between subordinates and superiors. The difference is love. This study provides best business practices for Human Resource Management with a focus on loving our employees like Christ.
6.1 God and Employees 6.2 Compensation Process 6.3 Organization Chart 6.4 Case Study VII. WHAT TO DO WITH PROFITS
Are profits inherently evil? No. In fact, large profits show that resources have been rightly allocated to their highest valued ends. Profits provide the opportunity to invest wisely and multiply the blessing. This course explores the re-deployment of profits to further grow a company.
7.1 God and Profits 7.2 Case Study
10
Where is Your Business at?
Lecture adopted from Christian Entrepreneurship Program, an online Biblical Entrepreneurship program developed by the Center for Christian Business Ethics Today and Fellowship of Companies for Christ International (FCCI) Written by Philip J. Clements Published by the Center for Christian Business Ethics Today, LLC
www.cfcbe.com
TABLE OF CONTENTS
What are the Three Stages of Business? Why are the Three Stages Important? What is a Hobby? What is a Practice? What is a Going Concern? How Does This Apply to the Entrepreneur? Actions Items Next Steps About the Program
1 2 3 4 5 6 8 8 9
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHAT ARE THE THREE STAGES OF BUSINESS?
The three stages of business are frameworks to help the entrepreneur develop his strategy for his business. The three stages of a business are: 1. Hobby 2. Practice 3. Going Concern
1
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHY ARE THE THREE STAGES IMPORTANT? 1. By knowing the three stages, the entrepreneur will be able to better assess the current status of the business. 2. With this assessment, the entrepreneur can better determine what the next step needs to be and whether it should or can be taken. 3. As the entrepreneur develops additional activities in a business, these three stages can be used to evaluate each activity and its effectiveness in the overall business. a. Many times the serial entrepreneur suffers from not understanding the stage of the business. b. This can cause the entrepreneur to start another activity before the current activity has moved to a viable stage. c. The result can be failure of both the current and the new activities, because the scarce resources are too divided to be effective for either activity. d. This is often viewed as the curse of the entrepreneur – never completing or building any viable company.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
2
WHAT IS A HOBBY? 3
1. A hobby is an activity that is not consistently profitable and the entrepreneur is not compelled to cause it to be consistently profitable. a. In most cases the activity is being done because of a passion of the entrepreneur. b. But the determination of making the business a systematic activity, such that it is systematically profitable, does not exist. 2. Often we see hobbies within families, where one family member wants to do an activity and the other member(s) supply the capital. a. There is no accountability. b. There is no need for the family member to make a profit for support. c. There is no likelihood that the current track record means the hobby will become more than a hobby. 3. The risk of doing only what we are passionate about, is that it can be a justification of creating a hobby. a. Most commentaries on entrepreneurship say you have to be passionate about the business. But passion alone does not create a business. b. Business requires passion, but business also requires discipline that is systematically applied for the long term. c. Hobbies get passion, but do not get the discipline to determine to do what is needed to be profitable. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
WHAT IS A PRACTICE? 1. A practice is an activity that produces systematic profits that allow for people to live off of the profits. 2. The key distinctions from the hobby are: a. Profits. b. Systematic nature of the profits. c. Someone counts on these profits for livelihood. 3. A practice means the entrepreneur is vested in its success, for his livelihood. 4. The practice can be the next step of the hobby. a. The passion and activity begins to generate a reoccurring activity. b. The activity is refined to be profitable. c. The profits are scaled to be supportive of some one’s life. i. For some entrepreneurs, the employees become the supported group first. ii. But in all cases, the entrepreneur needs to experience regular flows of profits for either his own support or as a return of and return on investment. 5. Practices tend to be invested in the entrepreneur. If the entrepreneur stops, the practice stops. a. This does not mean the employees will not go to another entity. But it does mean that the employees do not carry on the existing entity. b. The entrepreneur’s practice may not be small, but it does mean that the practice depends on the entrepreneur.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
4
WHAT IS A GOING CONCERN?
1. The going concern is an activity that is no longer dependent upon the entrepreneur. If the entrepreneur stops, the activity will keep going. 2. Moving a practice to a going concern is a decisive step for the entrepreneur. a. The dependence on the entrepreneur has to be dissipated by the systems and staff of the company. b. The branding needs to move beyond the practice and not be bound to the entrepreneur. 3. Some key elements of a going concern are: a. The ability to regenerate customers. b. The ability to regenerate staff. c. The ability to produce the needed profits to allow reinvestment for the growth of the business. i. The key systems tend to be adequate financial systems to see where the company is. ii. Adequate training systems to bring new people to productive state. iii. Adequate marketing connections to allow for consistent revenue development, either from a stable customer base or from a market.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
5
HOW DOES THIS APPLY TO THE ENTREPRENEUR?
1. Entrepreneurs should start a company with an exit plan in mind. a. Therefore, the entrepreneur should understand what it takes to exit various stages of business. b. It is important to note that business value has to have two attributes: be identifiable and be transferable. i. Identifiable means that the business has the systems to show where the profits come from and how much the profits are. ii. Transferable means the activity and its profits can be transferred to another and that other can operate the business to achieve the same level or greater profits. iii. The various stages of business have different levels of these two attributes. 2. The exit factor at various stages: a. Hobby i. Has no operating value, because it is not reliably profitable. ii. Therefore, hobbies will exit either by shut down, give away or liquidation sale (this is the net asset value.) b. Practice i. Has consistent profits, so has some value. ii. The transferability is always a limitation, since the practice is dependent on the entrepreneur. iii. Often practices are excited by giving another the practice. In effect the buyer of the practice is buying a job. Thus it has serious value limits, because the income to cover the job piece is not profits. It is the profits above the job piece that is the value. This means that the practice can only pay to the entrepreneur the amount of cash left over after the new worker/owner has made enough to cover his compensation. This cash stream will be only for a limited time, such as two to five years. Generally this cash stream will be about 50% of that which is currently there. iv. Another exit is selling to another practice, where the entrepreneur’s costs are mostly eliminated. Such an exit is like a going concern exit, below, because the practice will carry on without the entrepreneur. c. Going concern i. The going concern has consistent profits and is not dependent on the entrepreneur. This makes the business fully sellable. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
6
3. An a.
b.
c.
ii. The value will be the profits of the business. iii. Because the profits are consistent, the value of these profits can be multiple years. a) Often this is a 3 to 5 times the profits. b) EBIT (earnings before interest and taxes) can be another way to describe the profits. c) EBITDA (earnings before interest and taxes and depreciation and amortization) is generally viewed as a proxy for cash flow. The big issue is that cash flow needs to address working capital. iv. The range in values of early stage companies also varies by the industry, where technology companies can be a multiple of revenue, where manufacturing will be based on cash flow. exit plan needs to have a buyer, identified value and transferrable value. The buyer is the seller’s responsibility. i. The seller should know to whom the company would be of interest. ii. Many times the future owner is recruited to be a partner. After a period of time, the new partner will buy out the founder. iii. By designing the exit, the focus in building the business helps make the value creation focused and efficient. iv. The risk is that for the entrepreneur, focus on exit will generally mean loss of passion for the customer and the innovations in aiding the customer. The result is the entrepreneur becomes focused on the “money.” Focus on the money means the entrepreneur can become greedy with all of the problems that creates. Identified value means that the buyer can see the value. i. Usually this will start with financial statements that document the profits and cash flow. ii. The business customer base is the next value proposition. Good customer base documents is essential. iii. The business processes and IP rights is the third source of value. Proper intellectual property protection creates value. iv. Note that in most cases the fixed assets do not create the key values of a going concern. The fixed assets create the value of a liquidation exit. Transferrable value means that the value components can be transferred to the buyer and that buyer can get the future value from the business. i. Clear title to the assets is important. Too often ownership in the assets and even the company is not clear. Where title is not clear, then little or no value can be placed on the asset. ii. Messy company ownership structures with minority interests also creates transfer issues. This means a deal may not be doable. If this worry exits, then the value goes down. iii. Brands and dependence on key people who are selling and not staying with the business means that the business is not transferrable.
This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
7
ACTIONS ITEMS 1. Evaluate the stage of your business using the Stage of Business Quiz here (goo.gl/ D5v07y). 2. Determine whether you strategically want to build the next stage business. 3. Evaluate your business plan to see if it is consistent with your goals. 4. Pray for guidance in these decisions and God’s peace for the plan.
NEXT
STEPS If you • • • •
need a business plan have questions about starting a business, want to learn more on how to run a better business, or want to learn how to apply your faith to day to day business operations,
please visit the Christian Entrepreneurship Program (www.cfcbe.com/cep-fcci) website to see if the program could help you figure out whatever you are stuck on and have the opportunity to walk alongside you for part of your entrepreneurial journey. If you have any technical questions about running your business, schedule a 15 minutes free consultation phone call with Certified Small Enterprises Advisor (CSEA, cseainstitute.org). Send us an email at [email protected] and tell us you’d like to talk to one of the CSEA Advisors, and we will set up a call for you. This material is copyrighted to the Christian Entrepreneurship Program owned by the Center for Christian Business Ethics Today, LLC.
8
You want to start a business, or you’ve started a business...
...but now what? CHRISTIAN ENTREPRENEURSHIP PROGRAM The program will incorporate real-time applications of Christian faith principles to business operations – featuring Biblical material connected to business principles. The courses will have a technical nature, to teach how to run a business, not just theory behind business practices. Each course will consist of lectures, recommended reading lists, and printable worksheets and handouts. Case studies and supplementary reading materials will be woven throughout.
I. WHAT IS BUSINESS
Entrepreneurs live out God’s cultural mandate through the ownership and production of private property. Starting a business is equal part vision, technical skill, and ability to implement. By growing your technical skills you glorify God.
1.1 God and Business 1.2 Structure of Business 1.3 Speed of Business 1.4 Roadmap 1.5 Case Study II. WHO ARE CUSTOMERS
How should we interact with and treat our customers and clients? Is the customer always right? Biblical commandments and parables show that we are our brother’s keeper and that we are to love our neighbor as ourselves. This course focuses on engaging clients by understanding how and why customers buy.
2.1 God and Customers 2.2 Market Position 2.3 Marketing Basis 2.4 Case Study
9
III. WHAT IS CAPITAL
What are the resources needed to start a business? How do investments affect a company? Capital is the sum of assets an entrepreneur uses to fuel their business and is both a responsibility and a blessing. This course explores how to acquire capital and deploy it wisely.
3.1 God and Capital 3.2 How Much Capital is Needed 3.3 How to Get Capital 3.4 Case Study IV. HOW TO BE ACCOUNTABLE
Who holds entrepreneurs accountable? In short, we are answerable to God for our work on earth. Entrepreneurs have the responsibility of how understanding concepts such as profit and loss and economic calculations to better allocate resources and make wise decisions.
4.1 God and Accountability 4.2 What are Financial Reports 4.3 Financial Statement Process 4.4 Case Study V. HOW TO BE LEGAL
How does political and economic liberty affect business? Scripture makes clear our responsibility to abide by the governmental order. During this course learn the implications that the law has on business.
5.1 God and Law 5.2 What Organization to Select 5.3 Why Pay Your Taxes 5.4 Case Study VI. HOW TO TREAT EMPLOYEES
Should a Christian employer have a unique relationship with his or her employees distinct from a secular employer? The Bible has much to say about the interactions between subordinates and superiors. The difference is love. This study provides best business practices for Human Resource Management with a focus on loving our employees like Christ.
6.1 God and Employees 6.2 Compensation Process 6.3 Organization Chart 6.4 Case Study VII. WHAT TO DO WITH PROFITS
Are profits inherently evil? No. In fact, large profits show that resources have been rightly allocated to their highest valued ends. Profits provide the opportunity to invest wisely and multiply the blessing. This course explores the re-deployment of profits to further grow a company.
7.1 God and Profits 7.2 Case Study
10
