Posts tagged with: business value
A survey from M&A Today reports that 85% of all business owners have no exit strategy.
The average private business owner has over 75% of their net worth tied up in their business. That’s an illiquid asset. It’s also a business value risk. Indeed, it is a commitment to the business they built and a confidence in the future of the business as being a good bet. Illiquid business value is not a healthy distribution of your wealth portfolio for security, growth, liquidity or balance.
The survey also says 65% of all business owners do not know the value of their company. I’d say that number is low. Owners know their revenue and profit numbers but not their market value. Unless they are looking for capital or seeking liquidity, it’s not a metric they use to make every day decisions. Yet, when you look at business value in your space, in your industry, you can use it to make decisions that reduce risk, identify operating efficiencies, as well as grow both revenues and profits.
Without this understanding of your business value and business value risk:
- How can you plan for growth for next year? Where do you start?
- How can you realize that true value if you don’t have a handle on today’s value as a baseline?
- How could you leverage that value to open new markets or extend your product line?
- How can you monetize the business you built to afford the retirement of your dreams?
According to a survey by the Rasmussen Group, as many as 42% of all small business owners have no plan or path to retirement. Without a plan, 22% of the owners surveyed, said they’ll just close the business. That means that they are willing to walk away with no return (nothing!) for the time, equity, risk, and commitment they invested in the business, rather than focus on the value opportunity latent in their business and achieve a liquidity event to fund and secure that retirement.
Do you want to be part of the status quo, the 85% who do nothing and when you can’t continue, just walk away with no return? Or do you want to develop your own roadmap, maximize the value of your business and command a higher premium for the business you built before transitioning to that retirement?
Most business owners and entrepreneurs work hard every day to grow their business. But are you focusing on growing the right things to make your business more valuable and sellable to your ideal buyer?
Do you know what buyers are looking for? Do you know what value drivers in your business, your ideal buyer will be looking for? Here are 5 areas where you can add business value just by what you focus on.
What makes you unique in your market? What do you do that your competitors don’t do or can’t do?
When your product or business model is hard for someone else to clone or copy, or you have built an enviable client-base, a buyer will pay a premium for what you have in place because it would cost them more in dollars, time and risk to reinvent your business.
Systems and Value
When a buyer closes the deal and buys your business, how easy will it be for him/her to step in and keep operations running smoothly?
Every system and process you document to run the business without you, can be monetized to add to your business value at the sale. Demonstrating that the business can run well with your team, your systems, and your procedures validates your position and gives you more leverage in negotiations. When you sell, can the business run consistently without your day-to-day oversight? Do you have contingency plans in place so that your team is prepared and can handle all key issues that may come up from time to time? Is your customer loyalty to the company and the brand or are they only tied to you and your personal relationship with them? Wean your clients off your personal relationship to demonstrated added value in the business.
You know the phrase, ‘you only get one chance to make a good first impression’. When it comes to buyers considering acquiring your business, that curb appeal typically starts with your financials. Before a buyer will pursue the deal any further, they will want to review your financial statements and forecasts thoroughly. They are looking for clean up to date books. Beyond those basics, they are looking for a track record of growing both revenues and profits. Anything less gives them an argument to reduce the valuation of your business. Do whatever it takes to clean up the books, keep them current and strong and demonstrate growing business value in both revenues and profits.
Look at your customer base. What is the distribution of revenues among clients? Are your sales distributed across a wide base or concentrated in a small number of preferred clients? Is your client database current or out of date with lots of former clients still listed? A business appraiser will recognize and monetize a good, strong, clean database as an intangible asset to be valued in the sale price.
Acquirers will review and analyze your customer database to determine how stable sales are, the lifetime value of each client, the lifecycle of each client, and to determine their retention rate after the acquisition.
Future Growth Potential
A buyer’s due diligence is quite invasive – especially in a privately held business where this level of detail and these documents have been held close for years or even decades. Buyers are simply identifying the risks they’ll incur for the price they are willing to pay. Buyers want good odds that they’ll not only breakeven after the sale but indeed sustain growth to increase their returns from future growth. Always be prepared to demonstrate a track record of achieving milestones and how you consistently hit your projections, to build confidence in future growth potential.
If you prepare your business all along the way to be buyer ready and buyer attractive, you will know the range of business value that it is worth in the market and that you would consider, before any buyer or acquirer comes knocking. When you are always building business value to make it saleable, you gain more leverage and can command a premium price.
If you would like to establish value drivers in every area of your business to grow your business value, check out this one year program.
When you want to sell your business, you want to command the highest possible value. For your business to merit the highest valuation, you must prove to the business appraiser and your prospective buyer that the value is in your business, not in you the owner. That means transforming you as an Operational President to become a Strategic CEO.
To start and launch a successful business, it is common for the owner/founder to ‘do whatever it takes’ to make it happen. That drive and commitment to move the business forward is essential to achieve your goals and objectives.
The control to achieve your goals and projections is often concentrated in you the owner, acting as the operational president. However, this must change for you to successfully transition out of the business and be compensated for the true worth of the business. Letting go of day-to-day operations is a tall order for many owners. To become a more strategic CEO and demonstrate that the business value is in the business itself, here are some suggestions to work yourself out of any day-to-day operational role:
- Create systems for everything. If you have systems, be sure they are documented. Document everything you do for the business (for every hat you wear). Anything that can be systematized and is repeatable can now be assigned to someone else. Once documented it can be assigned to someone else and come off your plate.
- Delegate everything. When your business can operate day-in and day-out without your hands-on oversight, you have a money-making machine that will attract buyers. This one change takes time, not days or weeks, but years. Identify the three things you absolutely love to do in your business and the three things only you can do. Delegate the rest. Be vigilant.
- Develop a succession plan throughout the company. Succession is not just for family businesses. Target and create a succession plan for your top people in every department and at every level. Groom them for the next step up and two steps up at all times. By building depth within the business, you add value for the buyer and secure their long term employment even under new ownership.
- Plan for scalability. Any business that is scalable has more value. Demonstrate that you are scaling successfully, even before the sale; now your business model can command even greater value.
When you apply these four suggestions diligently, you will work yourself out of the job of Operational President. You will free up your time to be a Strategic CEO and to focus on the things you love and what only you can do to grow your business to make it both buyer ready and buyer attractive.
Our new program, Build Your Business Value, helps you enhance the value of your business with 48 value drivers in 12 areas while improving your strategic position in the market.
Lisa Magloff’s article in Small Business Chron, How do I Create Business Value? is a good introduction to the concept of what constitutes value in your business. As she says, ‘It’s more than simply economic value.’ Business value comes from both tangible and intangible assets. To add business value, Magloff outlines five steps. Here are her five steps and my comments.
- Make and keep realistic promises on service, quality and delivery.
This is a great example of intangible business value. Do it well and it will measurably add value to your business. In addition it will result in higher standards of performance and productivity which will produce higher profits. But if you don’t keep these promises to employees, vendors or customers, that intangible value can slide quickly.
- Use information technology to create business value.
Business owners who grew up with technology see how obvious this is. Owners in fields where technology was not available when they built their business can’t see the value yet, because they still need to invest in the technology to make their business viable for the next generation. Technology adds both tangible and intangible value to the business. It can speed up and simplify transactions, and help the business improve overall results.
- Develop and encourage effective decision making practices by employees
Training and support to allow employees to take control of day-to-day decisions on their projects, helps retain them, increases their value to the business, strengthens the depth of management, and distributes responsibility throughout the organization. It prepares employees for advancement and even succession. It also frees up the owner/entrepreneur for more strategic challenges and opportunities while demonstrating that the value of the business is in the business, not in the owner.
- Strengthen your core competencies by investing in development and spending more time and money on those areas that are most important to your long-term success and growth.
To leverage the full value of your business for an acquisition or sale opportunity, it is essential to be aware of your unique strengths to position every asset you have for optimum value. If your biggest asset is your team, invest in them so they committed to stay. If your biggest asset is the process to develop and launch new products ahead of the competition, invest in that, protect it and highlight the value you can monetize just from that.
- Increase your business value by building capability within your business
Capacity building can be achieved in many ways. It depends on your objective and long term goals. Adding employees is one way, but that’s not just about hiring. Once you add employees, you need to nurture them with training and knowledge to cultivate innovation to continually add value to the business. Capacity building can be about your brand and market perception of your value. It can also be about the right technology or adding technology to support increased capacity to serve the market. Every one of these approaches to build capacity sets up your business to grow, increase revenue, and add value to the bottom-line.
Creating business value is a process. Systematically building both tangible and intangible value will position you better for a sale or acquisition on your terms, on your timeline.
There are many aspects to exit planning that business owners take for granted, never think about, or abdicate to others. This naiveté is one of the biggest roadblocks to getting out on terms that give you the full value of the business. This scope of this book is broader, more all encompassing than just the finances of the exit transaction. You can find experts and financial models to help with the exit transaction in financial terms and you will need them.
To tame the numbers beast before you get there and make it absolutely manageable for any business owner, here are six core elements to consider on the financial side of exit planning:
- Setting Financial Goals
Your long-term income needs and the financial requirements of your reinvention (new venture, avocation, adventure, hobby). From these financial requirements, you can determine the sale price and terms you want your business to deliver when you exit. Initially, these two numbers may not match up. That’s just one good reason to start planning early.
- Current Value of the Business
To be buyer ready, you should always know the current value of your business. You won’t be disappointed by a buyer’s offer if you know the current fair market value of your business. Valuation experts analyze the business books and other materials and compare its profits and losses to relevant businesses in your region and/or industry. With the current competitive value in mind, you can track your timeline to exit on your terms and meet your financial goals.
- Build Business Value
To exit early and maximize the value you walk away with, it is imperative to always be building business value. If you are always adding value, accelerating growth and making the business more buyer attractive, you will have the opportunity to exit with the financial freedom for your reinvention. If you have not been building value all along, start now so that you can sell the business for what you know it’s worth and meet your long-term financial goals.
- Selling a Business
Selling a business has many parallels to selling a house. Once you decide to sell and the business is buyer ready, it can still take 6 months to 2 years to close a transaction. Before you must sell (for any reason), consider all your exit options, all possible buyers and the impact of each option on your exit, on the future of the business and the future employment of your team with the business. Before you choose a specific option, also investigate the tax impact on you and the business. The tradeoffs can be severe.
- Contingency Plans
Murphy’s Law – if something can go wrong, it will. The same is true for your business, as well as your exit from the business. Knowing this up front, is another incentive to start early and aim for an early exit. You want to build a contingency plan for the business in case of any crisis or emergency. For example: you need an emergency plan documented with a copy kept totally offsite – if for any reason you can’t get into your offices, you lose power and can’t access computers or passwords, there’s a fire/blizzard/hurricane that destroys your business, etc. Plans like these and plans for other types of unexpected situations should be built right into your business exit plan from the outset. You also need a documented contingency plan in case you, the owner/CEO, become physically or mentally disabled, have a heart attack/stroke and are laid up for six months or even worse, if you should die. Additionally, your contingency plan must include all current buy-sell agreements, services, resources, client orders, employee contracts, key employee incentive programs, business/disability/life insurance policies that are in effect.
- Life and Legacy Beyond Business
With your comprehensive business exit plan and strategic contingency plan in place, you can explore and consider options for reinvention alongside your estate planning goals to leave a legacy and secure your dynasty. Much of your financial independence beyond the business as well as your estate planning are tied to the sale of the business (aka a liquidity event). You have more estate planning options, more tax advantaged options and more ways to maintain the owner benefits you enjoy; if you start this planning early – ideally, five years before you can fund those options at your exit.
Your financial position, holdings, and control over the business and those holdings, will change drastically and instantly once you sell the business. Therefore, you must revisit your personal financial plan and your estate plan at each business milestone of the exit process. As you make choices for exit options and reinvention opportunities you want to pursue, be sure to circle round to be sure they still coincide with your business exit and contingency plans.
Stating the obvious, this is not a complete discussion of the financial aspects of exiting your business. It does however give you a general outline of the scope of the financial issues to address with various key experts on your team. Just on the financial side, you can begin to see the value of starting now, planning early and preparing to maximize the value of your business when you want to get out.
Do you know where the value is in your business right now? Is the value in you, the owner/entrepreneur? Or is the value truly in the business itself?
This is the uncomfortable wakeup call for most entrepreneurs. Are the expertise and the business strategy all in your head, and in your proprietary files? Here’s the risk:
You have nothing to sell and
you have no exit options
if this is still true.
Instead, you can and should start now to:
- train others on different pieces,
- outsource different pieces, or
- start delegating more and more.
Start now because it takes time to transfer knowledge, expertise, systems and processes, nevermind responsibilities, to others. In some cases, you’ll know exactly what to delegate and who should be doing tasks instead of you. Sometimes you already know who should take on responsibilities or who is ready to step up to take on more responsibility. When you start early, you can train and groom people to grow into positions and responsibility – which ties them to the business more. Both add value to the business when you want to get out.
When you outsource, you have the flexibility to divide up work piecemeal and try different vendors and sources to get work done. When you start early, you can find those vendors who fit your needs and adapt well to suit your corporate culture and become an extension of your team, again adding value. And if a vendor is not an asset when you are trying to maximize value for a potential buyer, you have time to find and train the replacement within your timeline.
When you offload operational responsibilities, you can focus on leadership and strategy to make the business more valuable now and for a future buyer.
The side benefit of delegating, outsourcing and automating is that you free up time to work on your most valuable activities including your exit strategy to achieve your ultimate goal.
“Business owners do not plan to fail.
But 95% fail to plan. Don’t be one of them.”