Start a Home Travel Business and Profit From the Multi-Billion Dollar Online Travel Industry

Yes, it is true. You can make money online working from home and can actually make a lot of money if you work hard, stay focused and execute. You can build a home travel business and live the Internet lifestyle you always dreamed of by operating an online home travel business. This article will put to rest any misgivings you may have had about starting an online travel business. I will not sugar coat it. In fact much of what I have to say will probably cause an up-roar in some parts of the online travel industry. I am aiming to tell it like it is.

The TRUTH!
Who really Makes Money in Online Travel. The truth is that you can’t really make a lot of money reselling other businesses travel products. This statement is directed towards the home-based travel agent market. Yes, its easy to get started as a home-based travel agent and the online travel agencies can provide you with your own personalized white label branded website, including quality customer support but in the end you are NOT building a business, you are only paying yourself a salary.

Don’t be fooled.

I am amazed at the amount of junk that there is online out there catering to the make money online from home crowd, touting selling travel as the route to freedom and riches. This truth is probably the most important fact anyone will ever tell you if you are just thinking about entering the online travel business. Let me repeat this for you one more time.

It is difficult to become rich and build a company reselling other companies travel products. You can become rich over time by building a business that sells your own uniquely branded travel products. You can get rich and build a business if you “own the travel product.”

Owning the travel product means that you are contracting directly with travel suppliers under your company’s own contracts, you are not just reselling a travel product owned by another travel business, tour operator, travel agency or travel consolidator. Your business creates the travel product by doing deals directly with travel suppliers. Your contracts with the travel suppliers become your businesses own unique inventory for the travel products you will be selling. The new travel product becomes your own brand. Your online travel business sells the travel product directly to consumers online or wholesales it too other travel agencies, travel agents, tour operators and resellers.

The Home based Travel Agent Dilemma.
I know I am opening up a can of worms here by disclosing this information but it’s really the truth. My intent is not to knock anyone down but to provide insight into how the online travel business really works and to show you WHO is really making the money and how you can make real money by deciding from the get go to actually build a business.

Yes, if you want to make $20,000-$50,000 working from home then reselling cruises or popular travel products will be the best option for you but if you want to make real money, six or seven figures and you want to build a business that has real tangible value and can be sold later then you need to develop and sell your own travel products.

The Internet is NOT causing Travel Agencies too shut down.
I believe that the main reason that brick and mortar travel agencies are closing is not because of the Internet but because all they are really doing is reselling other companies travel products. The Internet contributed to the destruction of the traditional brick and mortar travel agency but the biggest factor in the down fall of travel agencies and travel agents in the travel industry is due to the fact that they are not selling anything unique or different from anyone else. It’s really a business model established to fail in the long run.

How do you own your own travel product? You can own your own travel product in two different ways.

1. Your business acts as a travel supplier providing tours, guiding, travel and tourism related activities or you own a lodging property.
2. Your business partners with two or more travel suppliers to resell their individual travel products under a unique package that you own.

What type of Online Travel Business do I need to start where I can own my own travel product, sell packages and build a real business?

-Online Travel Agency
-Online Tour Operator
-Online Tour Guide
-Online Travel Broker
-Receptive Tour Operator
-the Hybrid

Let’s discuss a little about each type. There are many directions you can go.

OTAs or Online Travel Agencies traditionally sell everything underneath the sun; including lodging, air, cars, vacation packages, and much more. On a hierarchy level of all online travel businesses, this would be the most expensive and most challenging type of online business to start. It’s doable don’t get me wrong it would just take much longer and be more expensive to startup.

If you second tier niche and focus on contracting your own lodging deals and contracting with activity suppliers you could easily build a smaller more focused OTA. Another option would be for you to utilize the Global Distribution System (GDS) for air, car and for lodging that you could not contract yourself. I don’t recommend this last option as you’ll be just reselling product you don’t own but as long as you can combine the non-owned GDS products with your own contracted travel products you could create a nice win-win for the bottom line.

Online Tour Operator’s sell dynamically packaged trips and pre-packaged trips to vacationers. I believe building an online tour operator business is your best option at building a successful online travel business.

Now let me first state that the name is a little miss conceiving because of the word “Tour.” There is a big difference from a tour and a trip. On a tour there usually is a tour guide or person leading the tour with the travel participants. On a trip the traveler is traveling by themselves or with other people but there is no tour guide involved. In the travel business they call this a FIT trip, Drive vacation or Fly-Drive package.

I favor selling trips, where the traveler buys a tour or trip product then attends the trip by themselves on their own time. The reason being for this is two parts.

1. You don’t have to be the tour guide and you don’t have to hire one either.
2. You have 100% more freedom by not actually participating in the tour itself. Just think of the time involved of actually going on a tour with a group or individual people.

We operated tours when my wife and I owned the Yellow Breeches House Fly Fishing Lodge and B&B. We ran fly fishing excursions with lodging and guiding. Guess who was one of the guides? Yes, you got it. Yours truly. I would not change the past for anything. I learned so much from being a fly fishing guide and owning a lodging property. I just wouldn’t want to run that type of business again. There are much better travel business models out there. That’s part of the beauty about this report is that I am able to share some true life, realities for you.

Sell Trips not Tours. This is the most important thing I can tell you regarding wanting to live the Internet life style and working from home enjoying the freedom that comes from owning your own online travel company. You won’t be living any Internet lifestyle if every week you are giving tours.

Online Tour Guide’s provide tours to individuals and or groups. If I didn’t scare you off from above that’s ok, the tour guide business is a great business and it’s easy to get started with limited investment. This is a great business to enter the travel business and starting learning about how to build a business.

If you love dealing with people and spending much of your time outside then this is probably the best travel business for you. This is serious work, day-in-and-day-out, as you are always outside in the elements. This travel business could be a stepping-stone for you to then go ahead and build an online tour operator business. I have a really good friend that owns a kayaking guide service. He runs eco-adventures that include island hoping for three to five nights. He just loves it.

Let me share a little strategy with you that will totally change the way you build or grow your existing tour guide business. Hopefully by now you’ll already see it and be way ahead of me but if not here it is.

Create packages for your tour guide business that includes lodging, meals and your guide or tour service. You probably sell trips, guiding and or tours as an hourly or day product. Take the next step and package in lodging and meals and maybe a third activity. Sell packages to your clients and you will super-charge your revenue in a very big way.

Example:
Take an existing kayak guide that sells day trips for $250 for 2 people. Now create overnight packages. Create a new product line for your business.

1. Contract with a lodging supplier to buy lodging for your kayak packages.
2. Contract with two local restaurants to buy dinners for your kayak packages.
3. Sell a 2 night, 1-day kayak excursion, with 2-dinners. Make money off the lodging, dinners and a 3rd activity and you can seriously start adding more profits to your business.

Online Travel Broker – this is a new business category I stumbled upon. I believe this is a type of business you could start with literally no money. It’s just a matter of understanding the travel business. Here is how an online travel broker operates.

Every travel supplier needs sales representatives. Your travel broker business contracts with travel suppliers to represent their business and help them sell more of their travel products. Many smaller travel businesses don’t have sales representatives. This may be your entry into the online travel business industry.

Let’s say you live in a resort town or area and there are 4 golf courses nearby or 3 ski resorts. You represent the travel supplier’s products, finding larger partners and or resellers that would resell or distribute your client’s products. This business is just a matter of finding other travel suppliers that need sales representatives and finding larger companies looking for new travel products to sell and distribute. You make money by earning a percentage of all future sales booked or earn a flat fee per contract you sign. This would be a great way to enter the travel business as a part-time business. You could start with not much investment and build out slowly.

Receptive Tour Operators receive inbound travelers from foreign countries. This is a B2B business (business-to-business). You build an Online Tour Operator business but you don’t sell your travel products directly to consumers or vacationers online, you sell your owned travel products to wholesalers or other tour operators in foreign countries that then resell them directly to travel agencies and the consumers in their country. If you live in a world- renowned destination area or region where foreigners come visit you can build a successful receptive tour operator business. The receptive tour operator business takes longer to develop as the buyers of your travel products will be other travel companies, tour operators and seasoned travel business won’t necessarily want to do business with a company that is new or just in startup mode. Adversity can be overcome though, through focus, determination and having an owned travel product that a wholesaler or foreign tour operator believes he can sell and make money.

The Hybrid – build an Online Tour Operator business that caters to individual vacation travelers. After the business starts selling trips and or tours, start building a Receptive Tour Operator business component.

I hope you have enjoyed a little insight into the world and possibilities of the online travel business and what it will take to start a home travel business.

The Ten Keys to Building Your Coaching Business Beyond the Next Level

When you sit back and think about your business, what are the questions that you wrangle with the most? Are they questions of expanding your business, of how to stay competitive in the market, of how to expand your operation to include your network of colleagues into multi-coach interventions in organizations?

You have been selling coaching services long enough to know that there are natural, seasonal cycles to the market and you’ve probably already found business development systems to support you as you ride the waves of that current. Maybe you’ve overcome the hurdle of building your business while billing time and sustaining the momentum of sales so that you can balance your time between doing the work and getting more work. Perhaps you’ve mastered the use of the Lessons Learned Meeting to cut your sales cycle time in half and expand the sale while serving the client. Now you want to define what is next for your business. Where are you headed? Survival is no longer the goal, now you can focus on growth. Or not. What is the next level for you? What would represent a quantum leap beyond the next level? Do you even want that?

Whether you are an experienced coach who has built a sustainable business grappling with questions about where you’d like to take your business next, or you are seeking a selling system for building your business, you will need a systematic action plan that integrates three distinct domains: networking, marketing and sales. Of course, the first step is to strategically assess what the next level of your business will look like. Do you know what you want to do and what it will take to get there? Are you doing all you can to create the coaching opportunities you want? Do you have a concrete, systematic format for developing new business and new coaching clients? Are you methodically implementing a strategic plan? Take a few minutes to explore the ten keys below to see where you might be able to perform a minor mindset adjustment to tweak your business development efforts in a way that will get you what you want for your business and for yourself. None of these is rocket science, or truly new information, however you may not have thought of them in the context of business development before.

1. How Big is Big Enough?
To expand or not to expand? That is the question. If so, how? Stop to think about if your business is big enough. That means you have strategically created an entity separate from your profession that has the capacity to hold the systems, people, strategies, financial goals, streams of income, and outreach methodologies that will attract and create the business that matches your values, vision, purpose, goals, intentions and dreams. Does your business serve you while you serve your clients? Are you leading your business, or is your business running you? If you trade your time for money without additional streams of revenue, then you are self-employed, which is distinct from being a business owner. Did you intentionally choose that? If so, and it has been working for you, is it time to explore what it would take to go from a self employed practitioner to a business owner? Business owners focus their strategies on systems and people: there are two ways to make money…either people work for you or your money works for you. To build a million dollar coaching business you need to leverage other people. Do you want to manage people and create systems or do you find that by remaining more of a free-lance self-employed coach you have more flexibility to create joint ventures and alliances and partner with colleagues to expand your market offering without having to build a business to do so? Do you define yourself as a practitioner, manager, entrepreneur, or all three?

There are a few great resources that will guide this inquiry further: The E-myth by Michael Gerber, Rich Dad, Poor Dad by Robert Kiyosaki, and the liveoutloud [dot]com website which has free downloads and free teleseminars that support financial literacy and strategic business buiding. If you want to multiply your income, you will likely need to change what you are doing. The business strategy you choose will determine the size of the business you can build, providing you have done the pre-work to clarify for yourself how big is big enough for you. Having said all that, I hereby give you permission to not grow your business at all. It is okay to accept that running your own coaching business may not be the highest and best use of your personal coaching strengths, and you might be better served to take an internal position in an organization in which you can use your coaching skills with your peers and employees.

2. Building Business While Billing Time
We are all familiar with the frustration of the cycle that has us, as coaches, generate a full pipeline of leads that suddenly start to pop like popcorn, generating business that we then devote our time to delivering. While we are focused on client service and deliverables, we often lose our focus and momentum on marketing and sales, thus resulting in the discomfort of finding ourselves wrapping up projects or client engagements with no further gigs on the horizon and we must start all over again to build up the business development bench strength. “But, I’m too busy to do any marketing or sales now…I need to focus on being billable, and the time I spend selling is not billable time”. Does this sound like anyone you know? In a systematic business development strategy, you can utilize two strategies that will allow you to continue to build business while billing time, thus cutting your overall sales cycle in half and expediting your acquisition of additional billable time while reducing the amount of time you spend in-between gigs. One strategy is the Lessons Learned Meeting as a business development tool, and the other is actively building your business through referrals. The Lessons Learned Meeting is a structured interview with your clients and key decision-makers in the organization that takes place in the middle of the engagement as well as at the end. It is a time to check in with your clients and learn from them what is working and what can be improved as well as a time to share with them what they can do better or differently to help you to do your job better. Typically, these sessions are a mutual admiration and acknowledgement fest, which is a fabulous time to:

a.) ask for testimonials,
b.) ask for referrals, and
c.) ask what other challenges, issues, projects, or needs are coming up for your client so you can shift the lessons learned conversation into a sales conversation.

When interacting with your clients at any point in time when they express gratitude or appreciation for your skill and contribution, you can ask for referrals. There are three keys to getting referrals:

1. Provide exceptional service.
2. Express the importance of referrals to your business.
3. Ask for referrals.

Of course, once the referral becomes business, you close the loop with a handwritten note or small gift to the referral source.

3. No One is On the Bench
How do you actively stay competitive in this rapidly expanding market? Networking and business development are not spectator sports. Not only do you have to be in the game, on the court, out in the field, but you must think of everyone else in the world as also being in the game with you. There are no benchwarmers, which means that none of your interactions with any other human being is ever wasted. Every moment is an opportunity for building relationships, for speaking your vision to everyone all the time. Another critical piece of this mindset is to operate from the assumption that everyone wants to help you. This assumption will allow you to make big, bold, outrageous requests that will encourage and invite people to contribute to your growing business and blossoming self. If you are not networking all the time, what is in the way of that? Even if you spend most of your time with fellow coaching colleagues, they can be great networking and business development resources for you. Staying competitive in the market may not actually be about competition.

Let’s explore competition for a minute. In a personal services business like coaching in organizations, even though you and all your would-be-competitors offer similar or even the same services (360′s, MBTI, individual coaching, team coaching, situational leadership, presentation skills, etc.), so much of what you do is unique to you as an individual, therefore do you truly have competitors in your market? Here’s a mindset that better serves coaches to expand our offering into organizations and be able to provide larger scale interventions than individual coaches: I’ve heard it referred to as coopetition, an amalgam of cooperation and competition. The idea is one of collaboration with competitors, or turning competitors into partners by building alliances and joint ventures as a business development strategy. If you struggle with staying competitive in the market, identify those you perceive to be your biggest competitors and approach them to create coopetition arrangements that serve everyone and the greater good of the client organization. It is the old win-win concept that we facilitate our clients to attain…just applied to your own business growth strategy.

4. It’s a Numbers Game
There is a process to sales. In order to leverage that process, it is important to understand the numbers involved. Typically, research shows that it takes ten phone calls to reach six people to set up one meeting. It takes ten meetings to get one client. That means that for some folks, they would have to call 100 people to get each client. If ten clients is considered a full schedule, that means 1000 phone calls. The sales process can take anywhere from 5 minutes to 7 years, depending on your circumstances. Your personal hit rates may be quite different from the general numbers mentioned here, but until you know and understand the numbers, it is very easy to get attached to specific outcomes, and to take it personally when you do not get clients. Persistence and resilience are part of this game. I’ve heard that 80% of people stop trying to connect with a prospective client after their 3rd attempt, however 80% of all sales are made after the 5th attempt to connect!

Recognizing that it is a numbers game will allow you to keep your pipelines fully loaded, and to create the bench strength you need to continually generate sales. The gift in this numbers game is that it removes any of those pesky attachment issues many of our colleagues face. It is nearly impossible to be attached to the outcome of sales if you have more leads than you can track! Sales is only frustrating and emotional if we do not have enough possibilities in the pipeline, therefore we get attached to needing each lead to become business. If you are actively pursuing five strong leads, you have time to think about each one and to pine for it to work out in your favor. If you are pursuing 150 leads, it becomes very difficult to have high hopes pinned on any one of them, therefore freeing you up to focus on the sales process rather than specific potential opportunities.

5. Scarcity to Abundance: Shifting Your Money Conversation
We could devote an entire issue of the journal to this topic. Are you undervaluing your experience and under-pricing your coaching services? Our executive clients take us more seriously if we are priced in league with them…how credible are you if your hourly rate is more along the lines of what their administrative staff earns? There is a scarcity mentality prevalent in our professional community. This scarcity thinking leads to coaches undervaluing themselves, their experience, and their education which leads to under-pricing coaching services.

There are scarcity mindsets and coaching belief systems embedded in our professional community and propagated in our coach training schools that set up coaches to not make money. One such approach is the concept of giving away free coaching sessions to lure in clients. In reality, this method primarily allows the coach to undervalue his services and to attract clients who are more committed to getting something for free than who truly value the coach and the service. Once someone gets your services for free, it is very difficult to transition to paying high dollars for it. Do not diminish yourself or our profession by attaching a valuation of zero to our work. You can make a huge contribution to the world by providing pro bono services to those who cannot afford it, but giving it away for free as a sales ploy is inauthentic and gimmicky. Offer a reduced introductory rate, if you must, but stop giving away free samples.

I am continually amazed at the statistics I read about the coaching profession that estimate that fewer than 7% of coaches are making a living at it. Yet there are a small percentage of sufficiently abundance and prosperity minded coaches who are generating sustainable six figure revenues through coaching, and even fewer who have successful business models such that they are doing multimillion dollar coaching businesses. Financial literacy coupled with abundance thinking can help coaches to shift the money conversation in our profession.

6. Helping Professions and the Conflict With Sales
Coaches are not unlike the other helping professions. Self-employed doctors, lawyers, accountants, artists, and mental health professionals often sabotage their own efforts to make a healthy living or amass personal wealth by not engaging in prosperity-generating mindsets. Often, they are not aware of and are not taught or trained in a systemic sales process, so they find themselves truly committed to helping others and hoping that that will be sufficient to attract clients. They have a helping mindset and are hoping for sales. Often they have a negative view of sales and perceive it to be about forcing oneself on others, or pushing people to do something they don’t want to do. Shifting to reframing their current sales mindset to one of helping and meaningfulness would allow them to integrate their commitment with sales activity. The other thing I see a lot of is that people may be excellent practitioners, but often they are not business people or sales people. To truly succeed in business, we must be coaches who think like business people and we must consider ourselves to be the sales executive in our own businesses. If we think of sales as helping others to determine if our services and products would be useful to them or not, we can begin to integrate our commitment to helping with our need to sell. Approach every sales conversation seeking ways to help, with no pitches, no agendas, no attachments to closing. You can feel good about selling if it’s about making a difference with people, impacting leadership, or improving organizations in a global economy. Identify your current mindsets about sales and see how you can reframe sales to align with your values.

7. Asking for What You Want
Closing the deal becomes very simple…almost a non-event if you’ve been fully present in the conversation. It is a matter of listening for the opportunity to ask for what you want. Yes, you have to actually ask for the “buy”. You have to ask your client to contract with you. You have to ask for the money. However, if you have been selling through your natural style, using a coaching approach to sales, having an abundance mentality, and a helping mindset, then closing is as effortless as falling off a log. If you find that you have blocks when it comes to closing deals, then I’d refer you back to number 6 above and suggest that producing for yourself a shift in your money conversation will allow you to generate a breakthrough in asking for and getting what you want. The hardest part is knowing what you want. If you know what you want, then take the risk to ask for it. If you are not crystal clear about what you want, don’t ask for anything until you attain that clarity, because you will only confuse yourself and cloud the energy flow.

8. Thinking Big, Playing Big
Once you’ve removed your blocks and left scarcity thinking behind, it is time to invent. Without the shackles of thinking small, what’s possible? Can you double your rates? Can you re-think your sales strategy? Can you transition to a new business model? If the restraints are off…what do you really want? Do you have a coaching practice or are you building a coaching business? How big is a big enough business? Do you have the right team around you to build something that will continue to support you, sustain your continual learning and development, allow you to focus on continual improvement in the areas of customer service and product development? Are you working as much or as little as you wish? Do you love all your clients? If you could have anything in your coaching business, what would it be? What will it take to get there from here? What would it look like if your business surpassed even your own wildest dreams?

9. Harness the Sales Process
Knowing that sales is a process, respecting the numbers involved, and increasing your awareness of your own sales cycle will allow you to leverage the information in this article to take your business to the next level. In order to truly harness the sales process there are three things required:

1. Work the system,
2. Be in continual action.
3. It is also critical to understand the distinctions between networking, marketing and sales so that you can track your progress in all three areas. It takes activity in all three domains to produce dollars, clients, and business.

Networking involves all the steps you take to meet people and begin to develop relationships. Marketing is all the stuff you do communicate your credibility and service offering to the world. Making calls, scheduling meetings with those in your target list, and asking for the “buy” are sales activities.

10. Mailbox Money
Eventually, we get tired of selling our time for money. There is only so big you can grow your business that way, because time is limited to 24 hours in a day and you are limited in how many of those hours of each of your days you can sell. The answer is to find multiple streams of coaching income, and multiple revenue sources outside of coaching as well. Perhaps you create products that leverage core content in a specific niche market, perhaps you catch the wave of the current trend to harness the internet to reach prospective clients and sell products. Perhaps you have secured an in-house position to utilize your coaching mastery, or you’ve branched into real estate or other investment strategies to put your money to work for you. If you are not thinking about or doing anything to generate passive income, that is – money that you earn that is not directly linked to an exchange for your time, then you might consider one or more of these avenues to take your business to the next level. How can you leverage those teleclasses you lead? Can you videotape yourself next time you are in front of the room leading a meeting or training session? Can you find a colleague to interview you on video or by telephone line that is then recorded and put into an MP3 file that folks can download from your website? Have you written a book or been meaning to? Can you take the materials that you have created for various client engagements and link them together somehow into a workbook or monograph that you can sell? Do all your products and services support a common vision, purpose, or set of values that you stand for? Where are you not accountable to yourself for what you and your business stand for and how can diversifying your revenue streams support that?

Business Valuation From an Investor or Business Buyer’s Perspective

Most every business would like to know what the real value of their business is. The truth is an accurate answer can only be found out through an exhaustive process of selling your business or trying to raise funds. Traditional standard valuations do not really provide a true value for a small business, mainly due to the subjectivity involved.

With that said, you can get close. In order to get as close as possible to an accurate valuation of your business, sometimes it is best to forgo the traditional business valuation template, (which in most cases is fairly useless,) and instead put together multiple scenarios that will help you to understand the value of your business to a buyer as compared with other alternative investments or assets the buyer is considering. This exercise will have an added benefit outside of understanding of your company’s value, by also helping you to understand what you should focus on in order to make it more valuable in the years to come.

Just like you make an investment, buyers will be looking at buying your business versus alternatives. High Net worth investors will look at your business objectively as an investment or source of income. Strategic buyers will have a choice of buying your business or trying to grow organically. Or let the competition buy the company and spend the money on marketing. We will look at each buyer type, and how they will look at your business.

The majority of small businesses exit through a sale, and therefore one of the best ways to put a value on a business is to determine the price someone will pay for your business. In that respect, a lot of the information below will be with relation to selling a company.

Passive Investors

Passive investors are those that will not participate in the day to day operations of the business. These might be high net worth individuals such as “Angel Investors”, small funds, or possibly a financial institution. The value they will put on your company will be based on two characteristics:

1. What return can they get from the business?
2. What interest do they have in the industry?

These investors will typically have investment portfolios that contain a wide range of investments, from assets such as stocks, bonds, real estate, commodities, to other business opportunities, charities, etc. Each of these instruments will have an expected return associated with it, and the principle rate of that return is based on the risk of that particular instrument.

When you are seeking an investment from this group, you are really competing against other investments they would like to make. In other words, they are going to invest this money, is it going to be purchasing stocks, real estate, or equity in your company? To understand the value of your business, you need to look at these other investments as your competition, and compare the rates of return for these alternatives and compare them to the rate of return on an investment in your company.

Although this is not a pure science, the rate of return on a $250,000 investment (ordered by risk) could be described as follows:

Instrument Rate Risk/Liquid Investment Expected Value – 5 yrs

Government Bond – Rate of return of 2.7%, very litte risk/illiquid, expected value in 5 years, $285,622

Bank CD – Rate of return or 3.0%, very little risk/illiquid, expected value in 5 years $289,818

Stocks (taxes deducted) – Rate of return of 5.5%, Some Risk/liquid, expected value in 5 years, $314,163

Real Estate (income producing – no leverage) – Rate of return of 10%, Little risk/illiquid, expected value in 5 years, $375,914

Aggressive Growth Funds – Rate of return of 12%, Somewhat Risky, expected value in 5 years, $406,301

Angel/Strategic Investor (50% of equity) – Rate of return of 15%, High risk/non-liquid, expected value in 5 years, $500,000 (assuming $1million value)

Outside Investor (50% of Equity) – Rate of return of 32%, High risk/non-liquid, expected value in 5 years, $1,000,000 (assuming $2 million value)

Let’s try to use the above chart in an example. Let’s assume you are trying to raise $250,000. In your chart, you are projecting approximately $230,000 in earnings in 2012. Let’s assume 5 years is 2014. The business will need to be worth $2 million by that time.

There are a couple of items to keep in mind.

Every investor will beat up your projections, and chances are they will knock them down.

The exception to this rule is the Angel or Strategic Investor who understand your business, or would like to add substantial value to it. They are in it for more than just a return on their investment. They enjoy working with small companies. It is very difficult to find angel investors, and hard to determine what value they will put on the company, since it typically not an objective calculation.

Most companies are valued based on a multiple of earnings. Let’s define earnings as the amount of cash someone from the outside would see come to their benefit assuming they were able to take over the business and run it themselves. So you would add health insurance, car payments, taxes, etc back to the earnings to make it higher.

For a business with “average” risk, most buyers will value the company based on a number that is (arguably) 3.5x’s the “adjusted earnings number”. (more on this multiple below) Therefore by the date you are thinking of realizing your “goal” valuation number you have to make sure that your earnings are that goal valuation number divided by 3.5. If you compare this to the chart above, I believe you will find the logic behind this multiple makes sense.

You will face an enormous amount of scrutiny if you are presenting a sudden increase in your earnings to an investor to justify a higher than 3.5x’s multiple valuation, so be careful. You will need to back up any number you put in front of a potential buyer or investor with concrete evidence and facts.

Institutional Investors and Funds

A typical venture capital company will look to make a tremendous multiple on their investment, because you have to pay for the failures they invest in and they can still have a 20% return to their investors. Therefore, they will typically look for an annual return of 40% on any of their investments. In addition, they want to know they have a rock solid exit within five years, whether through the public markets, an industry consolidator, or a Private Equity Fund.

Institutional investors will only be interested above a certain revenue level, and knowing that there is a clear and predictable liquidity event as an exit. Private Equity companies will not invest in any company that has less than $1 million in EBITDA in the vast majority of cases. The Public Markets are even worse, where you typically need $3 million minimum in EBITDA to make it worthwhile.

Strategic Acquisitions

This is very difficult to estimate, since strategic acquires can be interested in a business for so many different reasons. They are almost always the investor or buyer type that will give you the highest valuation for your business. This is for a number of reasons, including:

- Lower risk since they understand your business, or at least the industry

- Potential synergies since some of the business functions are probably redundant

- Do not want your business to fall in the hands of another competitor, especially a well-funded or aggressive one that might cost them substantially when competing with them

What a Multiple of Earnings Means

The multiple is the amount multiplied by the earnings or the revenue that will compute to the price. In other words, if you were to use a 3.5 multiple of earnings, and the business is earning 100k, the price paid for the business will be $350k. If you are using a 0.8 multiple of revenue, and the company has $1 million in revenue, the price for the company will be $800k. The question is what multiple will an acquirer put on your business? As discussed above, it is mainly determined by risk. Unfortunately there is no concrete formula or absolutely definitive answer since no two businesses are alike. This subject will be discussed in other articles.

Conclusion

Your business is an investment to a potential buyer or other. You need to look at other investments as your your competition in order to understand your value. By putting yourself in their shoes, and asking the question about how much you would be willing to pay for your business, you can begin to determine the real value of the company.

We would love to hear your thoughts – please go to Selling a Business Blog

Disclaimer

The Information Presentation Is Provided “As Is”. Princeton Capital Strategies, Llc Does Not Warrant The Accuracy Of The Materials Provided Herein, Either Expressly Or Impliedly, For Any Particular Purpose And Each Expressly Disclaims Any Warranties Of Merchantability Or Fitness For A Particular Purpose.