By Maurie Cashman
How you execute your ownership transition plan depends on where you start.
I was reminded of this while driving to San Antonio with my wife this week. I am taking a course to become certified in business valuations and we decided to combine this with a little site-seeing along the way. We decided to take a slight detour in Kansas City to visit a sick friend who is in a rehab center in a suburb NW of the metroplex.
When we left the rehab center my wife punched up SIRI for San Antonio and off we went. Almost immediately I started fighting SIRI. I knew that I35 was to the east and SIRI was taking us to the west. The further we went, the more certain I was that we were on the wrong path. At one point I exclaimed that we were in Lawrence and headed for Topeka! At one point we were actually headed NW! This couldnâ€™t possibly be right but we were on a toll road and SIRI was insistent.
Well SIRI was right and I was wrâ€¦ I was wroâ€¦ I didnâ€™t realize that the best route depended on where we started. I was used to coming through KC from the N and not veering off I35. I also had forgotten that I35 takes a wide westward sweep south of KC. Our starting point in a NW suburb made it easier to get to Wichita by way of Topeka than if I had fought the plan and gone back into Kansas City.
Your ownership transition plan depends very much on where you start as well.
Understanding Your Objectives
The key to any successful plan is understanding your objectives. If you donâ€™t, you will end up on the Road to Abilene. More on that next week.
Understanding your objectives involves knowing what you want to do after you are no longer involved in the business, knowing what resources it will take to accomplish that, knowing how you want the business to continue and understanding the best route to take to achieve those objectives. These objectives are what will guide your decisions on the route you will take.
Your Starting Point â€“ Understanding Business Value
Once you understand your objectives you must understand your starting point. I believe that your starting point is understanding the value of your business and how you can increase that value. The key to understanding business valuation is understanding this equation:
value = benefits stream/required return.
We have been discussed this yesterday at our training session and will revisit it in many formats during the rest of the week. If you know two of these variables you can determine the third. So, if you understand the benefits stream (defined broadly as cash flow) that your business generates and you understand the risk factors that are present in your business, industry and the economy you can determine the value of your business.
Understanding these factors also allows you to make changes that impact the route you will take to your ownership transition. You can change the map.
How do you change the map? You examine the cash flow of your business and determine where you can make changes that increase that cash flow. This may involve cutting unnecessary expenses, exiting unprofitable business lines or making a strategic acquisition.
In addition, examine the risk factors present in your business. Do you have concentration in your customer or supplier bases that would be a concern to a buyer? Do you have key employees that you need to be sure are locked in place and will stay with a new owner? Have you trained your successor so that they can take over and continue to generate the cash-flow you will be dependent on when you are gone? These are only a few of a myriad of factors that you can look at that can change the risk factors in your business, but they take time to implement.
By understanding your objectives, understanding the starting value of your business and understanding how you can change the benefits stream of your business and how you can change the risk in generating that benefit stream, you can change the value of your business.
By understanding your starting point, you can take the best route to achieving your destination.