A reader asks:

I have been ‘invited’ to join ‘BREEZE’ for £1995 but I cannot fathom out what exactly they are selling or how I can make money other than finding other people to invest £1995 each – Do you have any knowledge of this Company?

I too have been approached by several people about it, none of whom ever convinced me to take it seriously as a business opportunity. In fact they all made it feel like a scam, so I didn’t bother finding out more. Despite an hour or so browsing several sites about ‘Breeze’ I’m still not really sure what it is. I do know that I certainly wouldn’t invest. Here’s why.

I Googled ‘Breeze’ and found this site: http://www.joinbreeze.co.uk/. I watched the video it links to. 15:00 in is the interest bit, ‘The Income Plan’, which quite clearly states that the main source of income is introducing other people to Breeze. Which makes it sound very much like a pyramid scheme to me:

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. Pyramid schemes are a form of fraud.

Source: Wikipedia.

Furthermore pyramid schemes are illegal in the UK.

I also came across this advert which claims that you can ‘Turn £2,340 Into £500,000’ yet when I followed the ‘register now’ link from www.joinbreeze.co.uk and then clicked on the link ‘Income Disclosure Statement’ which takes you to the URL: http://www.breeze.me/viptour/Breeze_Income_Disclosure_2009.pdf, the picture is rather different. Most notably in 2008:

• 32% of distributors (their term) made NO money at all.
• The average earnings for those that did make some money was $1,800 (that’s £1,200 at today’s exchange rate).
• The highest top ranked member working between 15 and 30 hours per week made an annual income of $31,000 (that’s £20,700 at today’s exchange rate).

So looking at the criteria I described in Defining Business Opportunity Scams:

• The investment required:  Between £1,000 and £5,800 (according to http://www.breezeinbusiness.com/overview.htm).
• the level of skill required: Unknown.
• how likely I think the average person is to make their money back: Based on the income disclosure it seems most people won’t make their money back.
• my opinion of the value for money of the business opportunity: Poor.
• Would I invest my own money? NO!

So has anyone tried it? How did you fare and are you willing to disclose accounts to verify your earnings claims?

If there’s a business opportunity you’d like me to review as a potential scam please contact me and I’ll review it ASAP. Equally I’d like to hear about any business opportunity scams that you’ve come across and would like to warn others away from.

As regular readers will know, I’m always interested in buying small businesses.

In the vast majority of cases I end up walking away, often without having made an offer for the business. Why? Well it’s usually because the vendor – or more typically their business transfer agent (you can read a little more about my thoughts on business transfer agents in the posts  Business Transfer Agents – Dishonest Or Clueless and Selling A Business: Don’t Waste Your Money On Business Transfer Agents) – has a come up with a completely unrealistic valuation for the business.

When it comes to valuing a business for sale, it seems that most small business owners (or their agents) take one of two approaches:

• Look at what else is for sale and pick the price of a similar business, then adjust a little bit. Much like estate agents do with houses. The problem is houses are easy to compare, they tend to have similar characteristics (number of bedrooms, number of bathrooms, square footage and so on) and there’s usually a very similar house within the same postcode. Businesses are not so easy to compare (unless you have access to full details of the financial performance of the business and even then each is to some extent unique). Furthermore the other businesses tend to be unrealistically valued too.
• Pick a number out of the air. Usually somehow related to either what they’ve lost since the business started, or the price of what they want to buy with the proceeds of the sale.

Both methods are obviously flawed. But is there a better way?

How to value a small business for sale

If asked how to calculate the value of a business an MBA student/graduate or academic might tell you that the present value of a business is the present value of all future cash flows, this is expressed in the formula:

where:

• DPV is the discounted present value of the future cash flow;
• FV is the nominal value of a cash flow amount in a future period;
• i is the discount rate, which reflects the cost of tying up capital and makes an allowance the risk that the cash flow may not be received in full;
• t is the time period in years that will be considered (in reality "all future cash flows" is unrealistic for a small business, instead 3 – 5 years makes more sense).

Which is hard to argue with. It’s also quite hard to actually apply, as you need to guess (hopefully an educated guess, but a guess) the value of future cash flows for each year. You then have to decided on a reasonable discount rate to use that reflects both the cost of capital (i.e. the interest rate of the loan you’re going to take out to acquire the business) and the level of risk associated with the business. If you’ve spoken to a bank manager, or you’re using your own cash then you should have a good idea of what is an appropriate interest rate. The allowance for risk however, is once again an exercise in (educated) guesswork.

There are a number of other methods used to value businesses, some of the more common ones are listed below.

Multiples method

This is a simple method that involves multiplying the pre-tax profits by a pre-defined multiple, the formula is: Value = Profit x Multiple. For example if you decided on the multiple of 3 a business making £30,000 profit would be worth 30,000 x 3 = £90,000. Nice and simple, but how do you know what multiple to use? The answer, once again, is to guess. The slightly more useful answer is to guess based on the multiple used to establish the value of similar businesses, if you can access that information.

Asset valuation method

Simply add up the value of all of the businesses assets, subtract the value of the liabilities and use the resulting figure. Which works quite well for a capital intensive business, but for a business with few capital assets the resulting value would be ridiculously low.

Entry cost method

This involves working out what it would cost to establish an identical business starting from scratch. Sounds like a good idea, but far from trivial to do for a business that has undertaken any sort of product development or created any intellectual property.

My method

My personal approach is a mixture of several methods. I use the asset valuation method to assess long term assets and liabilities, the entry cost method to assess the value of intangible assets and a multiple of cashflow to cover anything else.

The reality of valuing a business

All that said, no matter how many books, articles or blog posts you read on how to value a business, the value of a business is ultimately whatever a buyer is prepared to pay for it and a vendor is prepared to accept for it.

Useful books:

How To Value And Sell Your Business by Andrew Heslop – by far the best book on valuing and selling a business that I’ve read.

The Business Opportunities and Ideas blog is three years old today!

In it’s third year Business Opportunities and Ideas has grown to over 800 post attracting over 2,200 comments and the business opportunities and ideas forum has started to develop into a useful resource for budding entrepreneurs – so if you haven’t visited the forums yet, why not do so now!

I’ll be continuing to add more business ideas and expanding the number of business opportunities I review, while continuing to post useful business advice. I’m also going to be looking for more guest posts, so if you fancy writing for Business Opportunities and Ideas please take a look at the guidelines for guest posts and then get in touch.

Finally, what would you like to see me add to this blog to make it even better this year?

Photo by: Pink Sherbet Photography .

In the post Getting Rich As An Entrepreneur I answered a question asked by a reader, who remarked that they:

… could easily make more working as an employee, and with less risk.

To which I replied sarcastically, suggesting that they, shut down their business and go get a job, because you would have to be a complete idiot to take more risk for less money. I also noted that most entrepreneurs would have made more money had they stayed in employment.

Now economists will tell you that any rational person will expect to be better rewarded for taking a bigger risk. If we assume that most entrepreneurs are rational, it would therefore follow that most entrepreneur perceive the risk associated with being an entrepreneur to be less than that of being an employee.

I certainly do and that’s partly because as an entrepreneur I’ve had businesses fail, but never in 24 hours. In contrast as an employee, I went from having my dream job one day to being redundant less than 24 hours later. When the businesses failed I had time to react, plan and limit the damage. When I was made redundant I had no warning, I arrived at 8am for a normal day in the office, by 10am I was leaving the office, unemployed and without an income.

Think carefully about it. I think you’ll find the risks of entrepreneurship are less than employment.

A reader asks:

I’m a new entrepreneur but I’m struggling to get rich, I could easily make more working as an employee, and with less risk.

Then I suggest you shut down your business and go get a job. You’d have to be a complete idiot to take more risk for less money.

I hear stories of people that open a restaurant and then after two years they are driving a Ferrari… I wonder how is that possible!

It’s pretty easy to drive a Ferrari, just £99 will get you onto a driving experience day or for around £575 you can hire one for the day. With a credit card you can do that when flat broke, which is sadly how many restaurateurs end up.

You may have noticed I’ve been a little sarcastic. That’s because the attitude taken by people like this annoy me, they get entrepreneurs and small business owners a bad reputation because of their obsession with getting rich.

You see being an entrepreneur is NOT about getting rich. Princeton’s Wordnet defines and entrepreneur as:

• someone who organizes a business venture and assumes the risk for it.

Dictionary.com offers a two part definition:

1. a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.
2. an employer of productive labour; contractor.

Please note that neither of these definitions refer to getting rich. They do however acknowledge that entrepreneurs take on risk and most of us expect to be rewarded for this risk. The reality is that MOST entrepreneurs would have made more money had they stayed in employment. In other words the rewards for being an entrepreneur are more than financial and if your only measure of success is  financial, it’s rarely worth it.

Asking John:
Do you have a business question you would like me to answer? If so you can Ask John or or you can ask on the forums where you’ll get both my input and that of your fellow entrepreneurs.

Having decided to dedicate a section of this blog to helping people avoid business opportunity scams I’ve now got to deal with the difficult issue of deciding what I define a ‘business opportunity scam’ as.

Now I know some people would consider that to be fairly simple and might offer pithy answers such as ‘any ebook that promises to teach you have to make money’. The trouble is  don’t think it’s that simple. Sure many such ebooks are sold with a huge amount of hype and in many cases the only person likely to make the headline figures is the person selling the ebook. However there are some well known franchises that I’d consider far worse, after all the ebook only sets you back somewhere between $9 and $97 (£6-£60 depending on the exchange rate) whereas the franchises can often cost tens of thousands of pounds.

It seems to me that there are two extremes that are relatively simple to identify; pyramid selling is clearly a scam and a McDonalds franchise is clearly not a scam. It’s the huge grey area in between those extremes that most business opportunities, franchises and ebooks fall into that is difficult to categorise.

The hype used to market the ebooks often seems to fit the dictionary definition of a scam, but the price is usually relatively low and the content is usually just about good enough that you ought to be able to make your money back. Many of the franchises on the other hand often stand little if any hope of ever recovering the cost of the franchise. To my mind those are far worse.

So I don’t think I can really bring myself to classify most business opportunities as scam or legitimate, instead I’m going to present a summary of the opportunities that I look at and provide ratings for each of:

• the investment required;
• the level of skill required;
• how likely I think the average person is to make their money back;
• my opinion of the value for money of the business opportunity.

Finally I’ll answer the question: would I invest my own money?

If there’s a business opportunity you’d like me to review as a potential scam please contact me and I’ll review it ASAP. Equally I’d like to hear about any business opportunity scams that you’ve come across and would like to warn others away from.

Fred Wilson a venture capitalist and blogger based in New York has recently blogged about the idea of a Startup Visa. Described in his own words:

It is the idea that anyone who wants to start a business here in the US and can attract a modest amount of investment capital should be granted a visa to stay and work here in this country.

The idea was apparently put forward by Paul Graham, founder of Y Combinator early last year and it was seconded by Brad Feld, founder of the Foundry Group venture capital firm. You can find out more about in on the Startup Visa blog.

It sounds like a damn good idea to me and although I’m not a citizen of the USA I’d encourage anyone who is to think seriously about supporting the idea. Meanwhile it’d be nice to see a similar thing happening over here in the UK. We too could benefit from having more entrepreneurs enter the country and start businesses here, because such businesses create wealth and employment that benefits us all.

To those who’ll moan about immigrants I’ll leave you with Wilson’s comments:

I am certain that anti-immigration forces will find something not to like in this proposed legislation and fight it. But we have to fight back. So many great american corporations, like Intel, Proctor & Gamble, and Google were founded by immigrants. We need more jobs in this country and we can’t expect our large corporations to deliver them all by themselves. We need to create new businesses that can employ our citizens. And the history of our country is rich with stories of immigrant entrepreneurs. We have to embrace them, welcome them, fund them, and let them do their thing. A startup visa is one important way to do that.

Wouldn’t it be nice if the next generation of Billion dollar companies like Intel and Google were founded here in Britain and creating jobs and paying tax here in the UK.

I’ve had quite a few self proclaimed business ‘experts’ want a mention on this blog recently. Usually they tell me how they are special, generous or different because they “don’t expect to be paid”, instead they “work for equity”.

I think you should avoid them at all costs!

Why?

Firstly I question either their expertise or their honesty. Working for equity is getting paid, equity has a value (please see my earlier article on why you should Never Pay Anyone With Equity for an explanation of the real cost of equity).

Secondly I’d question their motivation for offering to accept equity over cash, because taking equity involves them taking on the risk that they’ll never receive any cash. So why, as ‘business experts’ would they be willing to take on this risk? Well it seems to me that there are two possible reasons:

1. They believe that investing their money in your business will provide a significantly better return than investing the money in their business. Although if they’re a business expert shouldn’t their business be a better investment than yours?
2. It is a sales gimmick because they aren’t good enough to sell their services for cash.

In short I just don’t believe anyone who is truly an expert on business would take on an unnecessary risk (the majority of small businesses fail) by accepting equity rather than cash. Do you?

Then there’s the complications and costs involved in taking an equity stake in a business. Any business expert should know that if they take equity they need to protect the value of that equity. In other words they need to ensure that having granted them 10% of the company as payment, the directors do not then issue a large number of shares to other parties diluting the experts share and depriving them of the value they expected to get. This protection against dilution is something investors also seek and is usually dealt with via a shareholder agreement. Such an agreement often restrains what the management of the business can and cannot do. Negotiating a shareholder agreement and getting it correctly written up by a solicitor will significantly add to the cost of the work – it might even cost as much as hiring the expert for cash would.

Finally, I would expect an expert to look to minimise their risk, whilst maximising their potential gain. So how could they do this? Well the simplest way is to get the fee written up as a convertible loan, thus the expert faces the minimum level of risk if the business fails, but has the option of sharing in any potential success. Of course this too will require costly written contracts and once again the cost is likely to exceed what the expert would have charged.

The Special Case

Ah but what about a business that just can’t afford to pay for expert advice, but desperately needs it, I hear you ask.

Well if the business really absolutely can not afford to pay for advice then, perhaps it’s not a viable business and the owner would be better of investing their time and remaining cash on another venture. Let’s assume however that the business is fundamentally viable, just lacking cash. In which case the business still has a number of better options than equity: they could ask the consultant to accept payment in instalments; ask for extended credit terms; attempt to barter; ask other suppliers for extended credit terms; seek a loan from a third party; or ask the “expert” to invest in the business. Such an investment would provide cash that will help the business continue to operate and the expert may opt to become a Director/Non-executive Director providing the business with access to their expertise. In the case of such an investment the expert is proving their belief in the business and their belief in their ability to help the business succeed.

Last week I received a press release from the OFT (Office of Fair Trading). Their PR firm sent it to me to raise the profile of Scams Awareness Month.

The PR firm got me interested by claiming that the OFT in collaboration with local Trading Standards Services are going to tackle Work From Home Scams, which sounds like a good thing to me. Unfortunately when I visited their website for the ‘Scamnesty’ (as they’ve called it) and followed it to their list of common scams and then the one and only page on work from home scams, it seemed woefully inadequate.

So I’ve decided to add a Business Opportunity Scams section to Business Opportunities and Ideas. After all if I write just two pages of useful content I’ll be 100% ahead of the OFT! Better yet, if you dear reader contacts me and report any home business/business opportunity scams, I’ll write them up and together we can produce a far more useful resource that can help people looking for business opportunities avoid being scammed.

If you know of any other useful website that help people avoid business opportunity scams please either contact me or mention them in the comment section. Thanks!

In a recent blog post Seth Godin wrote:

Watch the pennies and the dollars will take care of themselves.”

I’m not sure this is true. In fact, I’m pretty sure that if you watch the dollars, you don’t have to worry so much about pennies.

Big brands don’t sweat the small expenses. They don’t hassle about a return, or a little coupon fraud or the last penny per square foot on the rent in a prime location. In fact, they understand that there’s a powerful honest signal sent when you don’t worry about the tiny expenses. It shows confidence.

I disagree.

Firstly, the pennies add up, and often quite rapidly. In several of the businesses I’ve owned, or had access to the detailed financial information of the outgoings have exhibited a remarkable similarity to The Long Tail:

With the long tail (the small expenses) making up at least half of the overall expenses of the business. Many of these expenses are relatively small, few are essential and fewer still add any value to the business. They could easily be cut without hurting the business. On the other hand the big expenses are usually essential to the ongoing operations of the business and, because they’re important, relatively expensive purchases, considerably more effort has gone into ensuring that the business gets value for money.

Secondly, I’ve had a very different experience of big brands. As an employee I was often shocked at just how much they did sweat the small stuff when I had to provide receipts and justification for tiny levels of expenditure – tens of dollars when the company was doing billions of dollars worth of business – but when you think about it the same applies to them. Take Compaq as an example. According to Wikipedia it has 325,000 employees, what if each was wasting just $10 per month? Not much is it, but over a year that comes to $39Million. As a consumer and closer to home take a look at Tesco’s website and you’ll see that the rental price per square foot is something they clearly do sweat and it directly affects the price, we it’s customers pay.

I do however agree with Seth Godin on one thing, not sweating the small stuff does send a powerful message, but, to me, it’s one of overconfidence and financial waste.