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 or sellable 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 a 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 the strength of 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 today for help with accelerating the value of your business and planning your eventual exit. email@ennislp.com | 301-859-0860 | ennislp.com

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Exit Planning and Marathon Runners

“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor.  We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything.  We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning? 

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it.  With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

How Exit Planners Help Businesses Get In Shape

            Exit planners are a bit like personal trainers.  What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale.  A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

            A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

            Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments.  Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2.  The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

            Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve.  They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1.         Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning.  It's a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.  

2.         Set simple goals - Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning.  Three simple, easily achievable goals are:

a.     Determine how much money you need, or want, for retirement

b.     Decide when you want to leave your business

c.     Identify the person, or persons, to whom you want to transfer the business

3.         Start slowly – you can't rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4.         Stay steady and consistent - sticking with the plan and taking small, consistent steps will pay off.  Make time in your busy schedule to do the essential steps.  

5.         Measure progress - in order to ensure you're making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.  

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow - starting your exit planning program now will maximize your quality of life in the future.

Get started today with our FREE Exit Readiness Assessment.

Wealth Management for Small Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business into your overall plan for managing your wealth.

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

• Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?

• Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.

• A financial needs and gap analysis with an accurate valuation (not back of the envelope - meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?

• Personal risk management including asset protection, insurance planning, tax planning.

• A current estate plan — a business owner cannot do exit planning without doing estate planning.

• A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.

• An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Contact us at email@ennislp.com for assistance in building sellable business value or planning your eventual exit. Please also consider investing 15 minutes in completing our FREE Exit Readiness Assessment. We do not ask for confidential information.

Aligning Employee Incentive Plans with Owner Goals

Sarah wanted to exit in 5 years and had learned through planning and analysis led by her exit planner what “her number” was, as well as an objective estimate of the value for her business. She was pleasantly surprised to find that the financial gap for making her post-business dreams happen is not insurmountable. At the same time, she is aware that growing the value of the business (Sarah’s largest asset) will be necessary to close the existing gap.

With her newly designed comprehensive exit plan, and a decision to exit with a future sale to an unidentified strategic buyer, Sarah now has a crystal clear picture of what is needed to maximize and preserve the value of the business and attain her post-exit goals. Following are a few of the key value-driver action items identified during the analysis of Sarah’s situation:

• Strengthen Management Team

• Improve Financial Performance

• Establish and document a Growth Plan

• Increase Recurring Revenue

Now that Sarah knows how much she needs to grow the value of the business within her planned time frame for an exit, and what needs to happen to facilitate the required growth, she needs to take action in aligning employee incentive compensation with her strategic goals. For example, there is a need to increase EBITDA so she will implement an added incentive for the Chief Operating Officer that is tied to profitability. Currently, all that’s in place is a year-end bonus simply based on Sarah’s generous nature and whether or not they “had a good year.” She will do likewise for other employees who help drive the performance needed to accomplish her goals.

Sarah also now knows that it will be essential for these key employees to stick around during, and after, a sale transaction if the transaction is to be successful. Key employees who are not incentivized to remain through the owner's exit can seriously impact the owner proceeds at the sale and even destroy the deal.  

So, what does Sarah do? Stock Option Plan?  Phantom Stock Plan? Restricted Stock? Cash-Based plan? Stay Bonus? What plan or plans will be the most effective, easiest to implement, and cost-efficient?  Incentive planning can be complicated requiring deep expertise in statutory and technical requirements, tax planning, and other areas.   The Certified Exit Planner has made sure that the right experts have been involved and coordinated in designing and implementing Sarah’s new incentive plan, and so she is quite confident in the final plan.

In summary, be intentional in aligning your employee incentive compensation plans with your strategic owner-based goals for growth and exit, and get the needed expertise on your advisor team to help design and implement the plan. Effective incentive planning can play a key role in helping you attain exit goals within your desired exit time frame.

Contact us today for an exploratory conversation if you want to exit within the next 10 years. Don’t wait until you feel pressure to leave your business to begin planning. Plan now.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Know The Value Of Your Business

The business is often the largest asset in a small business owner’s overall investment portfolio. And, as a result, they typically see the future value of the business as playing a key role in retirement or whatever they decide to do next after the business. A critical and foundational element to designing and creating an effective exit plan would be what we refer to as an “accurate financial gap analysis”. Simply put, this is a calculation subtracting the value of all current assets (including the business) from the amount needed for financial security or post-exit goals. If there is a significant “financial gap”, then it will usually need to be filled by increasing the value of the largest asset, the business.

The “fair market value” of a business is the amount agreed upon by a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, with both parties having knowledge of the relevant facts. And, so as a business owner, you may have the thought or question as to why even bother trying to value the business until a buyer comes along. Why not just wait and see what they offer? The following are some quick responses to that understandable question:

• In planning for the future and how much you will need, you need to know the value of current assets to perform the calculation. The point here is to obtain the best estimate based on financial analysis of the business and current market conditions for a meaningful gap analysis.

• If in performing a financial gap analysis, you learn that there is indeed a gap to be made up by increasing the value of the business, it will be important for you to know the real value now and what you will need to do in order to maximize sellable value to attain your goals.

• If you receive an offer at the deal table and have not obtained a prior estimate of value from a valuation specialist, you will not be in your strongest position for negotiations. As a result, you may experience doubts during the negotiation, and regrets if the deal actually goes through.

These are just a few reasons to know the value of your business. There are others. We like to say, “Don’t wait until you feel pressure to begin planning”. If you wait until you’re ready to exit to obtain an objective analysis of the value of your business and perform an accurate financial gap analysis, you may find that you’re nowhere near ready to leave.

Don’t wait until you feel pressure to leave your business to begin planning. Get started today in completing our 15-minute exit readiness assessment, and receive a 12-page report with scores in 4 key planning areas. We do not ask for confidential information.

The Most Common Reasons To Grow Through Acquisition

Jim has done all he can to grow his business organically, however, growth in both sales and profit have come to a screeching halt. He remains confident, based on research, in his market, and he has taken countless steps to reduce costs to improve the bottom line. So, with his goals for growth and increasing business value being greater than what he’s currently realizing, Jim is now wondering if external growth through acquisition makes the most sense.

David Braun, in his book Successful Acquisitions, A Proven Plan for Strategic Growth, suggests that Jim, and any owner considering growth through acquisition, should consider the following “ten most common reasons to acquire”.

1. Increase top-line revenue.

2. Expand in a declining market.

3. Reverse slippage in market share.

4. Follow your customers.

5. Leverage technologies.

6. Consolidate.

7. Stabilize financials.

8. Expand your customer base.

9. Add talent.

10. Get defensive.

We highly recommend David’s book for anyone considering acquisition as an external growth strategy, and please contact us if we can be of assistance with your organic growth or decision as to which growth path you should choose.

Invest 15 minutes and take our FREE Exit Readiness Survey HERE. We do not request any confidential information.

301-859-0860 | email@ennislp.com

What Is A "Stay Bonus" And How Is It Helpful?

Simply put, a Stay Bonus is an amount of money paid to “key” and/or “important” employees to prevent them from leaving when an owner either voluntarily (i.e, sale to third-party) or involuntarily (death or disability) exits the business.

Lifetime Stay Bonus example: An owner is approached with an attractive offer by a potential Private Equity buyer. The selling owner is excited about the offer and wants to move ahead with the proposed deal. As the buyer’s due diligence process is implemented, the key employees, who have not been incented to remain during transition periods, are all getting “nervous” regarding the uncertainty of their future with the business. One actually leaves and the others are “looking around”. If the selling owner had implemented a Stay Bonus prior to a potential sale it could alleviate this potential deal-killer.

Stay Bonus Upon Death example: In a meeting with a client and her estate planning attorney, the attorney was recounting the story of a business owner who recently passed away and how his passing impacted the family and business. Of course it was emotionally agonizing for the owner’s spouse and family, but what compounded the pain of the situation was there nothing in place to keep key employees in place to continue to run the business. Hence, key employees left and so did customers and the value of the business (which the owner’s wife was depending on) decreased significantly. A bonus that had been planned and structured to retain key employees during this time would have saved the family, the employees, and the customers from much pain and uncertainty.

Key considerations:

• Plans designed for a short period of time must provide a meaningful payout in a short period of time if the business is sold.

• Keeping key employees is almost always necessary for the business to be sold at a maximum sale price.

• The benefit should be greater when the business is actually sold while more affordable when a potential sale went through due diligence but did not sell.

• Key employees are often asked to do even more during transition periods than what their regular job description calls for.

• As all cash sales to third-parties are the exception, owners are often exposed to post-sale financial risk that can be increased with departing or unmotivated key employees.

Invest 15 minutes and get our FREE Exit Readiness Assessment HERE. We do not ask for confidential information.

"I'm Not Ready to Sell My Business and Retire..."

In my past life, when working in the financial services/wealth management industry, we helped individuals and families create financial plans for their goals such as college education or retirement.  It was very unusual to have a conversation with a client or prospective client who did not already understand that the sooner they began planning the better chance they would have in achieving their goals. They seemed to "get it" that planning, building, and saving for their goal(s) would take time and they could not simply begin planning when suddenly they were ready to send the kids to school or retire from their job.  For example, when encouraging someone to get started saving for retirement as soon as possible, we did not often hear, "I'm not ready to retire yet."

Interestingly, it is not unusual to have a business owner respond to inquiries about their exit and legacy with, "I'm not ready to sell my business", or, "I'm not ready to leave my business and retire".  The inference being, that planning isn't needed until they are actually ready to leave the business (Or, maybe we simply did a poor job describing what we do...as we do not sell businesses).  As this conversation continues, it becomes clear this owner is assuming they will be able to sell their business when they want and for the money they want, and that any planning involved really only amounts to some legal stuff regarding the sales transaction.  These are very faulty assumptions.

For most small business owners, the future business value will play a key role in their retirement planning, financial security for their family, and their desired legacy.  Like an investment portfolio of stocks, bonds, and mutual funds, there are specific things that can be done to maximize value and minimize risk but each takes time (often years) and financial resources that need to be budgeted and planned for.  But because a small privately-held business is typically not as liquid as financial assets in an investment portfolio, long-term planning can be even more imperative. Particularly, if your desire is to sell to insiders or children.

Is your business the largest asset in your investment portfolio?  Do you know what you will need your business to be worth in the future, what it's really worth now, and a plan to increase its value?  Do you have a long-term planning perspective on what might possibly be the largest and most impactful financial transaction of your life?

Don't wait until you're "ready to retire" to begin planning your business exit or you won't be ready.  Instead, have the same long-term perspective in planning your exit as you do in making contributions to your 401k/retirement plans.  

Invest 15 minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Using Cybersecurity to Improve Your Company’s Valuation

Thanks to increasing reliance on computers, data, social media, programs, and networks, businesses all over the world are at a greater risk of a cyberattack or data breach. Companies have to fend off malware, DDoS, and phishing attacks at unprecedented levels. Cyberattacks have become so common that the cost of managing cybersecurity risks has become more of an investment than an expense. Consequently, one of the hidden costs of a cyberattack is how it affects the value of your company.

Cybercriminals, like water, find the path of least resistance. Investing in cybersecurity best practices, including a layered security strategy will reduce the risk of an attack. Stepping up your cybersecurity game will, in turn, enhance your market position and add tremendous value to your business. From a valuation perspective, strong cybersecurity means less risk for potential buyers and future investors. Cybersecurity diligence is particularly important for business executives who are looking to sell or are on the verge of selling.

Add Value to Your Company with Better Cybersecurity

Cybersecurity has become a necessity for every business out there, whether they offer products or services. Cybersecurity is rapidly becoming a trend in company valuations. All the factors that go into the value of the company including data operations, assets, customer records, intellectual property, employee information, marketing tactics, etc. are all vulnerable to cyberattacks. Demonstrating cybersecurity strength and integrity contributes to a company’s value.

As you can see, improving your company’s cybersecurity stature will fetch you a better price when it’s time to sell. Here are a few ways to secure your business and improve its value.

Risk Assessment

Cybersecurity risk is the likelihood of reputational or financial loss from a cyberattack or a data breach. A cybersecurity risk assessment is essential to a company’s risk management strategy and data protection efforts. Assessing risks and vulnerabilities can help you understand, manage, control, and mitigate cyber threats across your business.

Network Encryption

Data theft, tampering, technical failure, eavesdropping, etc. have all become commonplace in data networks. Securing network transmitted data against cyberattacks and data breaches is imperative for businesses. Only encryption can make sure that your company data is protected while in transit across data networks and links.

Network encryption makes data unreadable by anyone who is not explicitly allowed to access the information. A VPN is one of the most effective encryption tools. It creates a secure tunnel between your devices and the Internet, protecting your data from snooping. A VPN can also be downloaded in simple steps.

Layered Defence Strategy

In today’s dynamic digital environment, having a cybersecurity defense strategy can help businesses strengthen their resilience to cyberthreats. This strategy employs a series of layered defensive mechanisms including antimalware and network security controls such as a firewall to protect your online presence.

An emerging trend in the business world is the use of cybersecurity in company valuation. Organizations must strive to improve their cybersecurity position and increase their value. But with the cyber threat landscape evolving at a faster rate than companies can keep up, this is easier said than done. Risk assessment, network encryption, and adopting a layered cybersecurity strategy are some of the steps business leaders can take to improve digital security and add value to their companies.

Chris Jones is the resident tech expert and managing director of #TurnOnVPN. #TurnOnVPN is an activist group whose mission is to promote free and unimpeded internet for all. We take part in numerous online events to advocate for a safe, secure, and censor-free Internet. Learn more at www.turnonvpn.org/blog/.

Invest 15 minutes and take our FREE Exit Readiness Assessment.

5 Ways To Get Your Business To Run Without You

Some owners focus on growing their profits, while others are obsessed with sales goals. Have you ever considered making it your primary goal to set up your business so that it can thrive and grow without you?

A business not dependent on its owner is the ultimate asset to own. It allows you complete control over your time so that you can choose the projects you get involved in and the vacations you take. When it comes to getting out, a business independent of its owner is worth a lot more than an owner-dependent company.

Here are five ways to set up your business so that it can succeed without you.

1. Give Them A Stake In The Outcome 

Jack Stack, the author of The Great Game of Business and A Stake In The Outcome wrote the book on creating an ownership culture inside your company: you are transparent about your financial results and you allow employees to participate in your financial success. This results in employees who act like owners when you’re not around.

2. Get Them To Walk In Your Shoes

If you’re not quite comfortable opening up the books to your employees, consider a simple management technique where you respond to every question your staff bring you with the same answer, “If you owned the company, what would you do?” By forcing your employees to walk in your shoes, you get them thinking about their question as you would and it builds the habit of starting to think like an owner. Pretty soon, employees are able to solve their own problems.

3. Vet Your Offerings

Identify the products and services which require your personal involvement in either making, delivering or selling them. Make a list of everything you sell and score each on a scale of 0 to 10 on how easy they are to teach an employee to handle. Assign a 10 to offerings that are easy to teach employees and give a lower score to anything that requires your personal attention. Commit to stopping to sell the lowest scoring product or service on your list. Repeat this exercise every quarter.

4. Create Automatic Customers

Are you the company’s best salesperson? If so, you’ll need to fire yourself as your company’s rainmaker in order to get it to run without you. One way to do this is to create a recurring revenue business model where customers buy from you automatically. Consider creating a service contract with your customers that offers to fulfill one of their ongoing needs on a regular basis.

5. Write An Instruction Manual For Your Business

Finally, make sure your company comes with instructions included. Write an employee manual or what MBA-types called Standard Operating Procedures (SOPs). These are a set of rules employees can follow for repetitive tasks in your company. This will ensure employees have a rulebook they can follow when you’re not around, and, when an employee leaves, you can quickly swap them out with a replacement to take on duties of the job.

You-proofing your business has enormous benefits. It will allow you to create a company and have a life. Your business will be free to scale up because it is no longer dependent on you, its bottleneck. Best of all, it will be worth a lot more to a buyer whenever you are ready to sell.

Take our Free ExitMap Readiness Assessment.  You could also visit exitreadiness.com for Online Learning and Education.

Survive and Advance

In 1983, the NC State Wolfpack, coached by Jim Valvano, “survived and advanced” during March Madness by winning nine must-win games in a row (seven of which they were losing in the final minute) and having one of the most exciting runs to victory any team has ever experienced. On their unlikely journey, they had to beat Michael Jordan and three-time National Player of the Year Ralph Sampson. And then, this team that barely made it into the tournament now had to go up against “Phi Slama Jama”….the No. 1 team in the nation…Houston. A team loaded with talent including NBA Top 50 all-time players Hakeem Olajuwon and Clyde Drexler. Throughout this journey, their leader “Coach Jimmy V” consistently and passionately stated his mantra, “Survive and Advance!”. They indeed did survive and advance, as NC State, one of the biggest underdogs ever, went onto win the game that is considered by many to be the best college basketball game in history.

As a business owner in the midst of the Covid-19 crisis, you need to lead in both surviving and advancing. The normal course of life for you as an owner includes the ongoing challenges of increasing sales and growth of revenue and profitability, staffing decisions, cash flow and debt management, risk management, just to name a few. In the midst of this crisis, these routine challenges become even more intensified and worrisome as you do all you can to simply “survive”. And, the key to your survival will be a vigilant approach to cash flow and debt management. To assist you with staying on top of that crucial survival task we have created a Cash Flow Management Spreadsheet that you can access for free on our homepage along with a video tutorial.

This crisis will end at some point (hopefully soon), and life as your business has known it may need to change its mission, purpose, products, and product delivery. Some businesses simply will not be able to do “business as usual” going forward as the behaviors, desires, and needs of your customers may have changed as a result of the crisis. The owners who understand that possibility and begin to plan now will have the best chance of surviving, and also “advancing” and thriving in the future.

Any thought of “strategic planning” for the future currently can result in even more sleepless nights —“If we don’t do everything to survive today, there may not be a tomorrow!!!”. And certainly, there is truth in that. For some businesses, simply surviving will be enough when competitors are not able to make it through. However, a visionary leader will not leave that possibility to “chance” and will take the initiative to plan now and be more in control of future outcomes. There is a need for a “Level 5” (Jim Collins - Good to Great) leadership that can lead through the daily burdens while simultaneously planning for the future and the overall good of the organization. You would be wise to act now in adjusting, where needed, your strategy for the future.

This “strategy renovation” does not need to be a long and complex process. Following are areas that you could address with a measured investment of time while continuing to stay on top of crisis management:

• Forecast Future Products. Same? Add? Remove?

• Team. Who will be the key people needed to survive and thrive in the future?

• Markets. What customer segments will we market to in the future? Same? Different?

• Competitors. Who will be our competitors? Same? Different?

• SWOT Analysis. Strengths, Weaknesses, Opportunities, Threats.

• Goals. What should be our 3 big strategic goals coming out of the crisis?

• Financial Forecast. What do we project for sales, expenses, and profit over the next few years?

As Jimmy V and his squad survived, they also advanced. If you need any assistance in renovating your strategy for either survival or future advancement, please contact us at either 301-859-0860 or email@ennislp.com. We want to help you survive and advance.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Creating Business Value Through Your Key Employees

A key driver of the value of your business will be how much the business does or does not run through you the owner. The more essential you are to the business, the less value you can expect when you leave. It is actually your key employees and their involvement in the business that creates value. It is not an exaggeration to state that the future value of your business, and the level of success you realize when exiting, is largely linked to your key employees.

Let’s define which of your employees would qualify as a “key employee”. Employees that are key to your business success take initiative in their work, they want to see the business grow and prosper, they embrace challenges, are exceptionally skilled and knowledgable, and demonstrate intentionality toward personal and professional growth. Because they are on your team your business is thriving, and if they weren’t “on the bus” your business would suffer significantly. You would realize great pain if they were to leave, and key employees can be easy to identify as they typically act like owners of the business.

When you consider what will be critical for building the value of your business, a key value driver is hiring, motivating and retaining your key employees. Following are common elements of impactful plans for incenting key employees to build and remain with the business:

• Provide financial awards that are meaningful and attractive.

• The plan is specific as to the expected performance of the key employee.

• The plan is structured to build the value of the business and align with the growth and exit goals of the owner.

• Plan rewards are vested-payments tied to the tenure of the employee facilitating retention of the employee. Often referred to as “Golden-Handcuffs”.

• The plan must be in writing and clearly communicated to the employee.

Then, there is the decision as to whether to install a plan that is cash-based or equity-based, or a combination of both. Too often owners, due to their generous nature, offer an equity-based plan without thinking through the potential ramifications. For example:

• Provisions for buying the stock back from the key employee if things don’t work out as expected or hoped for.

• A method for valuing the equity interest/shares in the case of a repurchase.

• Offering stock to an employee when a cash bonus would have been sufficient.

• Not having an understanding of the substantial rights a minority shareholder has in the business.

• Awarding equity to an employee, who at yesterday’s size of the business, was considered key, but now at today’s level (i.e., three times the size) they are more of a detriment to growth than a key employee.

So, there is much to think through when it comes to effectively implementing employee incentive plans. And, you would be wise to get expert advice prior to moving forward as you will want to make well-informed and confident decisions pertaining to timing, structure, tax planning, and the type or types of plans to install. To obtain an initial idea as to whether you should consider a cash or equity-based plan, the professionals at VisionLink have created a decision-tree tool that is quite helpful.

Hiring, motivating and retaining key employees is just one of the many key planning areas for building sellable business value and a successful exit. Contact us today to learn more about how we can help you in designing and implementing your comprehensive exit plan. You can get started today with our FREE Exit Readiness Assessment.

Protect Business Value with a Legal Audit

When selling your business a potential buyer will conduct their own due diligence process assessing risk. Any risk exposure identified would result in a lower offer and perhaps the buyer walking away from the deal. And an area that can be easily overlooked by owners until it’s too late is the legal affairs of their business, including practices, procedures, and documents.

We have found that owners can assume that if they have legal documents in place the documents are adequate indefinitely when in actuality they seldom are. Due to changes in the law, business relationships (i.e, vendors; suppliers), or changing goals of the owner, documents can become ineffective, outdated, or even damaging. This can also be true for practices and procedures that have legal implications and potential liability, with employment practices and procedures right at the top of the list.

We recommend that business owners have a business attorney perform an initial “legal audit” years in advance of when the owner plans to sell their business. The initial legal audit should include a thorough review of basic corporate documents, all operating documents, and ongoing policies and procedures, followed each year with a review. Again, if you’re planning to sell at some point in the future, the potential buyer(s) will certainly do a legal audit as they conduct their due diligence process, and they will not want to acquire your business if it’s loaded with risk.

You will end up minimizing stress as well as legal fees (and significantly increase your chances for a successful transaction) if you prepare well ahead of time in a more measured way, rather than having to do a mad scramble during negotiations. Protect your business value with a legal audit.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Creating Attractive Business Value with Operational Excellence

It’s estimated that there are around 9 million Baby Boomer business owners. Each of them will eventually be exiting their business. For the large percentage of those owner-operators who define a “successful” exit as getting top dollar for their business, how do they actually realize that goal?

Potential buyers look at a number of indicators when searching for a business, in order to get the assurance that their investment is a good one - especially in an industry that has a large field of competitors in the same market.

So, what about you and your business? What differentiates you from your competitors in the same market? What do you have that your competitors don’t have, that makes you attractive to potential buyers now or in the future?

Having attractive EBITA is important and a good start, but this may not be enough to secure top dollar. For most potential buyers, there has to be more substance to your business to make it stand out from others. Buyers want to see the overall value of your business and whether it’s sustainable after you leave. This is especially true when they need to rely on the existing leadership team. So how do you stand out from other potential buyout targets? How do you build value in your company now?

The answer is simple, and easier to achieve than you may think. You achieve it by implementing a proven and practical operating system, one that incrementally strengthens your business in every aspect of your organization. EOS®, the Entrepreneurial Operating System, does exactly that for your business. When faithfully implemented and sustained by the leadership team, operational excellence is obtained and is self-sustaining. Healthy year-after-year growth is achieved. 

EOS® addresses an organization’s key aspects, called The Six Key Components™. They are Vision, People, Data, Issues, Process, and Traction. Combined with the EOS time-tested tools, guiding principles, and disciplines, this EOS Model™ becomes the means of achieving operational excellence. EOS is used by thousands of businesses to obtain better control, better balance, better focus, more company-wide excitement, and more profitability.

When a potential buyer of your company clearly sees these things in your business, you have excellent leverage and are in a better position to have a successful exit after taking all the other steps in your exit plan. To learn more, contact us at ENNIS Legacy Partners today.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations. ———————————————————————

Robert "Bo" Lotinsky has decades of combined leadership, management and results-oriented experience in a variety of sectors including manufacturing, non-profits, telecommunications, publishing, internet start-ups, and construction. Bo developed a passion for operational excellence in his first job with FMC Corporation’s Material Handling Division. Bo transitioned into start-up and mid-sized organizations for the excitement and challenge of seeing them grow more quickly and successfully.

The Hidden Downside Of This Common Management Idea

Cross selling new products and services to your existing customers may be a great marketing strategy, but if your goal is to increase the value of your business, the added revenue may do nothing for your company’s value – and may even lower it.

In order to be acquired for a premium, consider committing to a product, service, or a bundle that does one thing well. Your aim should be to make that offering so irresistible, that an acquirer will stop at nothing to get their hands on it. This focus will help you build a team around your product or service and ultimately make your company a whole lot more attractive when it comes time to sell.

However, most companies do the opposite. They take their initial success and water it down by cross-selling additional products, leveraging their relationship with their customers to sell them merely good offerings on the back of their great product or service. The problem with wandering too far a field is that while add on products may increase your revenue, they decrease your attractiveness to a strategic acquirer. Like being asked to buy a cable package of hundreds of channels when all you want is a few, acquirers don’t like buying things they will not use and therefore often walk away from a deal where a great product has been watered down with dozens of less attractive products or service lines.

How Stelligent Lost Its Focus (and found it again)

For example, take a look at Stelligent, a company in the business of helping help large enterprises automate their software delivery process. There was a time when big companies used to install their software deep, deep into operations – but the emergence of ‘The Cloud’ changed that. Employees across the globe now get access to the software they use anywhere they have access to a web browser.

Just as you might rent an apartment in a building, software developers pick one of the big cloud service providers like Microsoft Azure, Google Cloud, or Amazon Web Services (AWS) to rent compute, storage, database, and networking resources to run their software systems. Since Azure, Google, and AWS all take a different approach to hosting, an entire industry has been created to help developers configure their software for the cloud service provider they pick.

Paul Duvall, co-founder of Stelligent, is one of the pioneers of this industry called DevOps – which is a set of organizational, culture, process, and tooling practices that accelerate effective feedback between end users to improve the value of the software that's being delivered . Duvall started Stelligent in 2007 with his then silent partner Rob Daly. The goal was to help developers accelerate how quickly they could bring their software to market.

Stelligent was a typical consulting company, selling the time of the engineers Duvall hired on contract as his business required them.

By 2012, Stelligent had a half dozen contract workers and a few employees hovered around one million in annual revenue, as project demand ebbed and flowed. Duvall felt he was running on a treadmill. Each new project Duvall won required him to build a whole new team. Around this time, Rob Daly – who had enjoyed success starting and growing other companies - encouraged Duvall to read the book Built To Sell, where Duvall especially found tips around specialization to be most valuable.

With a focus on shifting toward even more specialization, Duvall decided to go all in on AWS.

About a year later, in 2014, Daly then joined the team as its 5th employee and would transition to CEO throughout the course of the year becoming very influential in building a team of specialists focused on helping enterprise customers.

As time went by, Stelligent began earning a name for itself as the AWS specialists. As Amazon’s cloud provider service grew in popularity, so did demand for Stelligent’s services. Over the next three years, Stelligent blossomed into a multi-million-dollar business with 30 full-time employees.

By early 2017, Denver-based HOSTING Inc. saw how quickly AWS was growing and concluded that by acquiring Stelligent, they could leapfrog their competition and become a market leader in AWS almost overnight. Later that year, HOSTING acquired Stelligent for about double what a typical consulting company would hope to command for a similar-sized business (when comparing multiples around high-growth companies in the technology sector).

The story of Stelligent is a reminder why you should focus your limited resources on becoming so good in your niche that an acquirer reasons it would take too long – or cost too much – to compete.

Most small businesses with limited cash, can only afford to get that good at solving one problem for their customers. That kind of focus is the opposite of what most sales and marketing pundits preach but it may be the one thing that will make your company irresistible to an acquirer.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Run Your Private Company Like It’s Public

Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you’ll fetch more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping. 

Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online.  This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online.

Soon after, Blinds.com was born.

Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.com like an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock.

The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return.

By 2014, Blinds.com had grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billion in sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping -- made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com.

Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

"Why Should A Business Owner Build To Sell?": Interview with Author and Founder of The Value Builder System™ John Warrillow

A new client to our firm will first go through the essential first step in our process of clarifying their financial and values-based goals. As the owner’s goals are clearly established, it also becomes more apparent as to which exit route will best achieve their goals.

We recently had a client successfully sell their business to a key employee and one of their children, and another client sold to a third-party strategic buyer. A primary reason they were both able to leave successfully was that their businesses were sellable. The businesses had value apart from the owner, they were profitable with strong prospects for growth, and had other drivers of business value that were attractive and strong.

If you want to be in control with a number of options for your eventual exit, then right at the heart of your exit plan will be an emphasis on building the business the right way today. We very much enjoyed a conversation with John Warrillow, the Founder of The Value Builder System™ recently on the ExitReadiness® PODCAST discussing the importance of “building to sell”. You will be well served if you invest 50 minutes to listen in and learn from John’s personal experience as a successful entrepreneur and his analysis of over 40,000 businesses.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

3 Ways To Make Your Company More Valuable Than Your Industry Peers

Have you ever wondered what determines the value of your business?

Perhaps you’ve heard an industry rule of thumb and assumed that your company will be worth about the same as a similar size company in your industry. However, when we take a look at the data provided by The Value Builder System™, we’ve found there are eight factors that drive the value of your business, and they are all potentially more important than the industry you’re in.

Not convinced? Let’s look at Jill Nelson, who recently sold a majority interest in her $11 million telephone answering service, Ruby Receptionists, for $38.8 million.

That’s a lot of money for answering the phone on behalf of independent lawyers, contractors and plumbers across America.

To give you a sense of how high that valuation is, let’s look at some comparison data. At Value Builder, we’ve worked with more than 30,000 businesses in the last five years. Our clients start by completing their Value Builder questionnaire, which covers 35 questions that allow us to place an estimate of value on a company. The average value for companies starting with us is 3.6 times pre-tax profit and those who graduate our program with a Value Builder Score of 80+ (out of a possible 100) are getting an average of 6.3 times pre-tax profit.

When we isolate the administrative support industry that Ruby Receptionists operates in, the average multiple offered for these companies over the last five years is just 1.8 times pre-tax profit. 

Nelson, by contrast, sold the majority interest in Ruby Receptionists for more than 3 times revenue.

There were three factors that made Nelson’s business much more valuable than her industry peers, and they are the same things you can focus on to drive up the value of your company:

1.     Cultivate Your Point Of Differentiation

Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude they can simply set up shop as a competitor and win most of your price sensitive customers away by offering a temporary discount.

In the case of Ruby Receptionists, Nelson invested heavily in a technology that ensured that no matter when a client received a phone call, her technology would route that call to an available receptionist. Nelson’s competitors were mostly low-tech mom and pop businesses who often missed calls when there was a sudden surge of callers. Nelson’s technology could handle client surges because of the unique routing technology she had built that transferred calls efficiently across her network of receptionists.

Nelson’s acquirer, a private equity company called Updata Partners, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in.

2.     Recurring Revenue

Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.

In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts—perfect for making a buyer confident that her company has staying power.

3.     Customer Diversification

 In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers will balk if any one of your customers represents more than 15% of your revenue.

At the time of the acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could lose a client or two each month without skipping a beat, which is ideal for reassuring a hesitant buyer that your company’s revenue stream is bulletproof.

Nelson built a valuable company in a relatively unexciting, low-tech industry, proving that how you run your business is more important than the industry you’re in.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Did Microsoft Pay Too Much For LinkedIn?

Microsoft’s $26.2 billion acquisition of LinkedIn provides an illustrative example of a strategic acquisition – the type of sale that usually garners the most gain for the acquired company’s shareholders.

You may be wondering what a billion-dollar acquisition has to do with your business, but the very same reasons a strategic acquirer buys a $26 billion business holds true for the acquisition of a $2 million company.

The financial vs. strategic buyer

A financial buyer is buying the future stream of profits coming from your business, whereas the strategic buyer is buying your business for what it is worth in their hands. To simplify, a financial acquirer buys your business because they think they can sell more of your stuff, whereas a strategic buyer acquires your business because they think it will help them sell more of their stuff.

One might argue that Microsoft overpaid for LinkedIn given that LinkedIn only generated a few hundred million dollars in EBITDA last year, meaning the good folks in Redmond paid an astronomical multiple of LinkedIn’s earnings.

But earnings are not the only thing strategic acquirers care about when they go to make an acquisition.

 Microsoft‘s acquisition of LinkedIn is a classic example of a strategic acquisition. The Redmond-based technology giant has been undergoing a major transformation from being a software company focused on operating systems to a business concentrating on cloud-based software applications. Microsoft enjoys a dominant market share in the basic tools white-collar business people use to get their job done, but other software packages have begun to nip at the heels of their dominance in many product lines.

Take Microsoft Office for example. Many businesses use competitive offerings from Google and Apple. Even more companies cling to older versions of Microsoft Office software, even though Microsoft is keen to move everyone over to the cloud-based Office.

In purchasing LinkedIn, Microsoft saw an opportunity to suck data from LinkedIn into Microsoft’s cloud-based software applications, making them irresistible. Imagine you’re a sales person and you just landed a big meeting with a new prospect. You enter the appointment as a Microsoft Outlook event and suddenly the details of the event feature everything LinkedIn knows about your prospect.

 Now you can make small talk about where they went to school, the previous jobs they have held and know the scope of their current role – all without ever leaving Outlook.

Microsoft is betting this kind of integration across its platforms will compel more people to upgrade to the latest software applications. While your company is likely smaller than LinkedIn, the same thing that makes a giant buy another giant holds true for smaller businesses. To get the highest possible price for your business, remember that companies make strategic acquisitions because they want to sell more of their stuff.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

5 Ways To Package Your Service

If you’re a service provider, it can be difficult to separate the service from the provider. Your customers might demand you, which means you can’t scale your business beyond the number of hours you’re willing to work.

In the absence of a point of differentiation, offering generic services leads consumers to evaluate the people doing the work. Referring to your service in a generic way e.g. “graphic design services”, or “lawn care services”, means you’re lumping yourself in with the other providers of the same service.  A quick scan of your LinkedIn profile will reveal that you are likely an expert in your industry which means prospective customers will often demand you, rather than your underlings.

The secret to overcoming this dilemma is to “productize” your service. This involves marketing your service as is if it were a thing. When people start buying the thing, rather than the people providing it, you can grow well beyond the hours in your day. 

Proctor & Gamble is the granddaddy of product marketing, so grab a tube of Crest toothpaste and follow their process for productizing your service:

1.     Name it

Crest is the brand name and it is always written in the same font. Having a consistent name avoids the generic, commoditized category label of "toothpaste." Do you have a catchy name for your service?

2.    Write instructions for use

Crest gives customers instructions for best teeth cleaning results. If you want your service to feel more like a product, include instructions for getting the most out of your service.

3.    Provide a caution

The Crest bottle tells you that the product is “harmful if swallowed." Provide a caution label or a set of "terms and conditions" to explain things to avoid when using your service.

4.    Barcode it

The barcode includes pricing information. Publishing a price and being consistent will make your service seem more like a product.

5.    Copyright it

P&G includes a very small symbol on its bottle to make it clear the company is protecting its ideas. Do you Trademark the terms you use to describe your service?

 Productizing your service is the first step to separating your service from its provider and the key to getting your service company to run without you.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.