If you analyse why most people go into business, the main answers will be independence, earn more and a better lifestyle. However, most business people only look at the immediate changes they can make by starting a business; rarely looking at the longer-term personal goals, and what those short-term decisions should eventually lead too.
How many of you reading this now have a plan for exiting your business as part of your own personal wealth creation to gear up for retirement, or indeed to diversify and explore other business opportunities? You’re a long time dead so why not enjoy some of your efforts?
As 2018 approaches, there will be a large percentage of business owners reflecting on the performance of their business in 2017, but also increasingly thinking about succession plans, and how to grow their business into a valuable saleable or investable asset. As a business coach, succession planning is a subject that is commonly discussed as part of the coaching process. Most business owners will have this subject in the back of their mind, and it is a significant part of the desire to create continuous high growth in their business, officially recognised as 20% year-on-year. However, very few have actually sat down and looked at this important milestone with any real conviction. Building continuous growth is highly attractive, but that is just part of the process of achieving a lucrative price when selling your business.
One of my main roles when coaching is of course to help the business owner achieve that magical 20% minimum year-on-year growth, which is a performance level I support the business owner in achieving through strategic development. As part of the planning process for growth, it is extremely important to build the value of the business, and making sure the business is as attractive as possible for a future buyer or investor. It should be a benchmark for all business owners to not only look at growth, but to look at creating a highly attractive asset that will appeal to prospective buyers, whether that is a generational takeover, management buyout or a wholesale sale of the business. Ironically the less active the owner is on a day-to-day basis within the business the more attractive it becomes because it means you have an excellent management team in place that can be trusted, and transitioned by the new owners for continuity.
So how do you build that all important value, and make sure your business is attractive for future investors?
Number one attraction for a successful sale is of course profitability and year-on-year high growth, and of course this is a sure-fire way to experience continuous prosperity as a business owner while building the saleable value of your asset. The value of a business is normally determined by accountants, but the formula they adopt very often overlooks the emotional attraction a buyer will experience when exploring the detail of the business. The company’s assets, so many times net profit and some form of good will payment is the standard formula EBIT or EBITDA, but how do you put a value on the multiples of net profits and good will. A buyer will always look at the track record of the business, management experience and structures, and determine when they will see a return on their investment based on historical performance. Maintaining high growth will be a priority for whoever takes over the business, as it clearly demonstrates a predicted return on investment. In addition a business is ever only worth what somebody is prepared to pay for it and that can encompass: market forces, niche markets, strategic business development, removing competition, purchasing intellectual property and technical knowhow, buy and build business models, entering new markets and many other factors that enhance that value proposition.
Other very important factors to consider
Marketing & Sales – A business that has adopted an aggressive approach to its marketing and sales will always been deemed valuable. It is a model the investor doesn’t have to create, it purely needs continuous monitoring and improvements where possible. A saleable business has to demonstrate this strength to build its value.
Reinvestment – Most businesses need a continuous level of investment into capital expenditure and infrastructure and a focus on improving the operational strengths of the business. If the business is profitable, but very obviously weak on productivity through lack of historical investment, alarm bells will sound with the investor. Most investors will invest more to make improvements, but they don’t want to perform some form of rescue where operations are continually failing. In fact, part of the sales pack should be detailing where further investment is needed to improve productivity.
It can flourish without you – Many businesses suffer because you the leader are an integral part of the daily customer facing operations. People buy from people, so if your business relies on you for sales, that needs to change by migrating this need towards a collective of individual sales and operational staff that form the front-line customer facing part of the business. You want to move on, and if you cannot demonstrate a business model that is relatively unaffected by your departure, this will soon affect the confidence of those looking to invest.
Residual or contract based income – It is a fairly obvious reasoning to suggest a business is deemed more valuable if it can demonstrate ongoing strengths in residual or contract based income. The buyer will immediately see where their return on investment can be gained, demonstrating a level of security and assurance for them.
Innovation – Businesses that don’t plan or predict the future market opportunities are not demonstrating a level of innovation that an investor or buyer will want to see. Predicting market trends and exploring a diversity of products and services, or building in contingency plans for predicted changes in the market are key to demonstrating a level of innovation and industry insight. You can quite easily impress an investor with your proactive approach to maintaining future stability through innovation.
Understanding your finances – I will very confidently state that most business owners overstate the value of their business first and foremost, and normally without real control and understanding of their finances. Something I touched upon quite recently is how business owners have a fear around the figures, and demonstrating this form of weakness in front of an investor is tantamount to disaster. A serious investor will want you to demonstrate control and understanding of your financial strengths as part of your pitch.
Creating a business model that is saleable is quite a complex process, and requires a series of significant marginal gains to build the true potential of the final valuation, and in reality there are too many areas to list in one article. However, if you are looking for an exit of some kind next year, or indeed in a few years’ time, I would strongly suggest you start planning now to maximise the value of your business. If you feel you need help, this is something I have had a great deal of personal experience of, and indeed forms a significant part of my coaching process – I can certainly help you to build that value!