Build and grow the right way...

Like most successful small business owners, George had invested much of his life and resources in his business over the last twenty plus years and realized personal prosperity and respect within the marketplace.  The business had been profitable, with revenue generally stable and increasing, and George continued to see his personal standard of living increase.  

At the same time, George had an ongoing irritant, and that was his inability to "really take a vacation".  George and his wife Susan were able to "get away" a few times each year, but it was seldom more than a week, and he most always remained tied to the business in some way or another while he was gone.  His phone and computer would still see a lot of action on "vacation".

Five years ago, George was "ready to sell the business and retire".  They now had four grandchildren they wanted to spend time with, they wanted to travel, and simply "enjoy life" while they were still very healthy.  George's transition from being "all in" to "I'm done" happened quite fast, surprising both George and Susan.  Coincidentally, around that time, George was approached by a couple of potential buyers interested in purchasing his company.  George was excited that he would now sell his company and he and Susan would be free to do all they wanted to do.

George experienced what he called "a sad awakening" when the most serious buyer made an offer that was significantly less than what George and Susan needed, along with an "earn-out" requirement.  George would have to remain on as an employee for three more years in order to earn 25% of the proposed sale price.  The potential buyer pointed to areas of risk including "the business still runs too much through you George", a lack of management team incentivized to remain during the transition, an inability to produce requested financials in a timely manner, and an unproven growth strategy as reasons for the low offer.

George had a huge decision to make, take the low offer and adjust downward the plans that he and Susan were looking forward to, or, reject the offer and invest more years in building his business the right way for a successful sale in the future.  Not an easy decision considering a few days ago both he and Susan were envisioning travel and "grandkid time" becoming reality within the next few months.  As George is now an employee working hard to earn the balance of his reduced payout, and Susan is doing much of the grandkid time by herself, he came to understand the hard way that you can never start too soon in building your business the right way for a successful exit.

 Let us know if we can help you build the right way for a successful exit.

 

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Accelerating the Transferable Value of Your Business

At the heart of an effective and successful plan for a business owner's exit is what we call "transferable value."  The transferable value being the value of your business apart from you the owner or what someone is willing to pay for the business without you.  

Following are a few sample questions for gauging the strength of your business transferable value:

"Can I really take a vacation from my business?  If so, for how long?  Would I be on the phone or my computer much of the time I'm away?"

"Do we have the right incentives in place to motivate, reward, and retain key employees even through a transition of the business?"

"Do we have a management team in place to take us to the next-level of growth?"

"Are our operating systems strong and could they support future growth?"

"When was the last time we had either a legal or HR audit?"

"Do we have recurring revenue?"

And, because potential buyers are buying future cash flow, right at the top of the list of questions would be, "How strong is our EBITDA or free cash flow and do we have a plan for growth?".  

The following sample scenario depicts the impact of strong cash flow and revenue growth on business value:

Today: 

Revenue = $ 2,500,000

EBITDA =   $ 250,000 (10%)

Biz Value Multiple of EBITDA = 4 X

Business Value = $ 1,000,000

End of Year 5 with Revenue and EBITDA growing at 10% (8% after inflation)

Revenue = $ 3,673,000

EBITDA = $   367,000 (10%)

Biz Value Multiple of EBITDA =  6X

Business Value = $ 2,200,000

NOTE:  The multiples used are for illustration purposes only.  For a business of this size, multiples are often lower.

So, if your post-business or legacy plans are contingent upon the future sale of your business to a potential buyer, the following are some action steps you should take as soon as possible to know how to increase cash flow and growth:

  1. Get an accurate current valuation of your business.  Find out what your business is really worth now.  Meaningful planning requires accurate data.
  2. Get a personal financial needs analysis.  Find out how much you will need to do all you want to do post-exit.  Not back of the envelope but legit financial plan that considers taxes, cash flow, goals, etc..  
  3. Perform a financial GAP Analysis.  Subtract what you have (personal assets and business value) from what you will need.  If there is a GAP, it will represent the amount your largest asset will need to increase in value, unless you have other assets with greater growth potential.
  4. Assess your value drivers and design a plan to accelerate value and growth.

It takes financial resources and planning to accelerate the value of your business, so the more time you have to budget, plan, and execute the plan the better your chances of a successful exit or transition.  Contact us for help with accelerating the value of your business and anything mentioned in this post.

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The owner of the business I work for wants to sell it to me. Should I buy it?

Our engagements are mostly with business owners who want to design and implement a plan for their eventual transition/exit from the business.  However, on occasion, we are contacted not by the business owner, but by an inside employee who has questions about potential ownership, or their future in a closely-held business.  Insiders typically include key employees, a child of the business owner, or a co-owner. 

 These insiders have questions such as...

  • "The owner has approached me about buying this business...how do I make a good decision?"
  • "I would like to own this business eventually, or at least part of it...how do I approach the owner and have that conversation?  What should I do if they are not willing to include me as an equity partner?"
  • "I have no idea what the owner's plan for succession is, and I'm concerned how it would impact my future...how do I think through that issue?"
  • "I have worked for a family business as a non-family employee...and I want to be an owner of the business...what do I need to think through?"

These questions and others like them are important, as buying or investing in a business is a huge decision.  If a strategic or financial buyer were to express interest in purchasing a particular business, they would insist on a due diligence process for review of financial statements, operations, management team, legal contracts, etc.  They need to consider the risk of purchasing the business, and its future growth potential.

Insider buyers need to conduct their own due diligence to determine if the business is indeed a worthwhile investment.  They also need to give serious and thoughtful consideration to what it means to own a business, whether or not they have the temperament for owning the risk, and whether or not the purchase would align with their personal family, financial, values-based, and legacy goals.

Regarding the issues of not knowing what the succession plan of a sole owner is, and your future ownership potential working in a closely-held family business, you will at some point need to discuss these issues with the owner or owners.  And, although all situations have differing dynamics that impact the timing of such conversations, typically it is helpful to all parties to have these conversations sooner rather than later.

If you're being presented with the opportunity to purchase the business you work in and need help thinking through it contact us.

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Exiting on your terms and conditions requires planning with accurate data

An initial and essential step in preparing for your eventual exit from your business successfully is a personal financial GAP Analysis calculating how much money you will need to attain your goals, for the rest of your life post-exit.

Too often business owners rely on a “back of the envelope” or subjective estimate of business value for this calculation, which results in planning that is not helpful and lacks integrity.  And, as the business is often the largest asset in an owner's investment portfolio, it is particularly important.  Meaningful planning requires accurate data.  

For example,  Tom and Jane had $500,000 in retirement and brokerage accounts, personal real estate valued at $1 million, and business real estate valued at $500,000 for a total of $2 million. Tom's Financial Planner Sarah was creating a retirement needs analysis for Tom and his wife and requested Tom provide a value for his business. Tom got back to Sarah with a "rough guess" of $4 million for the business, bringing Tom and Jane's asset total to $6 million.  After performing the needs analysis, Sarah informed Tom and Jane that they "did not have a financial GAP".  Tom and Jane were excited to hear, that based on the value of their business and personal assets, they should be able to realize all of their post-business exit goals!

But wait, what if the "rough guess" on the business valuation Tom provided Sarah was a lot more than the actual value of the business when Tom was "ready to sell and exit"?  What if, when a potential strategic or financial buyer performed their due diligence, Tom and Jane learned that the buyers were only willing to pay $2.5 million due to weak value drivers such as lacking a strong management team, low profitability, and deficient operating systems?  And, the $2.5 million offer was based on a three-year earnout for Tom, meaning he'd need to remain as an employee for that period.  Clearly, this would have a negative impact on Tom and Jane and they would then need to adjust their goals.  Also, in this situation, Tom would not be in control of his exit.

Tom and Jane could have experienced much more control in the years leading up to, and when Tom became "ready to exit" if they had planned with accurate data.  They would have also greatly increased their chances of attaining all of their post exit goals.  

Getting an accurate estimate of value, sooner rather than later, could end up being the difference between attaining or not attaining your post-business goals.  Contact us if you need help in taking action with an  Estimate of Value.

 

 

 

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