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:
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:
- Get an accurate current valuation of your business. Find out what your business is really worth now. Meaningful planning requires accurate data.
- 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..
- 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.
- 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.