By Maurie Cashman
Business value is critical if you want to reach your goals for your business and/or your families. The problem of building value is yours, your management team and your advisor team. It is however primarily yours because…
According to a 2015 poll of over 800 Canadian business owners conducted by the Canadian Imperial Bank of Commerce, 57% say they have Exit Plans, but of those, 80% report that your plans are “informal” and only 14% prepared your plans in consultation with advisors. When asked about your sources of post-exit income, more owners chose “sale proceeds” than any other income source.
No advisor has all the skills necessary to build value, but advisors skilled in Ownership Transition Planning know:
- What needs to be done,
- Which advisor (or advisors) to retain to help grow business value, and
- How to coordinate all the players to accomplish an owner’s goals.
â€œRisk is perhaps the biggest red flag for assessing [the business value of] a company.” David Bunton, president of The Appraisal Foundation
What Needs To Be Done
We have identified nine value drivers common to all businesses:
- Best-In-Class Management Team;
- Operating systems designed to increase sustainability of cash flows;
- Diversified Customer Base;
- Proven Growth Strategy;
- Revenue that is recurring, sustainable and resistant to commoditization;
- Good and improving cash flow;
- Competitive Advantage;
- Financial Foresight and Controls;
Operating Systems That Improve Sustainability of Cash Flows
The establishment and documentation of standard business procedures and systems demonstrate to buyers that a business can maintain its profitability after the sale. The establishment and use of systems contribute to cash flow creation and increase its sustainability.
Diversified Customer Base
Buyers look for a customer base in which no single client accounts for more than ten percent of sales. A diversified customer base insulates a company from the loss of a major customer. For example, if a company’s three top customers generate 50 percent of sales, a buyer would be concerned if one or more of them left upon learning that the owner had left company. To a lesser extent this may also be a concern to inside buyers if the biggest customers are loyal to the owner, rather than to the company or other employees.
Proven Growth Strategy
Owners should have a written plan describing growth and how that will be achieved taking into account industry dynamics and demand for a company’s products. This may include: development of new product lines or enhancing existing ones, marketing plans, acquisitions, territory expansion or increasing manufacturing capacity. A detailed and properly communicated growth plan helps to attract buyers especially if a company’s previous plans have successfully attained your goals. More importantly, it helps you to increase cash flow while you are still in control of the business and increases the value by both higher cash flow and higher quality cash flow.
A growth plan should break down each initiative into achievable actions and assign responsibility and deadlines to specific individuals.
Revenue that is recurring, sustainable and resistant to commoditization
Is there a way for your clients’ companies to create one or more recurring revenue streams? For example, if an owner sells a product, can she also offer a warranty or service contract for it at time of sale?
Strong and Improving Cash Flow
All value drivers contribute to stable and predictable cash flow. Start to increase cash flow by focusing on ways to operate the business more efficiently: increasing productivity and decreasing costs.
Can a company improve its profit margins if it increased its revenue? Think about designing a computer app like League of Legends. There is a fixed cost to design and test, but additional sales do not increase those costs. Scalability is a bit more difficult if you own a hardware store, but not impossible: if the store enjoys high profitability and strong revenue growth, it likely has many of these value drivers in place, including a competitive advantage. If these value drivers can be duplicated, an owner can scale this business by establishing new stores in different locations using the same value driver model. Think Home Depot.
Also think Home Depot when you are looking at growing sales. Are you able to grow margin at the same time that you are growing sales? I see companies every day that are thrilled that they have been growing sales to Home Depot, Walmart. Loews or other big box stores. The problem is often that they have not set up systems to manage these accounts to drive profitability. They find that sales are increasing but they are getting no additional profitability. The quality of their cash flow has actually decreased.
Competitive Advantage Competitive advantage is the product or service that a company offers either better or more cheaply over time than its competitors. A company’s competitive advantage is the reason customers buy from one company instead of from its competitors. Many successful owners have not identified their competitive advantage. If you do so you can grow and protect it.
Financial Foresight and Controls
Effective financial controls protect company assets and support a company that is consistently profitable.
Who Is Your Advisor Team?
No one advisor can wear as many “value driving” hats as it takes to build transferable value, that’s why Ownership Transition Planning advisors belong to and create networks of advisors skilled in complementary disciplines. A skilled Ownership Transition Advisor can assemble a team and keep everyone involved focused on one thing: the owner’s goals. That may mean setting deadlines, bringing in new consultants as the need arises and advising when a specialist may be needed to supplement the team.
Why Should I do this?
Only about 15 percent of owners have ever had a single conversation with an advisor regarding their decision to Transition Ownership or remain in their businesses. This is the greatest financial event of your life. If you don’t reach out to advisors, it is likely no one will reach out to you.
Second, it is unlikely that any other advisor has the awareness of how to help you grow value. It is critical that you examine your business to be sure that you have a team focused on growing and realizing the value of that business on your terms.