The Independent Contractor Revisited

As the federal government and the state governments look for more ways to bring in money, the independent contractor status is a likely place for them to look. After all, by using independent contractors rather than employees, employers don’t have to withhold taxes, provide workers’ compensation, contribute to unemployment compensation, or provide any benefits such as 401-k programs, health insurance or other benefits. Plus you can use and discontinue independent contractors as needed. Certainly, in this age of home-based businesses, the use of outside sources makes a lot of sense. Outsourcing a lot of business needs has been done for years and will only increase with growth of small business. Most one-person and small businesses don’t need full-time employees. Many requirements can be outsourced to independent contractors who in turn outsource many of their requirements. It is the use of workers who are classified as independent contractors, but are really employees that can cause … [Read more...]

Entrepreneurship Is Alive and Well!

A recent article in the Boston Globe reported that although more attention is on the large, primarily publicly held companies, more and more people are making their living by operating their own businesses. In fact, nationally, over 500,000 new businesses are started every year.  What this means is that over 10 percent of workers are “either starting a business or working at one that is less than 3 1/2 years old.”  And, as indicated by frequent reports, new businesses create new jobs. Those people who start businesses generally do not have their own funds available for start-up expenses. This is due in part to the fact that bank and SBA funding is not available to them.  In addition, fewer than seven percent of new or prospective business owners will receive actual venture capital funds.  So, where does the money come from?  Second mortgages, credit cards, and family loans are the most common sources of start-up funds.  The Globe added that “over the past few years, more than 80 … [Read more...]

Small Companies Are Innovators

Small companies are the innovators. The need for large companies to acquire small companies is necessary in order for the former to capture new products and services.  According to Fortune magazine, "Big companies almost never innovate. This is unfortunate because innovation is one of the few ways to gain proprietary advantage and stay profitable.  It's not that innovation itself is rare – it's occurring everywhere.  Which means, mostly, elsewhere.  And as engineers and inventiveness continue to flourish in China and India, elsewhere moves farther and farther from here.  A healthy business must therefore not only innovate more within its walls but leverage innovation elsewhere too. “So why is innovation so hard for big companies?  The main reason is that innovative people tend to prefer working in smaller organizations that have more focus and less bureaucracy.  Even in small companies, adopting a large-company style can frustrate the innovators. “The problem with large companies … [Read more...]

Small Company Growth Trends

The median sales of a company going public has gone from an average $15 million in 1999 and 2000 to $164 million in 2004.  Smaller companies have decided not to go public as often as in years past, and they reap the quick – and cheap – money as a result of that decision.  The question is "why?" A company with only $15 million in annual revenues would most likely not want to have an IPO and absorb all of the attendant costs and the on-going fees related to going public.  They also would not want to have to spend the money necessary to comply with the Sarbanes-Oxley regulations.  Smaller companies have to pay a hefty price to go public – and remain public.  In fact, a recent Business Week article reported that “Bankers expect a record number of U.S. companies to go private this year, topping last year’s 86.” Many CEOs, in order to rapidly grow their businesses, merge or acquire other companies.  However, many of these do not work out and the acquired entities eventually get sold off.  … [Read more...]

A Board of Advisors

In most jurisdictions, a board of directors is not required for privately held companies.  However, many of these companies have appointed what might be termed advisory boards.  Although they may not have any legal authority, owners of these privately owned companies have discovered that this team of outside advisors can assist them in many ways. One important way they can help is just by having their name and/or company affiliation attached to the company.  This can open doors to new customers and new relationships.  Appointing advisors from both the accounting and legal fields can help insure that the company maintains strong controls on these important areas.  This board can also assist in developing company strategy and systems.  A business-savvy board can also help in management succession and can help prepare the company for sale. In order to create a strong and helpful advisory board, “cronies” should not be included. The advisory team can consist of two to four people. They … [Read more...]

Closing the Price Gap

The deal is getting down to the wire, the price differential is close, but the parties are not yet in agreement. Following are some ideas that might get the ball rolling and help bring the parties together. Let the seller retain the real estate and rent it to the buyer, thus reducing the price. The same could be done for major pieces of equipment. Let the seller lease them to the buyer reducing the price. The lease should, however, like most leases, provide for a buyout at the end. Structure a royalty on sales rather than an earnout on gross margins or EBIT. Have the parties create a subsidiary for the fastest growing part of the business in which the buyer and seller share 50/50. Let the buyers acquire 70 percent of the business with the requirement that they purchase 10 percent more each year on the same multiple of EBIT as in the 70 percent sale. Arrange a consulting agreement with the seller to provide additional compensation to be paid annually. Certainly, any agreement or … [Read more...]

M&A Trends

A  recent article in M&A Today offered some observations concerning current and future M&A trends. “The business world is constantly changing.  For the first half of the 20th century, vertical integration was the objective in which, oil companies, for example, owned the entire process from drilling to retailing at the gas station.  From 1950 to 1980, diversification was in vogue.  Recently, the trend is to outsource everything except the core business.  One of the new business models known as the new profit imperative is to go downstream and get closer to the ultimate customer.” Today’s M&A Climate Many companies still look to acquisitions as the best way to increase both capability and market share.  Acquisitions generally add complementary products, new technology or increase geographic coverage.  Interestingly, today’s companies are investing in new ventures, while, at the same time; divesting themselves of some of their original businesses.  Since these “original” … [Read more...]

How Many Businesses Are There?

We suspect that the answer to this question depends on who you ask! The Internal Revenue Service (IRS) reports that they received some 24.8 million business tax returns for the year 1999. We can hear the joyful sounds emanating from new business brokers and those considering the profession. Wow, almost 25 million businesses! We can hear them adding up the commission dollars. This is a very misleading figure. Many of these tax returns are for hobby-type businesses, one-person consultants, writers, artists and the like. In fact, one source reports that there are 18 million non-employee businesses, and they account for only 2 percent of total sales. INC, in their Small Business issue, reports that Sole Owners generate only 3.3 percent of all revenues and have annual sales of about $38,000. Home-Based Businesses According to INC magazine, 61 percent of the firms in their 500 fastest-growing companies list started out as home-based businesses. And, on average, 15 months after they … [Read more...]

Size Breakdown of Businesses

Here is a common and much-used breakdown by the federal government: Small Business Administration (SBA): Very Small Business = 19 or fewer employees Small Business = 20 to 99 employees Medium-Size Business = 100 to 499 employees Large Business = 500+ employees … [Read more...]