Building Business Value

Submitted by John Brown on Mon, 02/09/2015 - 4:56pm
Image of a Business Report with Charts

According to a survey conducted by the Canadian Federation of Independent Business (CFIB), 89% of business owners indicated that it was very or somewhat important to them to rely on the proceeds of selling their businesses as a way to fund their retirement. These intentions, combined with the fact that 79% of small- and mid-sized business owners plan to exit their businesses within the next 10 years, strongly highlight the growing importance of enhancing business value. However, the challenge is that few organizations genuinely understand what actions they must take to achieve this goal.

The 89%

Boomer owners seldom exit their businesses without attaining financial security. They realize that the obvious path to financial security is to grow business value to the point at which a liquidity event nets them the money they need, but few genuinely understand what they need to do to achieve this goal.

Unfortunately, value building is also an area few advisors have experience or training to offer. Consequentially, businesses that top out at incremental, rather than substantial, growth rarely reach a value that enables owners to attain all of their financial and other goals.

The Role of Exit Planning

Every BEI Exit Plan includes a timeline that plots the value-building activities necessary to achieve an owner's financial goals by his or her chosen exit date. That timeline is created after the owner’s professional advisors assess the business owner’s current resources (especially business value and cash flow). This timeline illustrates exactly how much the business needs to grow in value to meet the owner’s income goal by the owner’s departure or exit date.

For example, a business owner may want to exit in five years with $250,000 of post-exit annual income. Her Advisor Team determines that, to achieve her goals, the value of her business must grow from $3 million to $4.5 million. They also determine that growing cash flow (or EBITDA) by $75,000 to $100,000 per year would create that value.

Then What?

The next Exit Planning step, and one many advisors don’t know how to take, is to assess the strength of the company’s Value Drivers, with the help of the owner and key management.

Value Drivers are the activities that create value in a company and their presence is evidence to others of value. We suggest that you concentrate on the fundamental business characteristics that buyers and private equity firms assess when they calculate business value.

Keep in mind that private equity firms and other buyers demand effective Value Drivers for the same reason that owners need them: to create sustainable, recurring, scalable and ever increasing cash flow.

Value Drivers

Value Drivers that private equity firms consider include:

  1. A stable, motivated management team that stays after owner leaves.
  2. Operating systems that improve sustainability of cash flows.
  3. A solid, diversified customer base.
  4. Recurring and sustainable revenue; resistant to “commoditization.”
  5. Good and improving cash flow.
  6. Scalability.
  7. A competitive advantage.
  8. A documented and proven growth strategy.
  9. Financial foresight and controls.
  10. Differentiated product or service, not a commodity.
  11. Significant, defensible market-share.
  12. Strong operating margins.

How Advisors Help Build Business Value

After reading this list, are you thinking, “I could never help a client with all this. This is outside of my expertise, and I have no time or desire to learn it”? You're absolutely right. No single advisor can tackle this entire list. But a team of advisors coordinated by an Exit Planning Advisor (i.e., you) can.

Exit Planning Advisor Teams engaged in value-building draw upon the skills of certain advisors in certain roles:

  • CPAs knowledgeable in using financial metrics and other evaluative tools.
  • Business consultants with both general and specific knowledge (e.g., compensation specialists, marketing consultants).
  • Attorneys to design incentive plans for management.
  • Financial planners and insurance professionals who offer funding solutions, and help establish financial goals and calculate investments return rates.

Building value is just one function of an Exit Planning Advisor Team. Team members are responsible for creating and implementing every facet of Exit Planning, from tax minimization to estate planning and lifetime planning.

Beyond the basics is the best part: the relationship between business owner and advisor. Growing an entrepreneurial business requires that business owners have access to people who can speak with them about basic decisions and who can weigh in with informed ideas. Such people are rarely to be found within the enterprise. Peter Drucker believed that those people are outsiders who constantly push to be certain that the growth needs of the business are met.

Developing long-term relationships with good clients, based on creating ever-improving businesses, is perhaps the most rewarding experience many of us have in the world of work: an experience that moves your clients into the elite 11%!



 Tags:

Are you ready to help your clients exit?

Have a question before getting started? Schedule a meeting with BEI or Contact Us

Schedule a Meeting to Discuss Exit Planning Solutions