The Role of a Growth Strategy in Transferable Business Value
In this series, we’ve examined the elements (or Value Drivers) that build transferable value: the value of a company without the owner at the helm. This is the type of value buyers look and pay for. Today, we consider the multi-faceted growth strategy that most businesses require if owners are to sell or transfer their companies for the amount of cash they need and want for their post-business lives.
If a business owner's business has sufficient value and cash flow to yield financial security when they sell or transfer it, advisors don't need to focus on creating growth strategies. For most owners, however, formulating and executing a growth plan is at the core of their Exit Plans.
The growth plans Exit Planning Advisors create are designed to achieve one goal: to provide the amount of cash owners will need at their exits to attain both financial security and their other objectives. Whether you call it a “growth strategy,” a “business plan,” or a “budget,” the point is that to exit on their terms—including their chosen departure date—owners need a road map that describes what needs to happen, by when, and who is going to be accountable for achieving each task.
The time frame to achieve the growth needed begins today and ends on the owner's anticipated exit date.
I recently spoke with an investment banker, Hank, about his experience designing growth plans for owners’ Exit Plans. He relayed the following story.
“When I began working with Yolanda, the owner of Company ABC, to create her Exit Plan, we determined that she needed a company with $20 million in annual revenue to meet her Exit Goals. ABC had steadily improved revenue to $8 million, but profits were decreasing.”
Using $20 million in revenue as their target, Hank and Yolanda sat down to create a plan to grow revenue and profitability.
The Elements of the Growth Strategy for Company ABC included the following:
- A management restructure. Most growth plans for established companies include some level of restructuring at the management level. In the case of ABC, Yolanda was the only “manager,” and she had reached the limit of her ability to grow business revenue and cash flow.
“Our first task,” recalls Hank, “was to find, hire, and retain an entire management team, beginning with a well-experienced COO. Yolanda was hard working and incredibly capable, but limited in the skills and financial resources necessary to grow the company. We created a plan to reward the new COO with significant ownership in the company provided it grew as we planned.”
- A formal, annual budget. Once the new COO was on board, Yolanda and Hank worked with him to create an annual budget that assigned responsibilities to the rest of the newly hired managers, set timelines, and projected revenue and cash flow over a seven-year time frame. In writing, the plan summarized what needed to be done, by whom, and by what date, using bullet points and attached pro formas.
- Additional financing. With the company's financial ducks in a row, Yolanda and her COO were prepared to obtain the additional financing necessary to fund the anticipated growth of her capital-intensive company.
As a result, Company ABC blossomed: Its management team implemented state-of-the-art systems and achieved the goals Yolanda had set for it. Five years after meeting Hank, Yolanda sold the company, which had reached its revenue and cash flow objectives, for cash to a private equity fund.
Yolanda was integral to making company growth happen. She had built great customer and employee relationships as a foundation. But she also had the humility to know what she didn’t have (a plan!) and to bring in Hank, a knowledgeable advisor. Yolanda was also willing to change her role in the company for the sake of growth. Without that combination of Yolanda’s insight and Hank’s prompting and expertise, her company would have continued to drift along, and it's unlikely that she would have exited as successfully as she did.
Combining next-level management (the mother of all Value Drivers) with a written growth plan is, in our experience, a powerful one-two punch. With the Exit Planning Advisor's input and guidance, owners and top management can create a plan for how a company will achieve the owner’s goals. Without the input of experienced advisors, owners simply don’t know whom to turn to for advice on moving their company forward. As a result, their companies stagnate and their exits remain a wistful dream.
As we’ve tried to demonstrate in this series, creating and implementing an effective Exit Plan requires the efforts of a coordinated team of advisors. When it comes to helping an owner drive business growth (or other challenges), Exit Planners take a three-step approach:
- Recognize the challenge facing owners. (In this case, the need to accelerate growth.)
- Communicate the challenge to owners in a manner that (a) puts meeting the challenge in the context of their successful exits and (b) prompts them to take action.
- Recommend the appropriate professional advisor. That’s one purpose of creating a network of advisors.
As we hope Hank’s case study illustrates, creating and implementing growth plans for business owners is a vital element of shaping their successful exits.