Blog | This Way Out Group
Every business owner intuitively has a sense for their metrics. When you identify those metrics and quantify them, magic happens. Your magic ‘operational dashboard’ that will transform your business is simply a listing of your business’ key metrics (your key performance metrics (KPI)). They are effective for many reasons.
GoDaddy CEO Bob Parsons, summed it up when he said,
“Measure everything of significance.
Anything that is measured and watched, improves.”
It’s simpler than you think. Make a list of your company’s key metrics. These become your personal ‘magic’ dashboard.
Simply by measuring something, it can improve. Draft your own operational dashboard to track performance and exactly how your business is performing overall. Start measuring performance against key metrics you need to hit or industry standards, financial standards, etc.
Everything that you track and measure will:
- Improve productivity
- Increase in value
- Demonstrate what was intangible value
- Provide the data to spot and fix problems faster
- Strengthen the core of your business
- Validate forecasts
- Increase the value of your business
Prove it to yourself. Pick 3 things significant to your bottom-line. Measure, watch and track them for 30 days. See what improves.
The fourth quarter is a perfect time to review, refine and revise the metrics you want to track and measure for the coming year to hit your numbers and achieve your goals. Don’t wait until January to start thinking about what you want to improve. Instead, make your plan, share it with your team and be ready to execute starting on January 2.
To ensure your company will survive and thrive and meet the demands of your market, customers and vendors, you must work on the business systematically and analytically to build value in every area. If you don’t know where to start or if you don’t know what metrics to track to improve your business, call 508.820.3322 or email us. You can also check out our 12 month program, Build Your Business Value.
You already know that your company’s revenue and profits play a big role in how much your business is worth. Did you also know the role that cash flow plays in your valuation and therefore the size of the check you can receive at closing?
Cash vs. Profits
Cash flow is different from profits in that it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge $10,000 upfront for a service that takes you three months to deliver, you recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work.
But since you charged upfront, you get all $10,000 of cash on the day your customer decided to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two checks: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund all immediate obligations like payroll, rent, etc.
The trick is that both checks are drawn from the buyer’s same bank account. Therefore, the less cash the acquirer has to inject into your business to fund its working capital, the more money it has to pay you for your company.
However, the inverse is also true.
If your company spends all its cash as it comes in (like living paycheck to paycheck), an acquirer will calculate that she needs to inject a lot of working capital into your business on closing day, which will deplete her resources and reduce the check she can write to you. Everything she has to put into working capital to continue the business, reduces the available cash that she could pay you and reduces your leverage to command a higher selling price.
How To Improve Your Cash Flow
There are many ways to improve your cash flow – and therefore, the value of your business. Here are just three simple ways you can try now.
- Find a way to reduce the cash you spend on equipment, however you can every time. Can you buy used gear on sites like eBay? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent it instead of buying?
- Reassess your pricing. If you can’t accumulate cash reserves, check to see if you are underpricing your services or if your cost to price equation needs to be reviewed.
- Streamline processes and productivity to keep payroll and services within budget allocations.
Profits are an important factor in your company’s value but so too is the cash your company generates. We call this phenomenon The Valuation Teeter Totter and it is one of the key drivers of the value of your company. Curious to see how you’re performing on a whole set of value drivers? Get your private Sellability Score here.
When you look ahead to next year, where will your growth come from? Will it be from selling more to your existing customers or finding new customers for your existing products and services? The answer to the growth vs. value question may have a profound impact on the value of your business itself.
Take a look at the research from a recent analysis of owners who completed their Sellability Score questionnaire. The analysis looked at 5,364 businesses and found that the average company that received an overture from an acquirer was offered 3.5 times their pre-tax profit. When we isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.
However, the real bump in multiple appeared when we isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. Niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.
Nurture Your Niche
Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, you are asking them to buy something they cannot easily replicate on their own.
A large company acquirer will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale position them better to sell the things that you both offer today.
Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.
Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.
You can get your own Sellability Score, and see how you compare on the eight key drivers of sellability, by taking our 13-minute survey here.
Lower middle market business owners risk the future success and likely demise of their business (90% walk away with nothing*). All because no one told them early exit planning is a better way to control the outcome and maintain more leverage in any transaction negotiation. The mistakes owners make when they delay exit planning are often very costly and sometimes irrecoverable.
Baker’s Dozen Mistakes
Here are 13 mistakes owners of private and family run businesses frequently make. They:
- Never align personal, financial, business, family, reinvention and exit objectives. When your objectives pull you in opposite or competing directions, indecision keeps you paralyzed.
- Misjudge their company’s true, transferrable value in the market place. Almost every business owner undervalues or overvalues their business to a potential buyer (financial or strategic).
- Avoid establishing an “Owner’s” Estate Plan. Putting an estate plan in place does not mean you will expire in the next 60 days. Rather it ensures your plans and intentions for the business survival, your team and your family are secure; regardless of what may happen to you someday.
- Neglect claiming and protecting all the intellectual property they have built up in their business. As a result, they leave the business and themselves vulnerable to unnecessary risks and lawsuit losses.
- Start and run their business long-term without any contingency plans in place to protect them and the business from partner disputes or ownership challenges.
- Use the business coffers as their own ATM, so there is no residual value in the business to attract new owners.
- Enjoy a lifestyle funded by the business which cannot be maintained when they sell the business. Their exit options and returns are limited by their personal or family wealth mismanagement.
- Resist marketplace changes and become rigid in their business model missing a market shift or new opportunities.
- Give up on finding or grooming a capable successor. Developing successors takes time, training, delegating and finally relinquishing control.
- Never prepare the company to be ready to transfer ownership.
- Claim excessive tax costs preclude planning for an exit, when the opposite is true. With early exit planning, owners can drastically minimize the tax impact of any transaction down to single digits.
- Postpone considering all exit options until it’s too late to execute most of those options and their choice is being dictated by time, health or other critical game-changing issue.
- Pursue the wrong exit option in the last 6-9 months. As a result, they run out of time, cashflow and opportunities to close an ideal deal to meet their exit criteria.
Now you know so you can avoid each one.
If you need help assessing your business or fixing these mistakes to put your business on a stronger path with early exit planning, call us at 508.820.3322 or email us.
Too often, business owners don’t recognize the signals and symptoms that they need to start now to plan for their ideal exit transaction and their transition to the reinvention of their dreams. No one ever told you what those symptoms are.
As an owner you surround yourself with exceptional experienced advisors who help you increase sales, build out your team, manage your finances, upgrade your infrastructure, stay compliant with a myriad of licenses and regulations, etc. But who monitors your business readiness to sell, scale or pass the business on to your successors when it is opportune, instead of too late?
Symptoms to Look For
Here’s my list of symptoms to look for. If you recognize that any of them describe you now, then indeed you need to start planning for both that transaction and your transition plan to reinvention. That’s because it takes 3-5 years to prepare you, your business, your family and your finances (personal and business) to leverage that ‘once in a lifetime’ transaction to achieve the reinvention you’ve been dreaming of.
- Age. You are 55+ and you keep postponing any exit or transition planning (“I don’t need to start thinking about it for at least another 5 years”).
- Successor. You keep on keeping on because you have not identified your successor or groomed the assumed successor.
- Retirement. You find yourself pondering about what comes next; retirement, reinvention, golden years. This question in itself can stifle business and cause insomnia.
- Change. You resist changing your business model to compete effectively, grow and strengthen your market positioning. Maybe things have grown stale, and you’ve run out of ideas to keep your business moving forward. Or maybe you would need to pour tons of money into updating your business and you are resisting the investment.
- Motivation. What drives you now? Do you have a hard time getting up in the morning and going to work, or making the calls necessary to keep your business running?
- Focus. Your focus is drifting away from the business. Life changes, demands and opportunities may be causing you to lose focus or shift priorities.
- Family. Your family keeps asking you when you will slow down and you keep saying never.
- Dynasty. You worry that your wealth may not be enough to fund your reinvention lifestyle for decades to come and provide for the generations to follow you.
- Children. You now know your kids don’t want, or are incapable of running, your business.
- Legacy. You are thinking about how to answer the question of what is your legacy and what do you want it to be, and therefore; how that will impact any transaction where you let go of day to day operations.
- Expansion. You are spending more time thinking about maintaining rather than expanding your business. You settle for good enough or watch competitors take the lead.
- Health. You or a family member may be facing specific health concerns that limit your participation in the business, distracting you, which can risk your revenue stream.
- Energy. Your stamina to run the business as you once did is declining.
- Profit. Your financial focus has shifted from maximizing profits to what you can get when you cash out.
- Planning. Your strategic planning efforts stagnate.
- Customers. Your customers are all tied closely to you personally, not the business.
- R&D. You have been reinvesting in the company less and less as you start to pull more cash out of the business.
- Dependence. Your business depends on your day-to day decision making. It’s not the turnkey operations buyers will pay a premium for.
- Exit. You are starting to ask what it will take to make your business buyer ready, buyer attractive and more sale-able.
- Offer – You get one or more calls with offers you’d be foolish to refuse.
- Next Venture – You are more interested in your next opportunity, or to do something else you’ve always wanted to do, pulling you forward.
Start that planning now to ensure you will:
- Maximize the value of your business
- Maintain control
- Increase the leverage you can command at the negotiating table
The longer you wait, you will continue to lose all three.
If you need help to assess your symptoms or make a timely plan to complete the transaction that will achieve your dreams, call 508.820.3322 or email us.
Exit Risks Owners Are Accepting by Default
Exit planning is one of the most critical components of owning a business, especially for owners of private and family owned businesses. Too often, small and medium size business owners have the majority of their wealth tied up in the business. If their reinvention plans beyond the business and their lifestyle moving forward depend on harvesting that wealth when they exit their business, they need a well-thought out exit strategy that addresses exit risks for the owner, the business, their team, their family and their finances. And they need to build and execute on that plan starting years before they cash out.
Most entrepreneurs are consumed with the day-to-day activities of running and growing their business (es). Making time for the strategic side, and delegating operational responsibility has not been prioritized. This lack of long-term planning has many unfortunate consequences that owners are therefore accepting by default.
As advisors, we refer to many numbers when describing the exit risks that owners of private and family owned businesses face when they decide to monetize the business they built. A few of these ominous numbers which owners are indeed accepting by default are listed below:
- 90% of all private businesses do not have an exit plan.
- 75 – 90% of an owner’s wealth is tied up in their business
- Owners leave up to 50% of the value of their business on the table when they cash out.
- Owners don’t know how much value they give away until 2-3 years after the transaction.
- Only 13% of all possible business exit transactions are completed. 87% fail.
- Of that 13%, three quarters fail in the execution, integration and follow-through.
- Only 3% of sales of small and medium size businesses succeed.
- It takes 3-5 years to prepare a business, maximize valuation, and demonstrate that value before entering into a transaction
- It takes at least 6-9 months to complete the transaction process with many possible delays, detours and caveats. And if the business, team, personal and financial planning is not already complete, the transaction process can be put at risk.
- Owners who start exit planning, transition planning and reinvention planning in parallel can minimize (~1%) or eliminate the tax bite on any transaction.
The current seller’s market window is closing. Do you have time to maximize and demonstrate your peak value and cash out by 2018?
If the default option doesn’t fit your goals and dreams, email or call us to explore all your exit strategy options and reduce these risks for you.
Business Blood Pressure
When was the last time you had your blood pressure tested? You get your blood pressure checked regularly by an expert, right?
In fact, taking your blood pressure is one of the first things most doctors do before treating you for just about anything. How much pressure your blood is under as it courses through your veins is a reliable indicator of your overall health; and it can be an early indicator of everything from heart disease to bad circulation or even stress.
Does it tell the doctor everything they need to know about your health? Of course not, but one powerful little ratio can give the doctor a pretty good sense of your overall wellbeing.
Likewise, an assessment like your Sellability Score can be a handy indicator of your company’s wellbeing. Like your blood pressure reading, your company’s Sellability Score is an amalgam of a number of different factors and can help a professional quickly diagnose your company’s overall health.
Predicting Good Outcomes Too
When doctors takes your blood pressure, they not only rule out possible nasty ailments; they can also use the pressure reading to forecast a healthy life ahead. Similarly, your Sellability Score can predict good things for your future. For example, based on more than 10,000 business owners who have completed their own Sellability Score questionnaire, we know the average multiple of pre-tax profit they are offered for their business when it is time to sell is 3.7. By contrast, those companies that have achieved a Sellability Score of 80+ are getting offers of 6.6 times pre-tax profit.
In other words, if you have an average-performing business turning out $500,000 in pre-tax profit, it is likely worth around $1,850,000 ($500,000 x 3.7). If the same company improved its Sellability Score to 80+ while maintaining its profitability of $500,000, it would be worth closer to $3,300,000 ($500,000 x 6.6).
Are you guaranteed to fetch 6.6 times pre-tax profit if you improve your Sellability Score to 80? Of course not. But just like blood pressure, one little number can tell you and your advisors a whole lot about how well you are doing; and your advisors can then prescribe an action plan to start maximizing your company’s health – and its value down the road.
First Step to Business Good Health
Heart disease is called “The Silent Killer” because most people have no idea what their blood pressure is. People can walk around for years with dangerously high blood pressure because they haven’t bothered to get it tested. The first step on the road to health is to get tested. If you have a great score, you can sleep well at night knowing you have one less thing to worry about. If your score is not where it should be, then at least knowing your performance can get you started down the road to better health.
If you’re interested in checking your Sellability Score, please visit http://www.thiswayoutgroup.com/exit-strategy-resources/sellability-score/
In any negotiation, being the person who makes the first move usually puts you at a slight disadvantage. The first-mover tips their hand and reveals just how much he/she wants the asset being negotiated.
In the same way, when considering the sale of your business, it is always nicer to be courted, rather than being the one doing the courting. You need to attract the attention of your ideal acquirer. The good news is, the chances of getting an unsolicited offer from someone wanting to buy your business are actually increasing.
According to the Q2, 2014 Sellability Tracker analysis released in July 2014, 16% of business owners have received an offer in the last year, which is up 37% over Q1. If you look at these numbers as they impact you, you’re 37% more likely to get an offer to buy your business today than you were at the beginning of the year.
Big companies are buying little ones for a lot of reasons and the current market conditions are accelerating their appetite:
- interest rates are low and
- stock markets are high,
- they are flush with cash
Which provide the ideal platform for acquirers to realize a return on their investment from buying a business like yours.
So how do you ensure you are on their shopping list? Here are five ways to get noticed by an acquirer:
1. Win an award
Get recognized as the “Widget Maker of the Year” by the Widget Makers Association. This is a great way to get the attention of acquirers in your industry.
2. Hire a PR person
Engage a public relations professional to tell your story to the media to get you on the radar of buyers in your industry. A lot of media relations professionals focus on the big mainstream publications, and while these are important, be sure that your PR firm also targets trade publication and industry-specific websites that are read by acquirers in your industry.
3. Host an event
Consider hosting an event (e.g., conference, tradeshow, or summit) for your industry and invite representatives from potential acquirers to attend. Being invited to an industry event can be flattering for acquirers and it is a good way to get them to notice you as an industry leader.
4. Join a board
If an executive from a company you think would make a natural buyer for your business is serving on a board of directors, consider joining the board. Serving on a board together can be a great way for an acquirer to notice you and your company without you having to say you’re for sale.
5. Grab lunch
Consider inviting a senior executive from a potential acquirer to share a meal under the guise of discussing trends in your industry. At the very least, you may glean some useful information about how big companies are seeing your industry evolve. At best, your lunch mate may realize that your company could play a key role in helping them grow.
The sale of your business is a delicate dance where it is usually better to be the courted, rather than the courter. Acquirers are on the hunt for new businesses, and having them notice you will put you in a position of strength when you get to sit down at the negotiation table.
Valuation is important at every stage of your business lifecycle. Owners assume it’s implicit in their revenue goals, growth goals, hiring and expanding. Instead, a formal tangible valuation is essential all along the way to keep your company on course. These five reasons are tied to the lifecycle of every business.
Ideally, if you follow Stephen Covey’s advice to ‘begin with the end in mind,’ you will perform your first valuation before you open your doors. This will give you a baseline for everything else you do. It also starts the habit of focusing on value, not just revenues.
As you grow your business, periodic valuations are a measure of how the market would value every area of your business. A valuation report will help direct you to focus on certain value drivers to achieve your objectives.
Consistent periodic valuations will help you measure your position in the market, your competition, as well as timing the best opportunity for your sale or exit. Basing your exit timing on objective third party reporting will guide you to make strategic decisions that give you more leverage in negotiations before you get to a transaction.
If your business is in decline for any reason and you have been conducting periodic valuations along the way, you will see the symptoms of that decline earlier, be in a position to respond and correct the situation to mitigate risk and damage.
The valuation process owners are familiar with is the one initiated by the intended buyer or acquirer. This valuation on its own, late in the game, is a wildcard – you don’t know what their business appraiser will discover, focus on or be concerned by. Any questions or concerns they find will (intentionally) discount the offer price or possibly derail the whole thing. But if you have a history of three or more periodic valuations:
- You won’t be surprised by anything they find, anything they ask for
- You will be better prepared for the process
- You will have uncovered and resolved every concern they could raise, beforehand.
- You will have your documents complete, up to date, accessible, in a format they seek
- You will fare much better through the process because you are prepared to be so forthcoming
- You will be in a position to support and defend the value you expect to command in the marketplace.
There are many different ways a business appraiser can value your business. In addition, a wide range of objectives also affect how the calculations are done. Be sure your periodic valuations are consistent in formula and objectives.
I don’t perform valuations, but I do help you build, track and measure the value drivers that will enhance your market valuation. Call 508.820.3322 or email us to discuss your unique situation.