Posts tagged with: 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?
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.
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.
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.
Excellent article on Entrepreneur.com by Simon Cohen, founder of Global Tolerance. He gave his business away.
He elaborates on his three reasons for his OLE (Open Leadership Exercise):
1. Traditional Exit Strategies are Broken
“ For any entrepreneur, putting your life’s work in the hands of a strategy that succeeds only one in four times is flawed. “
2. Values have Value
“It’s amazing to me how many companies express certain values, but when it comes to exit, those values are left at the door. In a world of discerning customers, this is a disaster for brand and customer loyalty — and the long-term value of the company. “
“…too many people confuse money as the ends rather than the means. For the most part, we want to be happy. To make a difference. To live a life of meaning.”
The whole (brief) article is worth reading.
For many, January is a time of rebirth and resolutions. It’s a month to reflect on last year’s achievements and to set goals for the year ahead. July 1, six months later, is a good time to revisit goals, resolutions, and progress made towards this year’s achievements.
Some people set personal goals like losing weight or quitting a nasty habit, and most company owners set business goals that focus on hitting certain revenue or profit milestones. But if your goal is to own a more valuable business this year, you may want to commit to at least one of the following business resolutions:
- Take a two-week (or even three-week) vacation without checking in with the office (i.e., no cell phone). When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.
- Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow. Resolve to document one system a month and by the end of the year you’ll own a more sellable company.
- Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you personally as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.
- Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.
- Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.
- Find your lease (and any other key contracts). When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord. Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company.
- Check your contracts and make sure they would survive a change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.
- Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.
- Get your Sellability Score. Every goal starts with a benchmark of where you’re at today, and by understanding your company’s Sellability Score, you can pinpoint how you’re doing now and which areas of your business are dragging down your company’s value.
A lot of company owners set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one. Pick two resolutions from the list above to execute before the end of the year. Email me what you will do. I’ll keep you accountable to make yours a more valuable business.
Exit Planning Exchange
The Sixth Annual Summit
GROWTH: THE BEST ROAD
TO VALUE AND LIQUIDITY
The Conference Center
at Bentley University
May 2, 2014
Join fellow advisers and business owners to explore the many facets of growth. The day is packed with great opportunities to connect, learn and explore.
Some of the opportunities: Learn from a successful business leader on how he has grown several businesses with the aid of trusted advisers. Hear from subject matter experts on topics such as seizing growth opportunities, building value, and exploiting innovation. The afternoon keynote speaker will pass along lessons learned on liquidating / transferring a business. Then take the opportunity to work with peers to delve into a business case study or two.
Join this dynamic day and walk away with great information to share with colleagues or clients, with new connections to expand your professional network, and with a wealth of ideas to make your business or practice even more successful!
[Early Bird rates available through April 11th]
When was the last time you thought about how to cash out of your business?
Is it a topic you avoid? Do you only think about it when you are at the end of your rope after a really bad day? Is it a black hole you know nothing about?
Or do you include the long-term impact/implications in every decision you make? And tie every short-term decision and strategy to where you want to end up so you can cashout?
HARVEST YOUR WEALTH gives you the foundation for all those decisions in bitesize pieces so you can start planning early, to get out on your terms and on your timeline.
It’s never too early or too late to plan your exit. But you must make a plan and start executing on it now if you intend to cash out of your business to cash in those plans for reinvention (what comes next).
Start here, http://harvest-your-wealth.com
HARVEST YOUR WEALTH is for business owners who need to start thinking about how to sell, scale or pass on a business to successors. It’s not for advisors, transaction experts or buyers and their agents. It’s for you, the business owner who has put their life, spirit and soul into the business.
It’s only when you cash out of your business, that you can begin to cash in on the future of your dreams. To pursue that reinvention, you must have a plan to get out with the maximum value you can achieve for your business.
When you get ready to sell your business, the value of the business must be in the business to be monetized and for a buyer to see the value without your active involvement.
Before you can sell the business for maximum value, you must transfer all your knowledge and wisdom into your team, systems, procedures to carry on prosperously in your absence.
For each challenge listed below, here’s what you need to do:
The whole business is in your head – only in your head
You must share every idea, policy, system, process, key, password, contract, etc with your management team. You may give specific tasks and responsibilities to specific people or you can appoint a successor to take on your operational role
Don’t know how to plan, when to plan, when to find time to plan.
You must delegate day to day operations and make time to plan strategically. Get training, hire an advisor, or hire a temporary COO to get plans in place
No marketing plan, sales plan, financial plan or operating plans – except in your head
Get all these plans out of your head an on paper and assigned to different people to implement and achieve the goals in each area. Delegate responsibility for each area of your business to someone, not you. Make them operationally responsible, not you.
Don’t know how to automate or outsource
Exit planning is a great incentive to learn to automate and outsource to get more done, cheaper, not by you. Start by automating just one task. Start outsourcing by hiring an individual or a company to take over just one task or project on your To-Do list.
Decide no new tasks will get added to you To-Do list – instead you will always seek to delegate, automate or outsource first.
No operating procedures
Create an Operations Manual. Buyers expect to be able to read your operations manual, instead of calling you for each procedure. Every time you do something that is a process or procedure, write it down. Every time you document or record how you do something, you are adding value to the business. Start by simply taking notes on an index card for each task, process, system, tool you use.
No contingency plans
A contingency plan is like a security blanket for your business. It protects you, your business, your team and your customers. It also demonstrates to your buyer how valuable your business is that you are willing to protect everything that can be considered unique systems, models or intellectual property. You must lay out your emergency plans for fire, flood, other natural disasters, loss of power, computer crash, password security, data security and redundancy, safety and OSHA policies, backup procedures for when each person is on vacation or ill, etc.
No exit strategy in place
You must choose to take action to explore and consider exit options that would suit you. Take responsibility for ensuring the longevity of your company, the legacy you can leave, and providing ongoing employment security for your team. By following an exit plan you will be in control of when you exit, on what terms and the valuation you will receive to fund your reinvention
Keep all expertise in the owners/ executives heads and private files
You must start sharing your knowledge and wisdom in the business and about the business. You will maximize the value you will receive at exit, only if you transfer all of your knowledge and wisdom about the business to your team.
Everything on this list is a challenge all owners face to some degree. You can share your knowledge, understanding, wisdom and guidance willingly with your team and make your business an attractive buy at a premium price. Or you can horde all your knowledge, resist potential buyers’ due diligence efforts to understand the value in your business, and struggle to sell the business for a fair return.
The good news is that we can all learn new mindset/attitudes and beliefs, we can all learn new skill sets, and we can all learn new information combined with experience to produce the knowledge we need.
You probably built your strategic plan when you launched your business. More than likely, you have not looked at it in a long time, never mind used it as a guide for building out your business. Strategy and planning add value to your business.
When you start preparing for your exit, that strategic plan and any newer versions become valuable intellectual property as well as the guiding strategy for your transition out.
Your business strategy will be a key selling feature of the business that will attract ideal buyers. It should articulate the goals, objectives and prospects of your business, and the implementation of your vision.
Your strategic plan outlines the objectives you will achieve, the order, the timeline and the tactics to be used. Your strategic plan becomes the blueprint for your company’s success and your successful exit.
Strategic Planning Benefits
Still not sold on the value of strategic planning in your company?
Some of the purposes and benefits of strategic planning include:
- Clearly defining the mission and purpose of your business
- establishing realistic goals and objectives consistent with that mission
- defining the timeline and schedule for implementation.
- Communicating those goals and objectives to all stakeholders
- prospective buyers
- Ensuring the most effective use of company resources
- Identifying Key Performance Indicators to be used to assess and measure progress
- Preparing and provide a mechanism for change [to be invoked when needed].
- Ensuring maximum efficiency, effectiveness and integration across all departments
- Providing focus and direction for all constituents
- Increasing productivity by instituting processes, procedures, tracking and measuring
- Resulting in improved communication, team cohesiveness and recognition of accomplishments when goals are reached.
- Pro-actively solving potential problems in the company before they occur
Strategy and planning add value to your business from day one. That same strategy and planning add even more value to your business when you want to monetize it to get out.