By Maurie Cashman
BUILDING SUSTAINABLE VALUE is critical to the success of any business enterprise. My wonderful friend Joan Ridley, owner of Just For Advisors, wrote a compelling article this week – â€œFocus on Business Sustainability Rather than Exit Planningâ€ (and was kind enough to feature an article by yours truly titled Five Ways to Reduce Business Risk â€“ quite an honor!). Joan and I have very interesting discussions regarding Ownership Transition Planning and best practices for our clients. She has helped me greatly and I hope that I am able to return that occasionally.
In that spirit I am attempting to extend and add to her well-presented thoughts. My thanks to Joan for starting an important discussion.
First, let me state clearly that I agree with everything Joan puts forward in her article. I encounter many businesses that, while they may be operating very well for their current owners, are simply not sustainable business models. This may be due to over-reliance on one or a few customers, owner dependency, obsolescence risks and many other issues of sustainability. A sustainable business model is absolutely critical if you are going to win in the coming race to transition ownership of your business.
Many have been arguing who would win in a head-head race â€“ Affirmed or American Pharaoh. I have a million dollars bet on American Pharaoh. I feel pretty confident in that bet â€“ since Affirmed is dead.
Now let me build on that idea. In the world of hybridization and genetics two things are critical: selecting traits that add value to the organism and making those traits consistently transferable to the next generation. You can bet that the owners of American Pharaoh are working feverishly at just that, and getting paid handsomely for it. I am confident they are also selecting a few phillies with complimentary traits to sustain and improve the line even further. Sustaining and improving eventually leads to a triple crown.
I agree that sustainability is the common denominator, however, to have a denominator you must have a numerator, which I believe is growth. Sustainability is only relevant if you are sustaining an ever improving trend, just as increasing the scale of your business can be disastrous if it is not sustainable. This is the philosophy that runs through the Continuous Process Improvement movement, which is similar to the genetics example.
In any ownership transition there are going to be a few things going on. Usually these revolve around how the business is going to be valued and financed. The new owners are going to be dependent on two things: increasing cash-flow and the sustainability of that cash-flow to pay for the business. If you can get both, you can exponentially increase the value of the business and manage problems with creative planning. Since you are going to be dependent on the proceeds of the transition, however it is structured, you want to see sustainable growth as well. Taxes may be a problem, one that I want to have.
By focusing on building SUSTAINABLE VALUE GROWTH we are able to increase the value of your business exponentially, as shown above. By definition, all else being equal, a sustainable increasing cash-flow will be worth more than a business with sustainable but stable cash-flow or one that has increasing but unstainable cash-flow. COMBINING these concepts should be at the heart of every business plan.
You are going to have lots of competitors trying to transition ownership of their businesses at the same time you are. Do you want to be riding Affirmed or American Pharaoh?