Tranzitioning.com

We’ve been discussing how the Great Recession started out as a massive credit collapse, resulting in a deflationary cascade.  With declining wealth, incomes and revenues, people and corporations have had to embrace some extreme cost-cutting measures.  As a result, the significant advances in technology over the last couple of decades are now being deployed in ways that are drastically changing the employment landscape.

Employment is not the only aspect of our economy that is being affected.  The very nature of markets, and marketing, have changed as well.  This can be seen in the decline of newspapers across the country.  As a business broker, I used to advertise in the local paper.  About 5 years ago, the response to my print ads fell off a cliff, while the response to my online advertising started to take off.  I believe this is a direct result of the rise of the micro-niche.

Going back several decades or so, virtually all marketing was mass marketing.  You advertised on TV, radio, or print, to a very large audience.  This made sense if you were selling a mass-consumer item, but it also made it difficult to market niche products or services.

Then, technology started to allow a more focused type of marketing.  Direct mail and telemarketing, while costly, allowed targeted messages to a targeted audience.  New cable channels and magazines segmented viewers into smaller, and more consistent audiences.

Today, the Internet and other technologies allow us to advertise to very small, targeted markets, for very little money.  For example, using a “pay-per-click” (PPC) campaign, I can specifically target people who want to buy small businesses in Atlanta for pennies per site visitor.  I can buy a TV ad that is only shown to one little neighborhood on a local cable system, for a fraction of the cost for the same TV ad that goes out to everyone watching that channel.

The result is counter-intuitive.  It is actually easier and more effective to market unique product and services, than it is to go after any mass-consumer markets.  When combined with the other changes summarized in my last post, we now have a world where small companies and individuals can successfully compete with the big boys with unique products and services.

How big a market do you need?  It depends on what you’re selling, and your profit margin.  Let’s say that you desire an income of $100,000 per year.  You can achieve this milestone various ways, as outlined below:

Bottom line, technology has made it cost effective to market to very small niches, and to customize products and services for these very small niches.  Next time, we’ll continue our discussion by exploring the customization of products for micro-niches.  As always, comments welcome.

Tranzitioning.com is a blog by Jay Fenello, principal and founder of TranzServices.com,
an Atlanta-based  firm that helps people tranzition to the new economy.

Over the last couple of weeks, we’ve been exploring the massive restructuring of employment occurring today — how traditional, full-time jobs with benefits are disappearing, while various forms of self employment are rising.  Confirming these trends is this report by CBS News, indicating that one third of all people working today are  freelancing.

So what’s driving these changes?  In a word — technology.  Technology has changed the employment landscape in two profound ways:  It has virtually eliminated geography as a consideration for many jobs, and it has drastically lowered the cost for many services that only the largest firms could previously afford.  Let’s explore these two in more detail:

Technology’s Impact on Geographic Location

In the old days, only local telephone calls were free.  Then came deregulation, and long distance prices began to fall.   That was followed by the new cellular services, which allowed people to become untethered from their land lines.  Then came the Internet revolution, which brought a similar expansion of coverage to the transmission of data, at ever reducing costs, mirroring what had happened with voice communication.

Together, these changes have allowed people to communicate from wherever they are, at a very low cost, with feature-rich voice, video and data sharing.

Technology’s Impact on Costs

In the old days, it cost a ton of money to start a business.  You needed to buy or lease significant space to house all of your employees, plus you needed to purchase a phone system to support your staff, plus you needed desks and chairs and computers, etc.   Then you needed to hire people just to support the infrastructure you just bought.

When all was said and done, you could easily blow through tens of thousands of dollars just to start a small company.  On top of that, you needed to cover the ongoing monthly overhead costs associated with maintaining all of these business related assets.

Today, that entire paradigm no longer applies.  We now live in a world where geographic location is no longer a consideration, a world where every conceivable business activity has been sliced and diced and bundled and made available at a cost that anyone can afford. (this is one reason that many Venture Capitalists are not providing large amounts of seed money to startups these days.)

To get an idea of the scope and scale of changes we are talking about, here’s a small sample of services that have drastically changed due to technology:

Phone Systems – 20 years ago, I was a partner in a small firm that had about 12 employees.  It cost us over $10,000 just for the phone system we installed.  Then we added voice mail and an automated attendant (i.e. press “1” for sales, “2” for service), which cost another $10,000.  Today, those same features plus many more are available for less than $20/person/month.  By using a service like Phone.com, today’s company can hire people from all over the world, and have calls automatcially routed to them wherever they are via an automated attendant.

CRM Systems – 20 years ago, systems like these were out of reach of most small to mid-sized companies.  Those that had them used proprietary systems that were very expensive, both to install and maintain.  Today, through services like Salesforce.com and Zoho.com, you can get a full-blown CRM system for a low monthly fee.

Video Conferencing – Some of the early attempts at Video Conferencing required a dedicated video conference room plus a satellite uplink — very, very expensive.  Today, almost anyone can video conference from their PC with free software from Skype.com.  More sophisticated versions are also available from business service providers like Zoho.com.

Fulfillment Services – In the old days, if you wanted to sell a physical product, you needed to lease a warehouse, staff it with people who could pick, pack and ship your products, and tie it all together with software to manage the process.  Today, you can simply outsource this entire function to third party fulfillment companies like DotComDist.com.

Bottom line, today you can get almost anything you need for your business on demand, for a small monthly fee.  Best of all, these services are fast and easy to implement, and scale easily as you grow. Next time, we’ll look at how these changes are impacting the marketplace, and what you can do to capitalize on the resulting opportunties.  As always, comments welcome and encouraged.

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

As more and more traditional, full-time jobs disappear, more and more people will find work as soloists (freelancers, independent contractors, etc.).  As a result, a funny thing happens to companies:  they become much more dynamic and fluid.  Instead of spending a large amount of time and resources finding people with a perfect set of skills, contacts, and experience, companies can solve their immediate needs by contracting with individuals, small firms, and boutiques.

Consider the risk/reward profile of these two approaches.  When hiring a traditional employee, a company is making a long term commitment to pay an annual salary (plus benefits), to someone who will presumably be around for a long time.  That means the employer is betting that their new hire will not only solve their immediate needs, but that they will grow into other roles that will benefit the company over the long run.  For these reasons and more, the employer must be extremely cautious in who they hire.

When contracting with a soloist, a company is making a short term commitment to someone whose only role is to solve an immediate problem.  This allows the company to more easily bring in specialized resources as needed, without impacting their long-term financial obligations.  And while these benefits are available to companies large and small, it’s the smaller companies and startups that stand the most to gain.

The Rise of the Virtual Startup

All companies need, at a minimum, to take care of the basics:  marketing, finance, operations, sales, and accounting.  Typically, someone who starts a business will have a skill set that covers only about half of these needs.  The other half will need to be covered by a partner, employee, soloist or outside firm.  Let’s look at each of these in detail:

• Partners – Finding a partner is much like finding a spouse:  they’re great when it works, and horrible when it doesn’t.  If you can find one that compliments your skills and is compatible with you on many levels, this may be the way to go.  Unfortunately, it is only after the “marriage” that compatibility issues often arise, and the resulting “divorce” can often kill the company that brought you together in the first place.
• Employees – Hiring an employee can be the right thing to do, especially if the company is well funded or has already attained profitability.  If it is like most small startups, however, funds are too tight to commit to a weekly salary.
• Soloists – Contracting with a soloist can be a great way to solve immediate needs.  Instead of hiring a full time marketing person for $100,000/year plus benefits, or hiring a PR firm for $10,000/month retainer, you can contract with someone for a short term project designed to get you to the next level.
• Outside Firms – Today, outside firms come in two flavors.  Traditional outside firms are expensive, with old-style overhead costs that must be passed on to their clients.  New outside firms are cost effective, using unique combinations of technology and soloists to provide custom solutions.  Depending on the size and scope of the project, the latter can be the right choice for today’s startup.

Moving from Soloist to Boutique

This last point also highlights another career path for soloists.  In my last posting, we explored the range of opportunities available to contractors, from administrative type functions, to tactical projects, through strategic solutions.  Moving up through this spectrum is certainly one avenue of growth available to the soloist.

Other options exist as well.  Instead of moving from tactical projects to strategic solutions, a soloist could grow by expanding their client base (2xs the clients = 2xs the revenue).  Soloists can also grow by increasing their reputation and billable rates (2xs the fee = 2xs the revenue).  Sometimes, the solutions you offer will require more work than one person can perform.  At this point, you can grow by contracting with other soloists, and offering your combined services through a new firm or boutique.

Whichever growth path you choose, you will find that outside help may be required or helpful.  Knowing how to find and contract with other soloists is a great resource that can take you to the next level.  This in fact paints a picture of the new employment model, one where people are free to do the things that they like and enjoy, and free to get outside help for those things that they don’t.

We’ll cover this in more detail in future posts.  Next time, however, we’ll discuss how advances in technology can be used to support your self-employment and startup efforts.  As always, comments welcome, and stay tuned …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

Last post, we discussed how to get started in the new, self-employment-based careers of the Great Recession.  In today’s post, we’ll describe this in more detail, along with the career paths available in this new environment. To get an idea of the new career ladder, let’s explore a hypothetical worker who has reached the top of the traditional ladder, and show what it looks like to start over as a self-employed worker.

For this example, we’ll use a CEO of a small corporation who had worked their way up from a job in the mail room.  From there, this person moved into customer phone support, to inside sales, to outside sales, to sales management.  Showing great skill as a manager, this person was promoted to VP of marketing, where their strategic vision was recognized, leading to their role as CEO.

Now, this CEO finds that their firm has shut down, with little if any prospects for another CEO position on the horizon.  Instead of waiting for another CEO  job to appear, I have suggested that this person use this time to make the jump to the new self-employment model.

While it’s possible that this CEO could immediately find, bid on, and win a job that fully utilizes their CEO skill set, these jobs are going to be few and far between, and highly competitive.  Further, without a track record, and without any experience as a contract CEO, they are very unlikely to win these bids.  Instead, I have suggested that they take on a short-term, entry level position.

For this CEO, any job or task they have ever performed is a possible target job that they can pursue.  For example, they could bid on jobs involving marketing strategy, sales management, inside/outside sales, or even as an administrative assistant.  Further, they could also bid on task oriented projects, like writing a press release, or preparing a Powerpoint presentation.

Regardless of which job they decide to pursue, the goal here is to win a bid.  This will accomplish many things:

• Bidding on a job is empowering.  Rather than submitting a resume to an employer who doesn’t respond, you will gain immediate feedback on who you are competing against, how your skill set compares to theirs, how competitive your bid was, etc.
• Bidding on a job forces you to explore your skill set, and focus on jobs where your skills are particularly strong and/or enjoyable.
• Bidding on a job forces you to better understand the needs of the person doing the hiring.  In a world-wide competition for jobs, would you rather pay $4 per hour to someone in India to write a press release, or $20 per hour to someone located in Texas?  If you’re going to pay $20 per hour to someone in the US to write a press release, would you prefer an ex-CEO without a track record, or a recent marketing graduate with four successful engagements in their portfolio?
• Winning a bid allows you to experience a full cycle of working in the new economy.  This will come in handy when you’re ready to hire your own contract workers (to be covered in future posts).
• Winning a bid is also empowering.  Once you make your first dollar as a contract worker, you’ll realize that your total income is under your control.  It’s simply a matter of growing your income to the level you desire.
• After your contract is complete, you will have built up some credibility within the freelancing service you used, allowing you to better compete on your next bid.

Now, not everyone is a CEO looking to make the tranzition.  The good news is, regardless of your prior background, you can bid on any job you desire.  If you don’t have the credentials, or the experience, or face some other deficit, you can always lower your bid price to the point that someone will be willing to take a chance on you.  Even if you have to work for free, you are gaining experience, and building a reputation that will help you win your next job. (note: doing a short-term job for free is *much* less expensive than going back to school).

In future posts, we’ll continue exploring self-employment options, including those in the start-up arena.  As always, comments encouraged and welcome.  Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

So far, we’ve covered what’s going in our economy, and what’s going with jobs.  In 2005, 3 out of 4 employees had a traditional job with benefits.  Since that time, many of these jobs have gone away, and are not likely to come back.  In today’s post, we’re going to begin a series of posts outlining all of the options available to people who have lost their traditional jobs, and/or wish to tranzition to the new economy.

Traditional Employment

As bleak as traditional employment may seem, it is still the source for a majority of the jobs today, and is likely to remain so in the near future.  However, the trends are clear.  Traditional jobs are in decline, and being replaced by new types of worker relationships.

If you have a traditional job, be greatful.  You have stable employment and benefits at a time when many do not.

If you have a traditional job, also be prepared.  In today’s environment, you never know when your department, division, or company is about to have lay-offs, or to shut down entirely.  In addition, you may find that the job you have becomes less attractive, as those around you get laid off, and your work load increases.  You may also find your salary under pressure, and your benefits reduced.

All in all, it’s in your best interest to start preparing yourself for the day that your current job disappears, and/or the day that you choose to go out on your own.

Build Your Networks

One of the first steps for anyone who wants a job of tomorrow, whether you currently have a job or not, is to start building your networks.  Personally, I’ve adopted LinkedIn for my business network, and Facebook for my personal network.  Here’s why I suggest this:

• It’s free. It doesn’t cost you anything but a little time to learn the platforms, and to connect to your friends and business associates.
• It takes time. To build your networks, you will need to invite people to connect with you, and they in turn must approve the connection.  This does not happen overnight.  The sooner you get started building your network, the bigger it will be when you need it.
• There’s a lot to learn. These platforms have many features, and offer different ways of interacting with the networks you’ve built.  In addition, these platforms are adding features rapidly.  Together, learning how to use these platforms is a constant work in progress, one that’s never done.  The sooner you get started, the more tools you’ll have in your toolbox when you need it.
• It will lead to Jobs!!!

In our next post, we’ll begin exploring the new career paths of the Great Recession, by starting with the jobs that are available now.  Until next time.

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

In the last post, we discussed how traditional jobs were going away, or moving towards a flexible work force.  Today we’ll discuss the one segment of the employment spectrum that’s destined to benefit from these trends — the ranks of the self-employed.

Changing Self-Employment Options

Too often, when people think of the self-employed, they think of the latest media-glorified entrepreneur who took sensational risks, to become wildly wealthy and successful.  And while people like Steve Jobs do exist, they are by far the exception among the self-employed.

According to the article The Two Faces of Entrepreneurship, there are two types of entrepreneurs:  the Innovative Entrepreneur, and the Replicative Entrepreneur.  The former is the one most people associate with people like Steve Jobs.  They innovate in ways not seen before, and create huge new markets that never existed before.

The latter is the far more common type of entrepreneur.  While they still set off on their own, and take the risks associated with building an employee-based business, they do so in established markets, with established concepts.

Unfortunately, both of these types of entrepreneurs have been negatively affected by the Great Recession.

For the Innovative Entrepreneur, a lack of venture funding has drastically impacted their ability to get the funds required to commercialize new products, establish new markets, or innovate on a large scale.  For the Replicative Entrepreneur, the traditional brick and mortar businesses have seen their sales decline, forcing many of these firms out of business.

The good news is, the fastest growing segment of the self-employed are not traditional entrepreneurs at all.  They are the ones who work for themselves without employees, and go by terms like freelancers, independent contractors, solopreneurs, homepreneurs, and non-employer businesses.  These are the jobs that are available now, and growing very rapidly.

Three Types of Self-Employment

Clearly, the opportunities of today are for the Self Employed with no Employees.  And these jobs can pay very well.  According to research by Network Solutions, “About 35% have revenues of more than $125,000, and 8% more than $500,000.  What’s more, median household income is substantially higher than it is for the population as a whole: roughly $75,000 for homepreneurs vs. $50,233 for households in general.”

In the coming weeks, we’ll be looking at this and the various options for self-employment in much greater detail.  As always, comments welcome.  Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

In the last post, we described the massive restructuring occurring in our employment base, driven by automation and technology.  In this post, we’ll explore this in more detail, with a focus on the trends driving these changes, leading us to the opportunities of tomorrow.

Trends Driving Employment Changes

The profound changes occurring in the 1930’s were driven not only by farm automation, but by a perfect storm comprised of many other trends that culminated in that decade.

Same is true about this Great Recession. Here’s a short list of the changes we are currently experiencing:

• Direct Replacement by Technology and Automation
  Automation has directly replaced many jobs like the factory worker (who manually moves widgets around the factory, and creates more widgets), the clerical worker (who manually moves paper around the office, and creates more paper), as well as all of those who used to manage these workers.
• Saturation Driven by Technology and Automation
  Just like farm automation drastically drove down food prices in the 30’s, improved efficiencies in the production of today’s products has driven down these prices, leading to a saturation of markets and an excess of manufacturing capacity.  (how many computers, cell phones, tv’s, and dvd, cd and mp3 players do you own?)
• Diminished Importance of Geographic Location
  Improved supply chain automation, reduced costs of long-distance communication, coupled with reduced barriers to international trade, has allowed work to move to the lowest cost producer (the so-called race to the bottom).
• Increasing Costs of Benefits and Regulation
  With US-based health care and benefits primary provided through large employers, as well as the expensive reporting required to meet Federal, State and local laws (including Sarbanes Oxley), employers have an incentive to reduce traditional US-based employment.
• Elimination of the Middle Man
  Historic roles such as stock brokers and travel agents have been greatly reduced by self-service websites, with many more intermediary roles under pressure.
• New Business Models Driven by Technology and Automation
  Digital delivery of audio and video content is one example, as is the low cost and high convenience of online suppliers who compete with traditional brick and mortar retailers (i.e. Amazon.com).

So where is all of this leading?  While no-one knows for sure, we can make some educated guesses.  (be sure to check out the comments to the previous posting — many good ideas are included there)

Spectrum of Employment Options

While there are many ways to slice and dice what’s going on in employment, I believe the most insightful way is to consider the employee/employer relationship, and how it is changing as a result of the Great Recession.

Coincidentally, Business Week recently published an article titled The Disposable Worker that describes in detail what I believe is happening.  In 2005, about 75% of all jobs were consider a traditional, full-time, employer/employee relationship with benefits.  In this decade, I believe we will see this number decline greatly, especially if health insurance is made available to all without regard to pre-existing conditions.  (There are way too many people underemployed at Walmart and Home Depot just so they can get health insurance for their families).

To get an idea of where the new jobs will be coming from, consider this spectrum of employment options:

As a general rule, I believe that the jobs of tomorrow will be moving from the Traditional employee/employer relationship, to more of the Hybrid/Self Employed models of employment.  In the next post, we’ll explore this in more detail.  As always, your comments are requested and encouraged.  Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

I recently saw the Great Depression film “The Grapes of Wrath,” and while I had seen it before, this time I was reminded of what’s going on in employment today.  The movie starts off with Henry Fonda returning to his family farm after having been away for a few years, only to find his home abandoned.  He soon learns that his family, as well as all of his Oklahoma neighbors, have been evicted and are leaving for the promise of jobs in California.

We then learn that the families in Oklahoma have been hit with a perfect storm.  Drought, low farm prices, and the displacement caused by farm automation had resulted in bankruptcy and foreclosure for millions of farmers.  It was reported that one man with a tractor could replace 10-15 family farms, and over 100 farm workers.

Similarities to the Great Recession

Consider the tractor for a moment.  The gasoline powered tractor first appeared way back in 1892.  However, it didn’t really catch on until the tractor was mass produced in the 1910’s.  Then, as tractor prices came down, its use on the farm started to take off.   The result was an increase in farm productivity, falling prices for farm products, and a loss of jobs for millions of farmers.  This displacement peaked 20 years later, during the Great Depression.

Today, we can see a similar process at work with computer technology and the Internet.  The first personal computer came on the scene way back in the late 1970’s.  Its adoption didn’t really take off until the 1980’s, eventually resulting in the computer being pervasive enough to enable the explosion of the Internet in the 1990’s.

Along the way, we’ve seen computers and the Internet displace people in selective industries.  Some of the first to feel the pain were the music industry, followed by the travel industry, newspapers and now the television networks.   We have also seen many roles within companies evaporate as well.  Factory workers were the first to go, followed by clerical, administrative, and now management level positions.

Today, after years of automating and streamlining processes, we’re seeing virtually every career in every industry under pressure.  Consider the following report by CBS News:

Bottom line, we are in the middle of a massive restructuring of our employment base, and the jobs of yesterday are about as likely to return as that of the farm labor positions of the 1930’s.  This is not only consistent with what happened during the Great Depression, but also what we would expect to happen during the “Winter” stage of the long economic cycle as reported in Deflation in History:

the “Winter” stage, that of severe depression, includes the integration of previous social shifts and changes into the social fabric of society, supported by the shifts in innovation and technology.

Jobs of Tomorrow

In the next couple of postings, we’ll explore the changing nature of the job market in more detail, with a special focus on new opportunities that can replace our old models of employment.  Since this is a work in progress, you questions and comments are encouraged.  Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

Until now, we’ve been exploring what’s been happening in our economy since the financial crisis began. To summarize, we are currently in a deflationary cascade brought about by a financial panic that started when credit markets around the world realized that much of the debt outstanding was not likely to ever be paid back.  This is now showing up in deflating prices in any asset class that depends on debt financing, including residential and commercial real estate, and small businesses.  In today’s posting, we’ll explore some strategies for benefiting from this chaos.

Rule #1:  Buy Low, After a Reactionary Price Reset

One unique feature of the switch from inflation to deflation (optimism to pessimism, greed to fear, etc.) is this change in people’s sentiment occurs very quickly, often in a matter of days or weeks.  And once it does, the reaction is usually excessive, moving prices from an overvalued position, past the point of equilibrium to an undervalued position.  Then, once things settle down, the undervalued position will often migrate once again toward equilibrium. For an example of this pattern, check out this graph of the Dow Jones Industrial stock prices since October 2008.

In a perfect world, investors could profit from this pattern by selling just before a panic, then buying just after the reaction to the panic.  Unfortunately, it is very hard to predict when these changes in sentiment will occur.  Even the market prognosticators who correctly predicted the housing collapse, had difficulty predicted *when* it would occur.

While this may not be possible for highly liquid markets, it actually becomes easier for illiquid markets. For an example of this, check out this graph of the decline in Residential and Commercial real estate prices. You can see how these two versions of deflation play out in the following graphs:

It’s important to remember that the aggregate price in an illiquid market, is made up of many individual asset prices that reset at irregular intervals over the course of a correction.  This can be seen in the following graph:

Armed with this knowledge, it becomes much easier to define a strategy to profit from the turbulence.  Today, we know that commercial real estate and small businesses are deflating in value.  We also know that, because of long term obligations, these prices are illiquid, and not able to reset on a fluid basis.  When they do finally reset, they will often be sold for less than their equilibrium value, presenting an opportunity for profit.

So, to sum up rule #1, find an asset you are interested in, and buy it as soon as the seller capitulates to the new realities, as outlined in “Personal Experience of Deflation”:

• Seller lowers the price beneath their debt, and takes a loss on the sale.
• Seller offers the asset for less than they owe, and gets the bank to take a “short sale” on the property.
• Seller gives the asset back to the bank as a “deed in lieu of foreclosure,” then the bank sells it at the market price and takes the loss.
• The seller defaults on their payment, then the bank takes it back through a foreclosure and sells it at a discount.

In future postings, we’ll explore other rules for buying deflating assets at a profit.  But next, we’ll start to explore the changing nature of employment in the Great Recession.  As always, comments welcome.  Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.

While homes were one of the first classes of property to enter deflation, Small Businesses and Commercial Real Estate are now deflating as well. And for many of the same reasons: people’s expectations of future value have gone down, there’s a lack of financing available, the declining net worth of buyers, rising unemployment, etc.

But there is also one major difference: small business and commercial real estate prices are directly related to the profits that they are expected to generate. If a small business is expected to earn $100,000 a year for its owner, its value is drastically different than the same business if it is only earning $50,000 a year. If a commercial strip center is expected to generate $100,000 a year in profits from lease income, its value is drastically different than the same property if is only generating $50,000 a year in profits.

For a concrete example, two years ago it was common for someone wishing to “buy a job” that generated $100,000 per year in profits to offer $250,000 for the business, paying $50,000 down in cash, and financing $200,000 with an SBA loan. (Note that this value is based on a multiple of 2.5 times cash flow.)

Then the Great Recession began, and small businesses started to suffer. It’s been very common to see gross incomes decline by 20% or more across the board. Because of the high level of fixed costs in a small business (things like rent and utilities), a 20% decline in sales could translate into an 80% decline in profits. The result is that this same business is now only generating $20,000 per year in profits, and would only be worth $50,000 using the same multiple.

But that’s not the worst part. Two years ago, businesses and commercial real estate were selling for premiums. Money was easy, and people were using pro-forma estimates of future earnings to justify higher prices. This was easy to do, because most businesses were showing a three year trend of improving results. So a buyer looking to buy a business that was reporting $60,000 in profits in 2005, $80,000 in 2006, and $100,000 in 2007, was happy to pay a high multiple on 2007 numbers, because they expected profits in 2008 to be $120,000 !!!

Today, the situation is reversed. Buyers are looking at sales trends that are going down, and they are expecting the down trend to continue again next year. Consequently, they are offering lower multiples, on these lower cash flow estimates.

Going back to our example, instead of offering $5o,000 for the business, today’s buyer may only offer $30,000 instead. Here’s a summary of how this has played out, using our sample company:

Small Business Valuations in the Great Recession

So, the small business buyer who bought a business for $250,000 at the top in 2007, today may only be able to sell that business for $30,000. And if that buyer borrowed money to do this deal, it’s very likely that they owe more than they can sell it for today.

In the next posting, we’ll explore how to buy these assets at a profit, given all that we have covered so far. Then, we’ll look at the changing nature of employment, and explore work options for the unemployed and the underemployed. As always comments welcome.

Until next time …

Tranzitioning.com is a blog by Jay Fenello, principal and founder of BizPlacements.com, an Atlanta-based
Business Brokerage and Placement firm that helps people buy and sell small businesses and franchises.