Posts tagged with: leverage
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.
As the owner of your business, you always have more to do than you have time to do it. You always have more to do than hands to get it all done. So when any of your outside advisors suggests starting early on anything strategic, be it wealth planning, estate planning, contingency planning, long-term tax planning, even goals and strategies to grow your business; the urgency isn’t always obvious.
Compared to product and service delivery, customer satisfaction and controlling costs, it is very challenging to find time to focus on and execute strategic projects and changes to build value into the business. The ROI on the time and effort required to build business value is years if not decades in the future.
Here are a few reasons disguised as incentives that may tempt you carve out the time and commitment to build business value now.
- Start focusing on what will increase business value, not just revenue. This will give you a longer lead-time to leverage and compound that increasing value.
- Prioritize working on the business, specifically to add value. This will lead to stronger results on the top line and the bottom line over time.
- Transfer operational responsibility to your team. This will free you up for more strategic efforts and demonstrate the value of your business is in the business, not tied up in you the owner.
- Build strong deep fundamentals in every area of your business. This will provide proof of what you know the business is worth, adding leverage in any transaction negotiation.
- Timing is everything. Run your company with clean books, up to date governance agreements and documents, with systems and processes in place to drive growth. Consequently, your business will always be ready and will ‘show better’ to any potential buyer (solicited or unsolicited).
When you apply value drivers in every area of your business, consistently reinforce them, and track the impact, then the positive compounding effect on Net Profit and Valuation is dramatic.
That doesn’t happen overnight or by itself. It takes time to build business value so you can harvest the wealth tied up in your investment in your business.
Check out our systematic approach here. Build Your Business Value is a 12 month program to set you up to add value in every area of your business.
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.
Time behaves like money – it’s a scarce resource.
Anything you achieve in life can be valued
by how much time you invested to acquire it.
Do you know the value of your time?
Procrastination vs. Productivity
You can’t hoard time from yesterday to use today. You can’t borrow time from tomorrow to use today either. You need to leverage your time, and how you spend your time, to deliver the maximum value for the business now, not someday.
Your own productivity is the standard for your entire business. Productivity is the time you apply to your most valuable activities – those tasks and responsibilities that generate the most or highest revenues for the business. Staying “busy” with tasks you can hire out at $12/hr. or $25/hr. is not being productive.
Do you know what percentage of the time you are productive? Really productive in your business? To put your answer in context, consider this:
One study of Fortune 500 CEOs estimated they had 28 productive minutes a day. Another one estimated it at 38 productive minutes a day.
You’re thinking, those CEOs put in such long hours, that can’t be right. Only 28 or 38 minutes a day? Now think about what these CEOs of the most successful companies do, how much they get done and how much (little) time they actually get to focus on profit-building activities.
You don’t have nearly the responsibilities of a Fortune 500 CEO. You should be able to carve out a lot more productive time. When you do increase your productivity, consciously using time more wisely:
- What will your day look like?
- What will get prioritized on your schedule?
- What has been siphoning off your valuable time that you can delegate more?
- How will this increase in productivity impact your bottom line?
- How much more time can you focus on the CEO role of strategy vs.
You need to stay focused on your priorities and your most valuable activities. Therefore, to scale or sell the business on your terms, you must leverage what you do best to achieve your most ambitious goals.
To leverage what you do best, you must view you and your business in a different way.
- You must stop seeing you as the sole resource in your business
- You cannot be the hub of every decision
- You cannot wear every hat
- You must start looking at how to leverage who you are and what you do to
serve a larger audience and play a bigger game.
To do that, you must build an actual business and a team around what you currently excel at doing.
“Leverage is a vitally important fundamental concept that is central to your deal-making success.”
~ Jay Abraham
Your Real Wealth Isn’t In Starting Your Business
You will never realize your real wealth by starting your business.
In fact, your wealth won’t be made simply by growing your business either. The bottom line is that your real wealth will only be made from the profits of selling your business. Your best option is when you can sell to someone who will pay a premium for your business because they [the prospective buyer/acquirer] believes they can generate even more value from the business you’ve worked so hard to build.
The most successful entrepreneurs create exit strategy plans; plans that layout their roadmap to grow their business so they can exit [get out] for the maximum valuation (dollar amount value) within a specified time period.
You can too because when you build a business to exit (whether via an internal/external sale, IPO or an acquisition), you set very different strategies and goals from the outset than when you simply try to ‘grow’ a business.
You see, your short-term results and success, and your long-term results and success are NOT mutually exclusive. When you build your business with a strong foundation including a defined exit plan, you can maximize short-term revenues and profits, while building and aligning your company for that multi-million dollar exit on your terms.
Since 1999, we have been developing exit strategy plans for our clients. Importantly, many of these clients who executed these plans, have since realized their high dollar exit dreams, which they had not known they could achieve. They are fulfilling the precise lifestyle dream they had when they first launched their businesses.
Your real wealth isn’t in starting your business. It’s in how you exit.
To streamline and optimize your business for maximum value, you need to think strategically and keep an eye on every facet of the business, the team and your personal goals and objectives. No one can do all that alone. It’s never too early to build your team of exit advisors.
The best advisors are proactive, open-minded and client focused. Before you commit to any advisor being on your exit team, specifically focused on your exit objectives and timeline, it’s up to you to qualify them to be part of this specific initiative. You need a full complement of advisors, not just your accountant and attorney when you prepare to get out of your business and move on to your own reinvention.
You need the full team of experts on board now to:
- Build a strong deep foundation to strategically grow the business.
- Accelerate growth to achieve your specified goals and objectives for the business.
- Protect all intellectual property – to have all patents, trademarks and copyrights secure and complete well before you want to get out, making them easy to identify and monetize.
- Get all governance up to date and compliant – That includes minutes, resolutions, and annual meetings being recorded, complete and up to date.
- Get the financial books meticulously clean – This goes far beyond balancing the books and paying taxes. It can take 2-3 years to achieve clean books ready for review or audit.
- Maximize valuation – your advisors will help keep this goal in mind at every milestone and strategic decision to ensure goals and investments are always tied to increasing the value of the business.
- Expand exit options – the earlier you start and with a full complement of advisors, you have more exit options to choose from because you have the lead-time to explore them before you decide how and when to get out.
- Ensure the business is buyer ready – your advisors will help you become a strategic CEO with the team in place to run operations independent of your daily presence. This is the easiest way to be buyer ready and buyer attractive, and demonstrate that the value of the business is in the business, not in your head.
- Get your accountants, tax advisor, estate attorney and wealth advisor on the same page. Do this early to expand your wealth preservation options to serve your reinvention goals, objectives and legacy. They can do a better job of achieving your goals when they are on board early and can implement tactics pro-actively for your future plans.
- Document and codify every system, strategy, process and procedure in the business. This one simple discipline adds value every day. It’s also one of the biggest ways that owners lose value in negotiations with buyers because they ‘never get around to it’.
- Give you greater leverage in negotiations with potential buyers. When your team of exit advisors has been working together building your business into a wealth-producing machine over time, you are in a stronger negotiating position with potential buyers.
When you surround yourself with a range of experts to support the exit process over the next 2-5 years, your business will be stronger, demonstrate appealing growth projections, will have a higher valuation than otherwise possible, and become buyer attractive. As a result, you can and will be able to exit your business by intention on your terms instead of closing the doors with no monetary gain by default.