Information & Registration: https://theforum-2018-09-25.eventbrite.com
Information & Registration: https://theforum-2018-09-25.eventbrite.com
If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.
Let’s call it “The Build vs. Buy Equation”.
At some point, every acquirer does the math and calculates how much it would cost to re-create what you’ve built. If an acquirer figures they could buy your business for less than they would spend on both the hard and soft costs of re-deploying their employees to build a competitive product, then they will be inclined to acquire yours. If they think it would be less costly to create it themselves, they are likely to choose to compete instead.
The key to ensuring that what you have is difficult to replicate is focusing on a single product or service and building on your competitive point of differentiation. When you create a product that is unique and pour all of your resources into continuing to differentiate it from the pack, you can dictate terms, because re-creating your business becomes harder the more you focus on one thing.
The worst strategy is to offer a wide range of services and products only loosely differentiated from others on the market. Any acquirer will rightly assume they can set up shop to compete with you by simply undercutting your prices for a period of time and driving you out of business.
C-Labs Focuses On Building an Irresistible Product
Chris Muench started C-Labs in 2008 to go after the burgeoning opportunities presented by the Internet-of-Things (IOT). He began by writing custom software applications that allowed one machine to talk to another. In 2014, he got the industrial giant TRUMPF International to acquire 30% of C-Labs, which gave him the cash to transform his service offering into a single product.
By the end of 2016, Muench’s product was showing early signs of gaining traction but C-Labs was running out of money.
In the end, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire an early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure check to buy it outright.
In other words, TRUMPF used The Build vs. Buy Equation and realized that buying C-Labs was cheaper than trying to reproduce it.
Selling too many undifferentiated products or services is a recipe for building a business that—if it is sellable at all—will trade at a discount to its industry peers. By contrast, the trick to getting a premium for your business is having a product or service that is irresistible to an acquirer, yet difficult for them to replicate.
To avoid eventually selling your business at a discount, GT Growth & Transition Strategies, LLC can help keep you on track to building a differentiated and more valuable business.
If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.
A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.
Obsessing Over Your Multiple
This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.
Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.
How Profitability Is Open to Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.
Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.
You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.
Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business. GT Growth & Transition Strategies, LLC can help you identify the “adjustments” that will bring added value to your business.
John McCann sold The Bolt Supply House to Lawson Products (NASDAQ: LAWS) at the end of 2017.
McCann’s strategy involved learning from the acquirers who knocked on his door. He invited would-be buyers into The Bolt Supply House and listened to what they had to say. He was not committed to selling, but instead wanted to know what they liked and what concerned them about his company.
One giant European conglomerate, for example, approached McCann about selling, but after a thorough evaluation, they backed out of a deal, worried about McCann’s central distribution system.
McCann thanked them for their time and set to work turning his distribution system into a masterpiece. Eventually, Lawson cited this as one of the many things that attracted them to The Bolt Supply House.
When it finally came time to sell, McCann commanded a premium, arguing that he had built a world-class company he knew would be a strategic gem for a lot of businesses. He ended up getting five competing offers for The Bolt Supply House and eventually sold to Lawson.
When a big sophisticated acquirer approaches you about selling, the temptation is to decline a meeting if you’re not ready to sell, but hearing what they have to say can be a great way to get some superb consulting, for free. The investment bankers and corporate development executives who lead acquisitions for big acquirers are often some of the smartest, most strategic executives in your industry and—provided you don’t get sucked into a prop deal—hearing how they view your business can be an inexpensive way to improve the value of your company.
If you need help handling and navigating these inquiries, or just continuing to build you company value, please contact Frank Mancieri, Chief Growth Advisor at GT Growth & Transition Strategies, (401) 651-1585, frank@gtGrowthcom.
If your goal is to grow your business fast, you need a positive cash flow cycle or the ability to raise money at a feverish pace. Anything less and you may quickly grow yourself out of business.
A positive cash flow cycle simply means you get paid before you have to pay others. A negative cash flow cycle is the direct opposite: you have pay out before your money comes in.
A lifestyle business with good margins can often get away with a negative cash flow cycle, but a growth-oriented business can’t, and it may quickly grow itself bankrupt.
Growing Yourself Bankrupt
To illustrate, take a look at the fatal decision made by Shelley Rogers, who decided to scale a business with a negative cash flow cycle. Rogers started Admincomm Warehousing to help companies recycle their old technology. Rogers purchased old phone systems and computer monitors for pennies on the dollar and sold them to recyclers who dismantled the technology down to its raw materials and sold off the base metals.
In the beginning, Rogers had a positive cash flow cycle. Admincomm would secure the rights to a lot of old gear and invite a group of Chinese recyclers to fly to Calgary to bid on the equipment. If they liked what they saw, the recyclers would be asked to pay in full before they flew home. Then Rogers would organize a shipping container to send the materials to China and pay her suppliers 30 to 60 days later.
In a world hungry for resources, the business model worked and Rogers built a nice lifestyle company with fat margins. That’s when she became aware of the environmental impact of the companies she was selling to as they poisoned the air in the developing world burning the plastic covers off computer gear to get at the base metals it contained. Rogers decided to scale up her operation and start recycling the equipment in her home country of Canada, where she could take advantage of a government program that would send her a check if she could prove she had recycled the equipment domestically.
Her new model required an investment in an expensive recycling machine and the adoption of a new cash model. She now had to buy the gear, recycle the materials and then wait to get her money from the government.
The faster she grew, the less cash she had. Eventually, the business failed.
Rogers Rises from the Ashes with a Positive Cash Flow Model
Rogers learned from the experience and built a new company in the same industry called TopFlight Assets Services. Instead of acquiring old technology, she sold much of it on consignment, allowing her to save cash. Rogers grew TopFlight into a successful enterprise, which she sold in 2013 for six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) to CSI Leasing, one of the largest equipment leasing companies in the world.
Rogers got a great multiple for her business in part because of her focus on cash flow. Many owner think cash flow means their profits on a Profit & Loss Statement. While profit is important, acquirers also care deeply about cash flow—the money your business makes (or needs) to run.
The reason is simple: when an acquirer buys your business, they will likely need to finance it. If your business needs constant infusions of cash, an acquirer will have to commit more money to your business. Since investors are all about getting a return on their money, the more they have to invest in your business, the higher the return they expect, forcing them to reduce the original price they pay you.
So, whether your goal is to scale or sell for a premium (or both), having a positive cash flow cycle is a prerequisite. If you have extensive growth plans or are struggling with cash flow due to existing growth, GT Growth can help you plan your cash flow and help you secure an adequate supply of cash.
Where do you sit on the doer vs. dealmaker continuum? On one hand, you have business owners who are really good operators. They have a plan, know their numbers and work that plan. They look for small improvements every day and hesitate to entertain new strategies because they know what works.
On the other end of the spectrum, you have the dealmakers. They quickly bore of the doing and are constantly on the prowl for the next big idea. They are always on the lookout for a business they can buy, a new concept they can negotiate the rights for or a partnership they can forge.
Some of the most successful entrepreneurs can be equally good at being both doers and dealmakers, and most business owners have a little bit of both personalities, with a tendency to tilt in one direction or the other. However, problems occur when you lean too far in one direction.
Let’s take for example, U.K.-based Jonathan Jay, a twenty-year veteran of the start-up world. Jay got his start publishing magazines, but quickly wanted out, and he sold his publishing company by the age of 27. He then started a coach-training business which competed with one other provider. His competitor ran into trouble and Jay decided to buy his business after less than a week of diligence. Jay then sold the combined entity for a seven-figure payday.
Bored after a week or two of retirement, Jay started a digital marketing company. He found client acquisition a challenge, so he partnered with a marketing guru who had a pre-existing following of customers. Jay gave his new partner 50% of his company in exchange for access to the marketing guru’s list, but he skimped on writing the partnership agreement because he was resentful of the legal bills he was paying to defend an unrelated claim.
Soon after merging, the partners fell out and Jay had to wrestle his shares back without the help of a formal partnership agreement. Unbowed by partnerships, he then found another distressed marketing agency to buy, which he did by assuming its debt and putting virtually nothing down. He put the business into bankruptcy after carving out the one piece that had value and merging it with his marketing company. Within a year of buying the business, he sold the combined entity for another seven-figure exit.
Jay’s story is exhausting. It’s a high-wire act of high-stakes negotiation, success, mistakes and eventual triumph. You can’t help but wonder if he would have been even more successful—and a lot less stressed—if he had been a little more of a doer and little less of a dealmaker.
Whether you are more dealmaker or doer, it’s worth asking yourself whether you’re tilting too far in one direction. As you find yourself swaying (or stuck) in one direction, you might seek the help of an outside advisor to help you stay on a more even plan. Contact me to help you build a plan and strategy, (401) 651-1585, or frank@GTgrowth.com.
A great business is bought, not sold, so, if you look too eager to sell your business, you’ll be negotiating on the back foot and look desperate—a recipe for a bad exit.
But, what if you really want to sell? Maybe you’ve got a new idea for a business you want to start or your health is suffering. Then what?
As with many things in life, the secret may be a simple tweak in your vocabulary. Instead of approaching an acquirer to see if they would be interested in buying your business, approach the same company with an offer to partner with them.
Entering into a partnership discussion with a would-be acquirer is a great way for them to discover your strategic assets, because most partnership discussions start with a summary of each company’s strengths and future objectives. As you reveal your aspirations to one another, a savvy buyer will often realize there is more to be gained from simply buying your business than partnering with it.
Facebook Buys Ozlo
For example, look at how Charles Jolley played the sale of Ozlo, the company he created to make a better digital assistant. The market for digital assistants is booming. Apple has Siri, Amazon has Alexa and the Google Home device now has Google Assistant built right in.
Jolley started Ozlo with the vision of building a better digital assistant. By 2016, he believed Ozlo had technology superior to that of Apple, Amazon or Google. Realizing his technology needed a big company to distribute it, he started to think about potential acquirers. He developed a long list, but instead of approaching them to buy Ozlo, he suggested they consider partnering with him to distribute Ozlo.
He met with many of the brand-name technology companies in Silicon Valley, including Facebook, which wanted a better digital assistant embedded within its messaging platform. They took a meeting with Jolley under the guise of a potential partnership, but the conversation quickly moved from “partnering with” to “acquiring” Ozlo.
Jolley then approached his other potential partners indicating his conversations with Facebook had moved in a different direction and that he would be entering acquisition talks with Facebook. Hearing Facebook wanted the technology for themselves, some of Jolley’s other potential “partners” also joined the bidding war to acquire Ozlo.
After a competitive process, Facebook offered Jolley a deal he couldn’t refuse, and they closed on a deal in July 2017. Jolley got the deal he wanted in part because he was negotiating from the position of a strong potential partner, rather than a desperate owner just looking to sell.
So, keep in mind that a great business is bought, not sold. Consider a “partnering” offer to another party that you would like to acquire your business, and build on that.
Whether or not you are actively looking to sell your business, you should always be working on building your business value. Understand the value drivers in your business and industry, and understand the risks to a future buyer. Contact me to help you build a plan and strategy to get you to a higher value, (401) 651-1585, or frank@GTgrowth.com.
How do you avoid not being disappointed with the money you make from the sale of your company?
Perhaps you’ve heard that companies like yours trade using an industry rule of thumb or that companies of your size sell within a specific range, and you want to get at least what your peers have received.
While these metrics can be useful for tax planning or working out a messy divorce, they may not be the best ways to value your company.
The Only Valuation Technique That Really Matters
In reality, the only valuation technique that will ensure you are happy with your exit is for you to place your own value on your business. What’s it worth to you to keep it? What is all your sweat equity worth? Only when you’re clear on that will you ensure your satisfaction with the sale of your business.
Take Hank Goddard as an example. He started a software company called Mainspring Healthcare Solutions back in 2007. They provided a way for hospitals to keep track of their equipment and evolved into a slick application that hospital workers used to order supplies.
Goddard and his partner started the business by asking some friends and family to invest. The business grew, but there were challenges along the way: Goddard had to fire his entire management team in the early days, product issues needed to be solved and operational issues needed to be resolved.
At times, it was a grind, so when it came time to sell in 2016, Goddard reasoned that he had invested more than half of his career in Mainspring and he wanted to get paid for his life’s work. He also wanted to ensure his original investors got a decent return on their money.
He was approached by Accruent, a company in the same industry, who made Goddard and his partners an offer of one times revenue. Accruent had recently acquired one of Goddard’s competitors for a similar value, so presumably thought this was a fair offer.
Goddard brushed it off as completely unworkable. Goddard had decided he wanted five times revenue for his business. Even for a growing software company, five times revenue was a stretch, but Goddard stuck to his guns. That’s what it was worth to him to sell.
A year after they first approached Goddard, Accruent came back with an offer of two times revenue and, again, Goddard demurred.
Mainspring had developed a new application that was quickly gaining traction and he knew how hard it was to sell to the hospitals he already counted as customers.
He told Accruent his number was five times revenue in cash.
Eventually Goddard got his number.
Being clear on what your number is before going into a negotiation to sell your business can be helpful when emotions start to take over. Rather than rely on industry benchmarks, the best way to ensure you’re not disappointed with the sale of your business is to decide up front what it’s worth to you.
If you are looking to plan your exit or stick with it awhile and increase your business value, contact Frank at 401-651-1585 or frank@gtGrowth.com.
Bryant University ~ Wednesday, February 7, 2018 – 7:30-9:30 AM –
In industry after industry, firms find themselves competing head-to-head with rivals offering similar products and services. Customers have a hard time distinguishing among the competitors. In fact, firms often find themselves constantly benchmarking and copying one another. As a result, firms imitate one another continuously, and strategies converge over time. How can companies truly differentiate themselves in the marketplace? What does it take to stand out from the crowd and create a distinct competitive positioning? In this presentation, Professor Michael Roberto will address these important competitive questions.
Our featured Speaker is Dr. Michael A. Roberto. Professor Roberto is the Trustee Professor of Management and Director of the Center for Program Innovation at Bryant University in Smithfield, RI. He joined the tenured faculty at Bryant after serving for six years on the faculty at Harvard Business School.
Professor Roberto has written two books: Why Great Leaders Don’t Take Yes For An Answer (2nd edition published in 2013), and Know What You Don’t Know, published in 2009. Professor Roberto also has created three best-selling audio/video lecture series for The Great Courses: The Art of Critical Decision Making(2009), Transformational Leadership (2011), and Critical Business Skills: Strategy (2015).
Professor Roberto’s research and teaching have earned several major awards. The Everest Leadership and Team Simulation(from Harvard Business Publishing) won top prize in 2011 in the eLearning category at the 16th Annual MITX Interactive Awards, the largest awards competition in the country recognizing achievements in the creation of web and mobile innovations and emerging applications produced and developed in New England. His multimedia case study about the 2003 space shuttle accident, titled Columbia’s Final Mission, earned the software industry’s prestigious Codie Award in 2006.
On the teaching front, Professor Roberto is a nine-time winner of the Outstanding MBA Teaching Award at Bryant University. He also has won Harvard’s Allyn Young Prize for Teaching in Economics on two occasions.
Professor Roberto has taught in the leadership development programs and consulted at a number of firms including Mars, Apple, Deloitte, Google, FedEx, Target, Disney, Morgan Stanley, Gannett, Wal-Mart, Siemens, Pernod Ricard, Phillips 66, Conoco Phillips, and Union Pacific. He’s also presented at numerous government organizations including the FBI, NASA, Joint Special Operations Command, the Air War College, and West Point. Over the past fourteen years, Professor Roberto has served on the faculty at the Nomura School of Advanced Management in Tokyo, where he teaches in an executive program each summer.
Professor Roberto received an A.B. with honors from Harvard College in 1991. He earned an M.B.A. with High Distinction from Harvard Business School in 1995, graduating as a George F. Baker Scholar. He also received his D.B.A. from the Harvard Business School in 2000.
BNY Mellon Wealth Management
Rockland Trust Bank
Standish Executive Search LLC
Zangari Cohn Cuthbertson Duhl & Grello P.C.
Wed, February 7, 2018
7:30 AM – 9:30 AM EST
1150 Douglas Pike
Smithfield, RI 02917
Organizer of Creating Value Through Differentiation: How to Stand Out from the Competition
From the decades of business experience of its founding Board and from their reputation for offering valued educational and informational programs to Southern New England businesses comes The Business Value Forum, Inc. (The Forum)
[Working with Bryant University, The Forum Board members have previously led the Breakfast at Bryant series that included such programs as “We Are Market Basket”, “Would You Buy Your Business”, “A Case Study in Performance Excellence – The Ocean House”….]
The Forum is a non-profit, non-membership organization whose mission is to provide business owners, leaders, and advisors with educational programs and information to help develop, grow and sustain an organization’s value.
The Forum, formed by its founding board in collaboration with Bryant University, offers valued programs focused on contemporary business challenges encountered at each stage of the business life-cycle… from inception to ownership transition. The Forum regularly convenes a mixed group of business leaders, advisors and educators in an environment that encourages information sharing and idea generation.
The founding board:
Itamar Chalif – Rockland Trust
Raquel Cordeiro – Bryant University
Stanley Davis – Standish Executive Search, LLC
Norman Gauthier – Heritage Hill Partners Inc.
Larry Girouard -The Business Avionix Company, LLC
Frank Mancieri – GT Growth & Transition Strategies, LLC
Kevin McNally – Interactive Palette
Mike Mellor – DiSanto Priest & Co
Rob Piacitelli – ThirdSide Capital
Mario Zangari – Zangari Cohn Cuthbertson Duhl & Grello P.C.
Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.
Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer.
To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. Through The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.
What did Breedlove do right? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.
When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.
Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.
Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.
One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.
The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.
Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.
When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.
This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.
The third thing that made Breedlove’s company attractive was recurring revenue.
Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.
By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.
Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.
Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.
By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.
In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.
At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.
In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.
To get your Value Builder Score and begin understanding what drives value in your business, please chick here: http://www.gtgrowth.com/value-builder-score
Have you ever wondered why some mature companies stop growing? Sometimes they run out of potential customers to sell to or their product starts losing market share to a competitor, but there is often a more fundamental reason: the founder(s) lose the stomach for it.
When you start a business, the assets you have outside of your business likely exceed those you have in it, because in the early days, your business is worthless. As your company grows, it starts to have value and becomes a more significant part of your wealth—especially if you’re pouring your profits back into funding your growth.
For most business owners, their company is their largest asset.
Eventually, your business may become such a large proportion of your wealth that you realize you are taking a giant risk every day that you decide to hold on to it just a little bit longer.
95% of His Wealth in One Business
In 2000, Etienne Borgeat and Olivier Letard co-founded PCO innovation, an IT consulting firm. The company took off and, by 2016, PCO had 600 full-time employees and offices around the world.
As the business grew, Borgeat and Letard started to become uneasy about how much of their wealth was tied up in their business. By 2015, the shares Borgeat held in PCO represented 95% of his wealth.
That’s about the point that aerospace giant Boeing came calling. Boeing wanted PCO to take on a very large project and Borgeat and Letard turned down the opportunity reasoning that the project was so large it could risk their entire company if it went wrong. In the early days, the partners would never have turned down a chance to work with Boeing, but the partners had changed.
That’s when Borgeat and Letard realized the time had come to sell. They agreed to an acquisition offer from Accenture of over one times revenue.
The success of your company is probably driven by your willingness to put all your eggs in one basket. You’re all in. However, at some point, you may find yourself starting to play it safe, which is about the time your business may be better off in someone else’s hands. GT Growth & Transition Strategies can help you continue to grow your buiness and help you start planning for your eventual transition, something that should be done well before your actual transition date. Call Frank at (401) 651-1585 or email him at frank@gtGrowth.com.
Most people think of starting a business as risky, but unless you invest a significant amount of start-up cash in your venture, you’re not really risking much other than your time.
That changes if you’re lucky enough to get your business off the ground. As your company grows, you start to risk more and more of your wealth because the business you’ve built is actually worth something. The longer you hang on to it, the more you have to lose.
This phenomenon makes owners become more risk averse as their business grows, potentially squeezing off growth to avoid risking what they’ve created. This can mean the owner goes from a company’s great asset to its biggest liability.
Cigar City Brewing
For an example of how growth can impact an owner’s appetite for risk, let’s look at the case of Joey Redner, the founder of Florida-based Cigar City Brewing. Redner’s craft beer operation started off in 2009 with the relatively modest goal of selling 5,000 barrels of beer per year.
Cigar City proved popular with the locals and Redner was able to sell 1,000 barrels of beer in his first year of business.
Cigar City Brewing continued to grow but was thirsty for cash, eventually forcing Redner to take on an SBA loan. Redner quickly surpassed his 5,000-barrel goal, and by 2015, had scaled all the way up to 55,000 barrels per year, at which point he ran out of capacity in his brewing facility.
To get to the next level, Redner would have had to find another $20 million for a major expansion, but he was tired of the feeling of being “all in” at the poker table. He had built something successful and wanted to enjoy financial security rather than having to roll his winnings into even more debt that he would have to personally guarantee with the bank.
Redner decided to sell even though his business was still growing and he had built a brand Floridians loved.
And therein lies one of the hidden reasons owners decide to sell. They are tired of shouldering all of the risk. Most of us have a limited appetite for risk, and as the Bob Dylan song goes, “When you ain’t got nothing, you got nothing to lose.” Start-ups aren’t risking much, but when you build something successful, every day that you decide to keep it is another day you have all (or most) of your chips on the table, and no matter how strong your hand, eventually we all decide to cash in.
Jay Steinfeld built Blinds.com into a $100 million e-tailer before selling out to Home Depot. Here are five things that made it a spectacular exit.
Win The Make vs. Buy Battle
Companies like Home Depot have a “make or buy” decision when they see a competitor winning market share. They can opt to buy the competitor or choose to simply re-create what they have built.
An acquirer will likely opt to buy your company if you are so dominant in your niche that recreating what you have built would take too long and cost more than acquiring it from you.
Blinds.com got acquired, in part, because they were a big fish in a small pond. At more than $100 million in revenue, they were the largest online retailer of blinds in America by a long shot. Even though Home Depot has close to $90 billion in sales, Blinds.com were outperforming them in their tiny niche and that made Blinds.com irresistible to Home Depot.
Run It Like It’s Public
At the time of the Home Depot acquisition, Blinds.com had 175 employees, yet Steinfeld had been running the company as if it were public for years. He had put together a top-drawer management team and taken the unusual step of assembling an outside board of directors. He had quarterly board meetings with formal presentation decks, and Steinfeld hired a Big Four firm to complete a full audit of his financials each year.
Steinfeld credits this rigorous approach to running a relatively small company as a major reason Home Depot was interested in Blinds.com and able to close on the acquisition so quickly.
Keep Most Of The Equity
Steinfeld invested $3,000 of his own money into a basic online presence for his blinds store back in 1993 and grew Blinds.com to more than $100 million in sales without diluting himself by taking three or four rounds of institutional investment, as would be typical of an internet start-up. Steinfeld took a small investment from friends and family and used bank debt to help him buy distressed companies for pennies on the dollar. It wasn’t until 2012—almost 20 years after starting the business—that he accepted his first round of “professional” money from a private equity firm who wanted to invest more, but Steinfeld refused, only taking enough to buy out a few of his original investors and pay off some debt.
Keep Investors Aligned
One of the reasons Steinfeld accepted an investment from a private equity group was that he had become misaligned with two of his original investors. The investors saw the success of Blinds.com and wanted Steinfeld to start declaring regular dividends. Steinfeld, by contrast, was focused on building a growth company and needed the cash to fuel his 25% per year growth. After a while, his investor’s expectations got so far out of whack that Steinfeld opted to buy them out.
Share The Love
One of Steinfeld’s best memories is the day he told his employees Home Depot had acquired Blinds.com. Steinfeld had made sure every one of his 175 people had Blinds.com stock options and so stood to gain financially from the sale. Steinfeld went further and gave each employee $2,000 of his own money to start an investment account as a personal thank you for all they had done.
Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?
While your objective to build your company’s value is admirable, here are five reasons why you may want to sell sooner than you might think:
When you start your business, you have nothing to lose, so you risk it all on your idea. But as you grow, you naturally become more conservative, because your business actually becomes worth something. For many of us, our company is our largest asset, so the idea of losing it on a new growth idea becomes less attractive. We become more conservative and hinder our company’s growth.
We’re coming out of a period of ultra-low interest rates. Financial buyers will likely borrow money to buy your business so—at the risk of over simplifying a lot of MBA math—the less it costs them to borrow, the more they will spend to buy your business.
The costs of most financial assets are correlated, which is to say that the value of your private business, real estate and a Fortune 500 company’s stock all move in roughly the same direction. They all laid an egg in 2009 and now they are all booming. The problem is, you’ll have to do something with the money you make from the sale of your company, which means you will likely buy into a new asset class at the same frothy valuation as you are exiting at.
If you have moved your customer data into the cloud, it is only a matter of time before you become the target of cybercrime. Randy Ambrosie, the former CEO of 3Macs, a Montreal-based investment company that manages $6 billion for wealthy Canadian families decided to sell in part because he feared a cyber attack. Ambrosie and his partners realized they had been under-investing in technology for years, at a time when cybercrime was becoming more prevalent in the financial services space. Ambrosie decided to sell his firm to Raymond James because he realized the cost for staying ahead of hackers was becoming too much to bear.
In most occupations, the ambitious must climb the ladder. Aspiring CEOs must methodically move up, stacking one job on the next until they are ready for the top post. They have to put in the time, play the right politics and succeed at each new assignment to be considered for the next rung.
By choosing a career as an entrepreneur, you get to skip the ladder entirely. You can start a business, sell it, take a sabbatical and start another business and nobody will miss you on the ladder. Your second (or third) business is likely to be more successful than your first, so the sooner you sell your existing business, the sooner you get to take a break and then start working on your next.
It can be tempting to want to time the sale of your business so that the economy and your company are peeking, but in reality, it may be better to sell sooner rather than later.
Bottom line: be prepared to exit on your terms. Meanwhile, keep working on building value in your business. For a quick view into where you stand, take this self-assessment. CLICK HERE
Announces Inaugural Breakfast Event at….
Company owners, executives and advisors are generally focused on business operations and performance. Most tend to defer thinking about how the components of their business’ operations and performance influence the overall value of the organization. It’s the enterprise value that is of prime importance to lenders, vendors, potential partners, suitors and some customers – all of whom play a pivotal role in a company’s future.
Our Topic, “Building Value in Your Business While Running It” …brings together experienced practitioners and business people who have had hands-on experience in building business value. They will share their knowledge and insights into how an understanding of a company’s value helps drive the kind of decisions that build real value for the long term.
Chris Mellen will be our Conversation Moderator….
Chris is Managing Director with Valuation Research Corporation in Norwood, MA. Chris has over 28 years of business valuation experience involving the valuation of over 3,000 businesses and intangible asset valuations. He has started, ran for 15 years, and sold his own business; earned 6 professional certifications; served on several valuation committees; published several articles; led over 100 seminars; provided expert testimony in court; and co-authored a valuation text book – Valuation for M&A: Building Value in Private Companies. http://www.valuationresearch.com/professional/chris-mellen
David Hirsch a Corporate Attorney with Hinckley Allen & Snyder LLP in Providence. David focuses his practice in the areas of corporate and business law, including commercial and public finance and mergers and acquisitions. He represents companies in general corporate matters and assists with a broad range of business and financing transactions. David also has experience advising financial institutions regarding regulatory compliance. http://www.hinckleyallen.com/people/david-s-hirsch/
Rob Kerr is Managing Director of CBIZ Tofias in Providence. Rob is a CPA with more than 15 years of experience in tax planning, consulting and compliance services for public companies, privately-held corporations, partnerships and individuals. Rob specializes in the private equity and venture capital industry where he provides assistance with domestic and international tax planning and compliance projects. And extensive experience working with Internal Revenue Code Section 382, assisting clients with ownership changes and associated impact against the certain tax attributes. https://www.cbiz.com/about-us/employees/employee/eid/3220/name/robert_kerr
Mike Tamasi is the President & CEO of AccuRounds in Avon, MA. A second- generation owner since 1985, Mike is responsible for overall strategy and organizational alignment guided by “The Path to Perfection” – providing opportunity for every member of the AccuRounds team. Mike is co-chair of the Massachusetts Advanced Manufacturing Collaborative and Chairman of Business Leaders United. http://www.accurounds.com/about-us-executive-team.htm
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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 Score™, 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. The average starting point value for companies completing The Value Builder Score™ is 3.6 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:
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.
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.
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. How do you run your business? Are you maximizing its value? Take The Value Builder Score™ and learn where you stand. Then take action to increase your business value.
Are you tired of inaccurate financial reports? Do you lay awake at night wondering if someone might be exploiting your systems for personal gain? Are you confident your data is secure?
It is critical to have the right internal controls as they help ensure:
We recommend implementing internal controls for small business that address compliance, taxes, data security, fraud protection and more. We take a closer look at each of these in the sections below.
You need to know the laws and regulations that apply to your business and make sure your systems comply with their requirements. For example, do you know how you need to store customer credit card numbers or employee social security numbers? Failure to comply can be time-consuming, expensive and damaging to your reputation, so you need to do all you can to ensure compliance now. Additionally, many stakeholders (such as lenders or investors) will require financials in compliance with GAAP (Generally Accepted Accounting Practices) so be certain your team understands what this entails.
Do you have a great CPA who you trust implicitly? Keep in mind that there is no room for shortcuts – or errors – at this step. You need a trusted advisor to make sure you’re addressing income, payroll, sales and use taxes. More specifically, you need to know what rules apply to your business, and what the process is for paying these taxes (by what deadlines and along with which forms). What is the frequency for paying taxes? Can you produce confirmation that the last three payments were made on time and for the correct amount? These are the types of tax questions your team should be prepared to address.
It’s also in your best interests to have controls related to data security. For example, are all confidential files locked away in a filing cabinet or office? Are all IT accounting systems password protected with robust password management policies? Do these systems offer login audit trail reports? Data security is critical, so make sure you’re doing all you can to protect sensitive information.
Fraud can largely be prevented through separation of duties. For example, create a process where one person collects and deposits receipts while another records accounts receivable. This should be similar for payroll and accounts payable where bank statements are reconciled by someone other than the person responsible for issuing checks.
We’re all human. We make mistakes. Some level of errors is to be expected. But your internal controls should protect against these errors going undetected. Your monthly closing process is a great place to embed these checks and balances. For examples, reconciling the bank, cash, and credit card accounts each month is a simple way to catch mistakes. Another is to print out the year-to-date profit and loss reports each month and study them for any inconsistencies. A fresh set of eyes proof reading reports in search of abnormalities goes a long way toward creating error free books.
You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.
Why are so many companies leveraging the subscription business model? The obvious reason is that recurring revenue boosts your company’s value, but there are some hidden benefits to augmenting your business with a subscription offering.
Free Market Research
Finding out what your customers want is expensive. By the time you pay attendees, rent a room with a one-way mirror and buy the little sandwiches with the crusts cut off, a focus group can cost you upwards of $6,000. A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.
With a subscription company, you get instant market research for free. Netflix knows
which shows to produce based on the viewing behaviour of its subscribers. No need to
ask viewers what they like, Netflix can see what they watch and rate.
For you, a subscription offering can allow you to test new ideas and gives you a direct
relationship with your customers so you can see what they like first hand.
Subscription companies are often criticized for being hungry for cash. Many charge by
the month and then have to wait months—sometimes years—to recover the costs of
winning a subscriber.
That assumes, however, that you’re charging for your subscription by the month. If
you’re selling your subscription to businesses, you may get away with charging for a
year’s worth of your subscription up front. That’s what the analyst firm Gartner does,
and it means they get an entire year’s worth of cash from their subscriber on day one.
Costco charges its annual membership up front, which means it has billions of dollars of
subscription revenue to float its retail operations.
Customers can be promiscuous. You may have a perfectly satisfied customer but if they
see an offer from one of your competitors, they might jump ship to save a few bucks.
However, if you lock your customers into a subscription, they may be less tempted to try
a competitor since they have already made an investment with you.
One of the reasons Amazon Prime is so profitable is that Prime subscribers buy more
and are stickier than non-Prime subscribers. Prime subscribers want to get their money’s
worth, so they buy a wider swath of products from Amazon and are less tempted by
The obvious reason to launch a subscription offering of your own is that the predictable
recurring revenue will boost the value of your company. And while that’s certainly true,
the hidden benefits may even be more important.
Recurring Revenue is just one of the many factors that help increase a company’s value. Learn about several others factors and how your company rates, by completing a 13-minute free questionnaire called The Value Builder Score™.
Click Here: http://www.gtgrowth.com/value-builder-score/
Business valuation goes beyond simple mathematics, but to get some idea of what your business might be worth, consider the three methods below.
Your business is likely your largest asset so it’s normal to want to know what it is worth. The problem is: business valuation is what one might call a “subjective science.”
The science part is what people go to school to learn: you can get an MBA or a degree in finance, or you can learn the theory behind business valuation and earn professional credentials as a business valuation professional.
The subjective part is that every buyer’s circumstances are different, and therefore two buyers could see the same set of company financials and offer vastly different amounts to buy the business.
This article provides the basic science and math behind the most common business valuation techniques, but keep in mind that there will always be outliers that fall well outside of these frameworks.
These are strategic sales, where a business is valued based on what it is worth in the acquirer’s hands. Strategic acquisitions, however, represent the minority of acquisitions, so use the three methods below to triangulate around a realistic value for your company:
The most basic way to value a business is to consider the value of its hard assets minus its debts. Imagine a landscaping company with trucks and gardening equipment. These hard assets have value, which can be calculated by estimating the resale value of your equipment.
This valuation method often renders the lowest value for your company because it assumes your company does not have any “Good Will.” In accountant speak, “Good Will” has nothing to do with how much people like your company; Good Will is defined as the difference between your company’s market value (what someone is willing to pay for it) and the value of your net assets (assets minus liabilities). Typically, companies have at least some Good Will, so in most cases you get a higher valuation by using one of the other two methods described below.
Discounted Cash Flow
In this method, the acquirer is estimating what your future stream of cash flow is worth to them today. They start by trying to figure out how much profit you expect to make in the next few years. The more stable and predictable your cash flows, the more years of future cash they will consider.
Once the buyer has an estimate of how much profit you’re likely to make in the foreseeable future, and what your business will be worth when they want to sell it in the future, the buyer will apply a “discount rate” that takes into consideration the time value of money. The discount rate is determined by the acquirer’s cost of capital and how risky they perceive your business to be.
Rather than getting hung up on the math behind the discounted cash flow valuation technique, it’s better to understand the drivers of your value when you use this method. They are: 1) how much profit your business is expected to make in the future; and 2) how reliable those estimates are.
Note that business valuation techniques are either/or and not a combination. For example, if you are using Discounted Cash Flow, the hard assets of the company are assumed to be integral to the generation of the profit the acquirer is buying and therefore not included in the calculation of your company’s value.
A money-losing bed and breakfast sitting on a $2 million piece of land is going to be better off using the Asset-based valuation method; whereas a professional services firm that expects to earn $500,000 in profit next year, but has little in the way of hard assets, will garner a higher valuation using the Discounted Cash Flow method or the Comparables technique described below.
Another common valuation technique is to look at the value of comparable companies that have sold recently or for whom their value is public. For example, accounting firms typically trade at one times gross recurring fees. Home and office security companies trade at about two times monitoring revenue, and most security company owners know the Comparables technique because they are often getting approached to sell by private equity firms rolling up small security firms. Typically you can find out what companies in your industry are selling for by asking around at your annual industry conference.
The problem with using the Comparables methodology is that it often leads owners to make an apples-to-bananas comparison. For example, a small medical device manufacturer might think that, because GE is trading for 20 times last year’s earnings on the New York Stock Exchange, they too are worth 20 times last year’s profit. However, if one looks at the more than 13,000 businesses analyzed through the The Value Builder Score, it’s clear that a small medical device manufacturer is likely to trade closer to five times pre-tax profit.
Small companies are deeply discounted when compared to their Fortune 500 counterparts, so comparing your company with a Fortune 500 giant will typically lead to disappointment.
Finally, the worst part about selling your business is that you don’t get to decide which methodology the acquirer chooses. An acquirer will do the math on what your business is worth to them behind closed doors. They may decide your business is strategic, in which case back up the Brinks truck because you’re about to get handsomely rewarded for your company. But in most cases, an acquirer will use one of the three techniques described here to come up with an offer to buy your business.
Curious to see what your business might be worth? Get a free valuation here: http://www.gtgrowth.com/value-builder-score/
Imagine you’re a farmer and you’ve been tending to your crops all year. It’s harvest season and finally time to collect the spoils of your labor.
You start harvesting your crops only to find out that pesky rodents have been quietly eating away at your fields. You’re devastated as you come to the realization that much of what you have been working so hard to cultivate has already been taken.
Feeling like there is not much field left to harvest is what acquirers and investors are trying to avoid as they evaluate buying your business. Metaphorically speaking, acquirers want to know that if they buy your business, there will be plenty of fresh farmland left for them to till.
Investors call it your company’s “addressable market” and it is one of the main factors buyers will look at when they evaluate the potential of acquiring your company.
Business 101 tells us we should strive for market share so we can control pricing. Market share is a worthy goal if your objective is to maximize your profits. However, if your primary objective is to increase the value of your company, you want to be able to communicate that you have relatively low market share across the entire addressable market. In other words, there is plenty of field left to plow.
Consider the following ways you might expand the way you are currently thinking about the addressable market for what you sell:
Demographics involve segmenting a market by objective measures like gender, income, age and education level. Marriott is a hotel chain but they have created a variety of brands to address the various demographic segments they want to serve. Ritz Carlton is a Marriott brand that appeals to affluent travelers, but if all you want is a basic room, you could opt for a Courtyard Marriott. It’s the same company, but they have expanded their addressable market by focusing on different demographic segments.
Psychographics involve segmenting your market according to the way people think. Toyota produces the Prius, which gets 50 miles per gallon and is a favorite among environmentalists. Toyota also produces the thirsty Tundra pickup truck and, at just 15 miles per gallon, attracts a different psychographic segment.
Success in your local market is good but if you want to really boost the value of your company in the eyes of an acquirer, you need to demonstrate that your concept crosses geographic lines. McDonald’s has more than fourteen thousand locations in the United States but they have also demonstrated that the golden arches can draw a crowd in other markets. McDonald’s has nearly three thousand stores in Japan, two thousand in China and more than a thousand locations in each of the European countries of Germany, Canada, France and the United Kingdom.
You don’t actually have to become a global giant like Marriott, Toyota or McDonald’s to increase your company’s value but you do need to be able to communicate that your concept could work in other markets and that there is still good land left to plow.
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If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.
If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.
Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.
Not sure how to create recurring revenue? Here are five models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.
If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.
If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.
Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.
If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.
You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.
So are you ready to drive up the value of your business? Take this 13-minute assessment to learn where to focus your efforts on driving value.
Are you tempted to re-sell someone else’s product to boost your topline revenue?
On the surface, becoming a distributor for a popular product can appear to be a simple way to grow your sales—simply find something that is already proven to be successful elsewhere and negotiate the rights to sell it in your local market.
While distributing someone else’s product may be a relatively easy way to grow your topline, all that revenue growth may do little for your company’s value. A typical distribution company will be lucky to sell for 50% of one year’s revenue, whereas if you control your product or service—and the brand that embodies them—you should be able to do much better.
For an example of the dangers of not owning your own products, take a look at the evolution of Blue Ribbon Sports into Nike Inc. As Nike co-founder Phil Knight describes in his recent autobiography Shoe Dog, the company started off by negotiating the exclusive rights to sell Tiger running shoes in the United States. Knight’s company was called Blue Ribbon Sports and he imported the shoes from Onitsuka, a Japanese company.
Despite their exclusive agreement with Blue Ribbon, Onitsuka started to court other American dealers. When Knight protested the obvious breach of their contract, Onitsuka threatened a hostile takeover of Knight’s business or to shut him down outright. Knight’s company was tiny at the time and so deeply reliant on Onitsuka for supply, he could do virtually nothing to enforce their agreement.
Given its dependence on Onitsuka, Knight’s company would have scored close to zero out of a possible 100 on what we call The Switzerland Structure, a measure of your company’s reliance on a supplier, employee or customer. The Switzerland Structure is only one of eight value drivers we measure, but abysmal performance on any one factor can be a significant drag on the value of your business.
Onitsuka’s snub became Knight’s impetus to start Nike, which gave him control of his marketing, supply and product development. Instead of simply re-selling someone else’s shoes, Nike developed their own designs and contracted the manufacturing of their products to other factories. By owning its own products and brands, Nike has become one of the world’s most valuable companies and regularly trades north of 20 times earnings.
To see how your business performs on The Switzerland Structure and the other seven factors that drive your company’s value, take 13 minutes and complete the Value Builder questionnaire now. CLICK HERE
For business owners who are thinking about exiting their business in the future, there are many things to consider to assure the business transition happens in a smooth manner and accomplishes your personal and professional / corporate goals. Owners are wise to seek the counsel of advisors in this complex and delicate area. Your choice of experienced advice in this area can mean the difference between success and failure to reach your goals. Not only do you need to know which types of advisors to choose but also when to bring them onto your team. This newsletter provides the top three things to consider when building your exit planning advisory team.
Exiting a business is a process, not simply a transaction. The process includes an owner thinking through all of that owner’s personal and company goals as well as the implications of the business running without their individual efforts, and how the owner will live without the business. Owners who go through this process ask themselves, ‘who can run the business, other than me?’ and ‘what would fill my life in the absence of working in the business?’
Unlike a solution-oriented approach, where issues are identified and your advisor brings you solutions to the problem, the exit planning process requires time and self-reflection to decide what is best for you, both from a business and a personal perspective. The advisor leading this initial process should have a practice that is designed to support this type of ongoing engagement with you, the owner. This is generally not consistent with the placement of products or solutions at this stage of the planning; generally speaking, solutions and the advisors who provide them come later in the process.
Similar to ‘process-oriented’ vs ‘solutions-oriented’ advisors, owners should consider whether their advisors are relationship-based or transaction-based. This distinction applies both to that advisor’s approach as well as to their manner of compensation. The world of professional advisors can be generally divided into two types; relationship-based advisors and transaction-based advisors.
Relationship-based advisors are those who come into the business owner’s lives and work with them, year-in and year-out, on a consistent basis. Two of the leading relationship-based advisors are accountants (for reasons stated already) and attorneys (often at the beginning of a business venture and again when the need arises). Many owners also confide and place their trust in financial planning professionals, insurance and risk management advisors as well as general business coaches and consultants.
These advisors take the approach that a relationship with a business owner exists over a long period of time and they remain available to these owners as needs arise.
Transaction-based advisors are those who approach the relationship with the owner with an eye towards addressing a specific, non-recurring issue for that owner. These advisors might include real estate brokers, consultants who start and complete certain projects for owners, valuation professionals as well as mergers and acquisitions advisors. These advisors enter the lives of owners to execute a certain transaction. For the most part, these advisors also plan to leave the owner’s life shortly after the transaction / project ends.
Shifting from ‘Planning Team’ Members to ‘Execution Team’ Members
Owners are advised to initially seek out planning team members who are relationship-based as well as process-oriented to lead the initial stages of the exit planning. However, an exit planning process often culminates with a transaction. When this happens, transaction-based advisors are necessary additions to the team. At this point in the engagement the focus shifts from the ‘planning team’ to the ‘execution team’ and different players are needed.
Planning team members – those described above – are critical to taking the owner through the initial stages of the exit planning process. However, when your exit planning brings you to the point that you are ready to transact, you will need to employ the services of transactional advisors. These include:
– M&A advisors to help find buyers and explain the business to the future owner, as well as to assist in the actual transition of the business to the next owner.
– Legal advisors who focus on transactions – these are ‘transactional attorneys’ who have experience negotiating and structuring deals for owners.
– Accountants and tax advisors who understand and have experience in the world of transactions and can help assess the tax implications of a transaction for the owner.
There are a number of other transactional advisors that need to be identified for the transaction team. These will vary depending upon the details of your transaction.
The Vital Role of the Quarterback
No matter where you are in your planning or transacting, it is helpful to seek out an advisor who can and will serve as the quarterback to your exit planning as well as your exit transaction. These multi-skilled advisors are some of your best allies in drafting a plan for your exit while also helping you to recruit all of the necessary ‘soft’ and ‘hard’ skilled advisors who will be needed for this multi-year engagement. The quarterback holds a special place with the owner through all stages. Owners are well advised to seek out exit planning quarterbacks who have made a commitment to being trained, supported and have the tools and the right network to recruit the people needed for the planning and transaction.
This newsletter makes the argument that owners need to consider different types of advisors during different stages of the exit planning process. Generally speaking, owners should seek out the counsel of ‘relationship-based’ advisors in favor of ‘transaction-based’ early in the process to create and begin implementing a multi-year exit plan.
Later in the process, when a transaction is ready for execution, advisors with a different skill set will need to be employed.
The exit planning process is one that should not be conducted alone and should include the patience and approach that relationship-based advisors bring to the owner as well as the execution skills that are needed later in the process. We hope that you find this helpful in advancing your exit planning forward.
When it comes time to plan and execute a business transition, there are several common “traps” that business owners fall into that end up either killing a potential transaction or otherwise harming the process. Like most things in life, the sooner that you can recognize these issues, the easier it will be to avoid them. This newsletter is written for owners who are thinking about planning for a future transition from their company and would prefer not to make the obvious mistakes that other owners have made, time and again, in the past.
1. Believing That Your Exit Will be Easy
2. Believing That You Can Do It Alone and Without a Plan
3. Believing That Selling the Business is the Only Way to Exit
5. Leading with the Business, not the Personal Concerns
1. The First Exit Planning Trap to Avoid is Believing That Your Exit Will be Easy
Getting out of business can be as difficult, if not more difficult, than getting into business. Difficult questions need to be answered, such as: Who will own the business after you? What is it worth? How will you get paid? Will your employees, vendors, customers, and family be OK? When should this transaction take place?
On this final point you need to consider that if you leave the business too early, then you have not brought the company to its maximum earning power and efficiency under your watch. This could mean that you get less money or don’t complete your building process. However, if you hang on too long (which is the most common problem with owners) then you’ll be trying to move your asset to someone else who may no longer want to own it.
Timing is only one of the difficult considerations to consider. The toughest issue, however, may be letting go – i.e. are you really ready to get out of the game? And do you know what you will do next to fill your time in a productive manner?
Building your business was not easy – it required a plan, and the ability to adapt and compete in your marketplace. Successfully exiting your business could prove even more challenging.
2. Believing That You Can Do It Alone and Without a Plan
All too often exiting owners believe that their success in business qualifies them to design and execute their own business exit. Just because you have proven successful in one field does not make you an expert in all fields. Most successful owners recognize that when they built their businesses, they had quality individuals and advisors who provided assistance. When it comes time to plan and execute a business transition, the right team and a well-thought-out, written plan can have the same, or likely a greater impact, to your goals as the team and planning process that helped you with your success and you can avoid this trap.
3. Believing That Selling the Business is the Only Way to Exit.
Selling your company to a competitor may seem like the most logical way that most owners would want to exit. However, a sale transaction is only one of the several options for a future business transition. While not simple to understand, it may be possible to bring an investor into your company, experience a successful management buyout, create an Employee Stock Ownership Program (ESOP), and / or gift shares of your company to others. Once all options have been explored, an informed exit decision can be made and you can avoid the trap of thinking in only a linear manner about only a sale transaction.
With so much information to process, it is easy for owners to put off creating an exit plan. The truth is, however, that an exit strategy should ideally be created along with a business plan, and assessed and adapted as necessary over the life of the business. Creating an exit plan will provide an “end goal” to strive toward through meeting smaller “mini” goals, and allow for progress towards those goals. If you put off beginning your exit planning now, it may, unfortunately, quickly become too late.
5. Leading with the Business, not the Personal Concerns
As stated in issue #1, business owners often fail to adequately consider their emotional attachment to the business or to the stature, and time consumption that owning a business entails. Many owners will resist accepting a seemingly strong offer for their business if they do not have their next stage of life charted out. Remember that there is little getting past the fact that an exit is a highly personal and emotional event and if you begin the planning process from a personal perspective, you are likely to get a better result.
No matter where you are in your business life-cycle, creating and routinely adapting a written plan for your business exit / future transition is a critical part of the planning process. Through examining these key five (5) traps to avoid you will be able to recognize and hopefully navigate these issues when it comes time for your own exit. Remember that your business is an investment, and as with any investment, you must study and plan in order to create the most financially, and emotionally, profitable outcome.
Many owners of privately-held businesses are not pro-active in planning for their exit and the company’s transition. This is true mostly because the ‘exit planning industry’ is nascent and many owners are simply not aware that a service exists to help owners with this complex issue. This newsletter is written to advocate the position that owners should be pro-active and should actively lead their exit plans by involving those that help them manage the business. An owner’s successful exit is an entry point for another owner to take the company to the next level, creating potential opportunities for the leaders in your organization. However, without leading the process, it is not something that you can rely on without proper planning. You might get lucky, but luck is rarely a solid strategy.
Exit Planning & Mountain Climbing
Let’s first examine how leading an exit is different from growing a company. We will use a helpful analogy – mountain climbing.
Climbing up a mountain requires determination, focus, strength, and management of many obstacles. The ascent is often arduous, creating doubt in the mind of the climber as to whether they will reach the pinnacle. There is a summit that can be identified and a specific point at which one turns to begin the equally, if not more so, challenging act of descending down the mountain.
On the way down a mountain a different skill is required. One’s weight is now working against them. There is a different need for balance and coordination of activities. In fact, Sir Edmund Hillary is not so much known for his ability to be the first Westerner to scale Mount Everest. Rather, he is famous because he was the first to survive the descent. Will you, and your business, survive your exit? The answer to this question may depend upon the new leadership skills that you learn.
First Set the Path for Your Exit
Before the climb and descent begins, a plan is established to reach milestones as well as the ultimate goal – you don’t climb a mountain in one day. It takes months, if not years, of preparation and the climb and descent requires careful planning.
A strategic, long-term plan for the business – including alignment of key employee’s incentive compensation with that plan – is an excellent start to setting the right path. When you take the time to formulate a strategic plan as well as align key people, you put the Company on a path to [eventually] succeed without you. When you can define a vision both for the Company as well as for yourself, you can work faster towards being the leader that your organization needs you to be to more effectively handle your exit plan. Without direction, there is no catalyst for positive momentum forward.
You Need to be a Leader in Your Exit, Not Just a Manager of the Exit
Your exit will require a different skill set than growing your business, the same way going down a mountain requires different skills than going up. You need to adopt a leadership mindset towards your exit. In fact, it will mostly be your ability to let go of the responsibilities that you have grown so attached to that will define the success of your exit. In order to let go you need to build a team who can assume your responsibilities. And in order to build that team effectively, you need to become a leader.
Empowering Others – An Unselfish Act
As you set your company plans remember that you are leading, not managing these tasks. For example, management is more about getting a task done, often with the self-centered objective of successfully driving a result. Leadership, however, is about the empowerment of others.
When you move from management to leadership, you focus on the strength of your team and begin to more effectively work yourself out of your job. Your overall strategic plan should have you working hard to eliminate yourself from the day-to-day running of the business. This is not so much to put you out to pasture but more to increase the transferability of your Company to someone else in the future.
Your Team Will Help Your Future Owner Manage the Business
Your exit will depend on your team because that team will lead your company into the future. Think of the situation in these terms – no matter how you decide to exit, it is the company that will pay for the value. Simply put, if the ‘golden goose’ stops laying eggs then an exit cannot be financed.
It will be the team that you develop and lead to self-sufficiency that will run and grow that company into the future. This is true whether you exit via sale to an outsider, or whether you exit via internal transfer to managers, family or employees. Someone has to run the business and be empowered to do so. The team that you build and lead will be that catalyst for the future and will define your exit.
Are You Developing Your Talent on a Regular Basis?
A leader is able to see out over the horizon and prepare for changes within the marketplace and the business. The success of your exit will depend upon your ability to replace yourself in this regard.
Do you have a process for recruiting new talent and assessing existing talent within your organization? Are you able to let go of large responsibilities and trust that they will be handled well by those that you lead? These are critical questions to ask and answer in advance of your exit because turning over the reins of a business is often an emotional event for an owner. Working through this emotion and putting the right people in place is an unselfish act that is done for the long-term growth and survival of the business.
You worked hard to establish your position in your company, industry, and community. Now you need to work just as hard to replace yourself in that role. This unselfish act (or more appropriately, series of acts) sets the stage for a successful exit because you are building your own replacement by leading the organization to a whole new level.
Business owners are risk-takers by nature. Interestingly, however, is the fact that these same owners are often-times not risk averse. What this means is that owners will assume risks in one area of their lives, but not necessarily work to mitigate risks in other areas. The primary issue in not mitigating risks lies in the fact that there are a lot of people in your world who rely on you and the decisions that you make. This newsletter challenges the use of insurance in the singular manner of addressing a loss of life. In fact, insurance products are useful tools throughout the spectrum of advanced planning for a future exit. This newsletter is written with the intention of discussing risk mitigation and broadening owner’s views on how and where insurance can ground and solidify your plans for a future exit, i.e. while you are still alive.
An Aleatory Business Contract
Let’s begin by taking a look at insurance by starting with the concept of an ‘aleatory contract’. Insurance policies are known as aleatory contracts. An aleatory contract is defined as “an agreement concerned with an uncertain event that provides for unequal transfer of value between the parties. Insurance policies are aleatory contracts because an insured can pay premiums for many years without sustaining a covered loss. Conversely, insureds sometimes pay relatively small premiums for a short period and then receive coverage for a substantial loss.”
So the financial industry provides a marketplace to understand your business risks and allow you an opportunity to share those risks with another institution. In a limited sense it is a forecast of the future – in the case of insuring the loss of life, if the event / death that you are insuring occurs, you “win” and the insurance company pays. If the event does not occur, you don’t necessarily lose because you have some peace of mind.
Insurance as an Asset Class
Insuring for the loss of life is only a small part of utilizing insurance in an exit plan. However many business owners fail to see the benefits of certain other forms of insurance. Insurance can serve as an asset class and a tool to harvest savings, share benefits and leave assets on your company balance sheet, as well as sharing an asset with key people to more easily retain them at your company. Most business owners, when thinking about planning for their exit, fail to see insurance as a tool for many facets of a transition plan.
Insurance as an Accumulation Asset for a Future Exit
Some typical goals of business owners who are thinking about a future exit, include:
Insurance contracts can serve as a ‘funding solution’ for the issues listed above. The primary goal of this newsletter is not to provide complex details of how this can work, but rather to help to re-conceptualize the role that insurance can play in your future plans.
Remember that insurance is a unique asset in many respects, not the least of which is the ability to harvest tax benefits, provide disciplined savings with your planning, and to customize an agreement that retains your key people.
Solving or Not Solving for Death
As mentioned, business owners too often view the purchase of insurance only as a vehicle to deliver needed cash in the event of a death. The use of funds is often to replace business income or to fund family needs and / or estate taxes. Many business owners hold contracts that are set to address these contingencies.
However, there is another way to look at insurance: as a tax-efficient, forced savings plan for you, your company, and your key people. In this case, the purpose of insurance is not necessarily to anticipate a death and for cash to be provided at the time of death. Rather, this form of insurance is for cash accumulation, either within the company or held outside of the business.
One of the reasons that insurance is looked down upon as an effective tool for exit planning is because many owners have survived against insurmountable odds to grow their business. Also, there is the uncomfortable issue of dealing with death. However, when insurance is viewed in more broad terms as a tool to accomplish many goals while you continue to grow your business and make plans for a future exit, the options and alternative uses begin to grow.
For better or for worse, it is often said that insurance is something that is sold, not purchased. In other words, the use of insurance in an exit plan has historically required a sales process in which a purchaser of insurance needs to see a vision of what could happen to their lives without insurance. This newsletter is written with the intention of moving business owners in a direction where a desire to learn about and utilize certain forms of insurance is something that is ‘purchased’ for the benefit of you and your company, and not something that needs to be ‘sold’.
Take Action Today
Call your insurance advisor and request a review of your existing policies for your business and your personal lines. Seek to learn about the different ways that insurance can serve as a catalyst and disciplined approach to advancing your plans for a future exit. You worked a lifetime to build what you have. Just as you were responsible for the success of your enterprise, you are equally responsible for seeing its succession and/or transfer, including your exit. Be sure to remember to insure your future exit. In doing so, you will advance further towards the peace of mind that comes as a result of proper planning.
The success of exiting a business depends greatly upon the mental perspective and preparation of an owner during the exit process. Business owners tend to fixate their thoughts only on running and growing their business. However, there is a tremendous amount of value in seeing the ‘big picture’ with your exit and thinking about the future and where you would like both the company, and yourself personally, to end up. The owner who is able to see the larger picture, and understands that stepping out of a business is an opportunity to move both themselves and their company toward a new stage of life, will be best prepared to execute a successful business transition. This newsletter is written to help owners think through the ‘big picture’ and align their thinking and resources towards a successful exit.
The Transfer Timing Slots
One of the first ‘big picture’ concepts that owners should grasp is the idea of ‘timing slots’. Much like a slot machine, you want to see if you can match up three (3) critical areas – (1) personal timing, (2) company preparedness, and (3) market timing. A solid ‘big picture’ of an exit considers all three.
Let’s Begin with Market Timing
Markets run in cycles and timing is important. If a business is performing well because there is a favorable economy, all things being equal, this can be an optimal time to consider an exit. Valuation is high, employees are engaged, and – often times – buyers / investors have a high degree of interest and activity.
As the chart below indicates, the last three (3) decades have followed a similar market cycle and this decade is following suit.
Therefore, if you believe the information above, your ‘big picture’ in terms of market timing indicates that the next few years are ideal in terms of market timing.
The 2nd ‘big picture’ concept for an exit is Company preparedness. In other words, your business needs to be [at least somewhat] transferrable to have a successful exit.
There are a large number of items that can lead to poor timing for an exit and lack of company preparedness. For example, you may have recently had a departure of a key manager or you may have lost a key customer and need time to replace that revenue. Alternatively your CFO or controller may not have your finances in order or you may have a law suit pending that should really be resolved before moving ahead with a transfer of the business.
While timing can rarely ever be perfect, it is important to think through the current and forecasted profitability and valuation to see that your company’s preparedness is optimal for a successful transaction that will result in a valuation and deal structure that works for you personally.
The final ‘big picture’ concept – and the third consideration in the timing slots of an exit – is personal readiness. In fact, it probably makes sense to begin the ‘big picture’ thinking of an exit with personal planning. The reason is that this can be the most complex and take the most amount of time to navigate. Also, how an owner thinks about an exit is what is most likely to drive the exit process. In other words, the market and company can be perfectly positioned for an exit, but if the owner does not want to leave, it is possible that an exit process will not begin.
A Vision for a Personal Future Without the Company
Prior to considering any of the various options for exiting your business, you must be able to recognize two key elements within yourself:
As a successful business owner, you realize that you have created self-worth and profit for both the company and those around you, including your family members. In building a company, you have built a personal identity, perhaps the only one which is recognized by some family, friends, and business associates. Many owners, without properly considering their new, post-exit identities will be unable to successfully pursue a business exit because of their continued attachment to the business. In order to ensure a smooth transition, you want to be able to articulate both where you are in your business today and the personal challenges associated with getting you to where you want to be.
Developing Exit Skills
The key to achieving the vision – or the ‘big picture’ – for your exit is an understanding that the tools and skills which have enabled you to build your business will likely be of limited value in planning your exit from the business; you’ll need to learn new skills. If you are using the same tools, skills and thoughts that you used to run and grow your business, it is very difficult to move on to the next phase. The primary reason why this is true is that the development of business value is not entirely consistent with the development of fulfilling personal needs and values.
A ‘big picture’ look at your situation will have you begin to ask questions about ‘why’ it is important to design an exit plan that meets the needs that you have defined.
Seeing the “big picture” in your exit involves taking the time to reflect on goals of the business, the timing of the market, but most importantly, your interests and objectives outside of the business. Exploring your personal goals allows you to confidently move forward to the next phase of life, which may or may not include continued involvement with the company. As in so many aspects of one’s life, perspective is key to ultimate success. By viewing your exit as an opportunity to a begin a new lifestyle instead of as a loss of your business identity, you can begin develop a ‘big picture’ for your exit.
Owners of privately held companies often times have the majority of their wealth tied to their business. These owners are well served in understanding the challenges faced in converting an illiquid asset into cash. For example, unlike the valuation and liquidity for a publicly traded company, the value and ability to cash in a privately held business is a more subjective and complex matter. This newsletter is written to highlight the differences between public ‘liquid’ and private ‘illiquid’ securities. By having this level of understanding, owners can more accurately understand the differences between private and public stock ownership and the challenges faced with turning their illiquid business stock into cash that they can use in retirement.
No Open Market Exists for ‘Illiquid’ Shares
The most obvious difference between ‘liquid’ and ‘illiquid’ company shares is the lack of an established ‘open market’ through which shares can be traded for cash. When a company’s shares are owned by the investing public and there are shares traded on an exchange, then liquidity has been achieved and the owners of those shares can cash in at any time, based on the current market price.
Privately held businesses do not have this luxury. In fact, the owner of a privately-held company needs to, in effect, create their own market for the sale of their shares. Buyers need to be identified and a valuation will be based on a negotiation that takes place during that process.
Private Ownership = Ultimate Control
So, while there is a sacrifice to liquidity for a private business owner, the advantage is being able to enjoy the benefits of control over their business. In fact, private company owners often do not report the performance and activities of their business to anyone except for the government and, perhaps, their bank. By contrast, if your business was publicly traded there would be requirements to report on a regular basis the company’s performance to non-controlling shareholders.
Private Business Ownership Limits Portfolio Diversification
A private business owner pays a certain price for control in the form of personal risk. That owner has a concentration of personal financial risk within one investment, their business. By contrast, holders of publicly traded shares can buy and diversify their holdings, creating an investment portfolio that insulates their wealth from industry/segment-specific fluctuations.
A Lifestyle vs. an Investment
An important difference between public and private ownership is in the management of a business and the owner’s motives. Public company management motives are fairly simple—increase shareholder wealth by producing the highest possible profit in order to increase the price of the stock. To the public shareholder, the entity is a mere investment.
By contrast, private company managers and owners are usually one and the same. And ownership represents a whole lot more than an investment; it’s a personal wealth builder. For instance, the private manager will often-times look to ‘suppress’ the profitability of a company in order to manage his or her personal tax liability. Beyond tax savings, the owner enjoys lifestyle benefits, such as a company car, additional compensation, premium benefits, extended vacations, and the personal satisfaction that comes with complete control over the entity.
Balancing the Benefits of Private Ownership with the Need for Liquidity
So the advantages of control and privacy are off-set by a lack of liquidity. These contrasting points come to a head when it is time to design and execute an exit plan from the business.
In order to attract a buyer for your company’s shares, an owner will need to disclose how their business is run – this includes the good, the bad and the ugly of how you handle your company’s management, strategy and finances. The owner also needs to accept that many of the perks of running the business will come to an end for them someday. For many owners, it is a challenge to share with others how your privately held business is run. Think of the analogy of selling your home – the place where your family lives and memories are made – and then the uncomfortable process of having strangers parade through your living area with judging eyes determining if they too want to live there one day.
The way that an owner can balance the privacy that they enjoy with the need for future liquidity is to set a plan for their future exit and understand how and when certain items will be disclosed.
Concluding Thoughts – Making Your Private Business Marketable to Someone Else
The exit planning process is about anticipating the needs and demands of your future owner so that you can prepare yourself and your business for this transaction and transition. An effective exit plan recognizes both the benefits and limitations of private business ownership. A well-prepared owner will not only understand these differences but will be in a position to explain them to a future buyer – much the same way that public companies disclose their business dealings. Such preparedness helps to assure the protection and preservation of the wealth that is ‘trapped’ within your privately held business.
We hope that this newsletter has helped you to see some of the challenges faced in designing an exit plan by comparing your privately-held business with that of a public company security.
Did you set a goal for your company this year?
If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate.
Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone.
But growth can come at a steep price and can even detract from your ability to build your personal wealth.
The Contrasting Exits of Michael Arrington
For example, let’s take a look at an entrepreneur named Michael Arrington. Arrington started Achex in 1999. It helped facilitate payments in the early days of the internet, and Arrington was focused on growing it. He accepted two rounds of outside capital to fund the company’s expansion.
Achex was ultimately sold to First Data Corporation for $32 million in 2001. Unfortunately, because Arrington had been focused on growth above all else, he had not only raised two rounds of financing but also reduced his personal stake in the company down to next to nothing. As he told Business Insider, “When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ. The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”
Arrington then went on to start the technology blogging website TechCrunch in 2005. This time Arrington wanted to grow the business, but not at the expense of his equity. Instead, they grew the company within their means and funded the business largely out of cash flow. Arrington still owned 80% of the company, according to Business Insider, when he sold it for approximately $30 million.
Apparently Arrington had learned his lesson—growth is good, but not at the expense of all else.
The Alternative to Growth at All Costs
The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:
Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Sellability Score. http://www.gtgrowth.com/the-sellability-score/
Microsoft’s recent $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 have started to 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 365.
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.
There is an old saying that goes “show me how I am paid and I’ll show you how I’ll behave”. The issue is simple for business owners – the right incentive plans help to grow the value of your company while the wrong (or no) incentive plans leave key employees with little direction as to help you, the owner, grow the company to the next level.
When it comes time to think about a transition or exit, often times key people are, rightfully so, the initial consideration. People issues can be some of the toughest that you will face in your role as manager, owner, and leader of your private business. The key is not only to attract these value-add managers but also to retain them and, perhaps also align their efforts with what drives value through your Company. If done properly, aligning your key people can not only result in a more profitable business, but also a more transferable company as well.
Typical Compensation Plans
Owners will often-times set up compensation for key executives in a few different ways. First there is base compensation and next there is some form of ‘year-end’ (or quarterly) bonus, based upon the performance of the business. The 2nd part of the compensation formula is often times the least well developed. The reason is that owners do not want to make a financial commitment that is not aligned with the performance of the company, so owners take a wait and see approach to determine what is available to pay at the end of a measuring cycle.
The challenge with this form of subjective compensation planning is that it leaves too much to the owner’s discretion, which, in turn, leaves room for the wrong interpretation from the key person. Moreover, when bonus plans are subjective, the key person does not feel like they have control over their income and that many times their positive efforts (which should be rewarded through a bonus) are being off-set by non-performers in the Company.
A Path Toward Alignment
So, owners who want to more closely tie the performance of the company to the compensation of their key people should start to focus on the key performance indicators in their business. “KPIs” are the metrics that are measured to determine the business’ success. Now, many owners will go right to revenue and cash flow as key metrics. That is natural because both of those items are critically important to making payroll and meeting other financial obligations. However, other key metrics that drive operational performance as well as help the company with its marketing efforts are equally, if not more important because those items set that stage for tomorrow’s revenue.
Alignment in a compensation plan considers both the short-term and the long-term. It thinks through the behavior that the owner wants to see versus the behavior that exists today. This is a highly customized approach that varies by different departments and job functions.
A Warning Regarding Profit vs. Value
Owners who are moving in the direction of aligning key executive compensation with Company performance should be forewarned not to focus only on revenue and cash flow. Rather, owners are well served understanding what drives value in a privately-held business and striving towards incentives that encourage behavior that produces more value-creating activity and not simply more revenue and cash flow.
The Starting Point for Alignment
So in order to get started with aligning your key people, you need to think through the overall goals of the company. If you ‘begin with the end in mind’ you can think through a future destination where you want the business to arrive, and then set a roadmap, through the incentive plan, to help reward the key people who get you to that destination.
However, this is where most owners fall short with longer-term planning. The reality of business ownership is that too much focus is on ‘working in the business’ and not ‘working on the business’. A lack of a strategic plan and forward thinking goals prevents the build-out of a comprehensive incentive plan that details the path forward.
Sharing the Build-out of the Alignment Plan
For owners who undertake to design an incentive compensation plan, you are well served in making your key people a part of the design process. This is a far better approach than simply creating a plan and delivering it to the key people. By discussing the details of an incentive design with your key people, they can feel a part of the process and also get a sense of ownership of the plan that is designed to help benefit both the company and their individual efforts. Take feedback. Involve key people in the process and you’ll end up with a better plan that has stronger buy-in.
Incentives that Lead to Growth and Eventual Exit
A well designed incentive plan will challenge both you and your company. It will put folks in control of their incomes and assure that increased income for key people first benefits the company. When you can do this, you begin to make the business less dependent upon you and increase the transferability of the company.
The alignment of your people therefore is key to the success of your exit. The overriding point is that you need to build a strong management team and design incentives that excite and challenge them. In doing so you will be personally challenged with ‘letting go’ of many responsibilities. When faced with this struggle, simply remember that the highest and best use of your talents lies beyond the day-to-day running of your business. Align your people to build a successful exit plan.
Across America today there are millions of baby boomer business owners who are thinking about how they will transition the ownership of their business to someone else as they reap the rewards of a lifetime of business success. However, because most of these owners have no experience with selling a business, they do not truly know what to expect in the process. And for a transaction of this complexity and size, it is likely that what owners do not know will materially hurt them in the process of transitioning their companies.
This newsletter is written to help owners get past the first, and most crucial preconception – that selling / transitioning their privately-held business will be similar to the sale of their home. Because so many business owners believe that selling a business is akin to selling a residential home, this newsletter explains the differences between selling a business versus selling a home – or, for that matter, how selling a business differs from the sale of virtually any other asset that you will sell in your lifetime. These comparisons become very significant because, generally, a privately-held business is that business owners’ largest and most valuable asset.
It is my objective to make owners aware of these differences in order to begin the process of educating owners who hold this pre-conceived and very false assumption.
The Mental Process of Associations
As human beings we learn through experiences and our associations with those experiences. So when we are presented with a new concept, for which we have no experience, we look to associate the new concept with something from our past.
In the case of the sale of a business, owners often look to a sale of another large asset that they may have experienced in their lifetime, the sale of their home. In fact, the sale of a privately-held business differs from the sale of a home in five (5) material ways that are provided below.
Difference #1 – Valuation & Buyers
Home sale values are based on the comparable sales method for neighboring homes that resemble the house being sold. This means that the seller of a home can most accurately see what their property is worth by seeking the closest comparable sale transactions in their neighborhoods.
This analogy is only partially true for trying to compare the sale of a business. While other companies like yours that have sold in the past is some indicator of what your business may be worth, there are large differences between a static, free-standing structure such as a home versus a dynamic, ever-changing entity such as a privately-held business.
Moreover, the value of a home is not dependent upon who the buyer is. In the world of residential real estate, all buyers are [essentially] equal – they are either qualified for financing or they are not. In the world of business sales, the type of buyer that you are talking to is critically important. Different buyers bring different attributes to the business sale – some will pay more than others, and some will have to pay you out over time, i.e. not all cash at the closing. For example, a competitor may pay more for your business than, say an employee who you would like to see own the business but does not have any money for the purchase. That employee would need to pay you from future cash flows and the idea of getting a higher value can be tough. This leads us to difference #2.
Difference #2 – Deal Structuring
When a homeowner sells their home, they get paid the negotiated selling price at the closing. In business sale transactions, the amount of money received at the closing often times represents only a portion of the total proceeds that are part of a larger negotiated selling price. Generally speaking, smaller deals – those less than a few million dollars – are subject to more ‘structuring’ of payments over time, while larger deals tend to get more cash at closing. That being said, if a company is, for example, highly dependent upon an owner, then there may be a larger earn-out or payment associated with the sale. Again, when you sell your home you certainly do not expect to be paid only a portion at the closing and the balance over time.
Difference #3 – Taxes
When you sell a home, there is [generally] one (1) tax rate. When you exit a business, there are an endless number of potential tax outcomes for the transaction. The most easily recognized tax rate for a sale transaction is the capital gains tax rate. This rate applies to the gain – the amount of value exceeding the cost basis of the stock – that is realized in the sale of shares of the company.
However, not all business sales are ‘stock’ deals that qualify for capital gains taxation. Rather, many are ‘asset’ deals that fall into a separate category and allocation process to determine the appropriate tax rates. Payments to an exiting business owner under an asset deal can have a variety of tax consequences that will impact what an owner will net from the transaction. This is not the case in the sale of a home.
Difference #4 – Transaction Types
The sale of a residential home includes all of the property and the structure(s) that are on that property. Therefore, residential home sales are an ‘all or nothing’ deal. Business sale transactions come in a variety of different forms, with owners able to sell all or only a portion of the company’s stock. Could you imagine a home sale that included only a few bedrooms and a garage, for example? Naturally that is not possible. However, in the sale of a business, the owner can sell all or only some of the equity and can also have an option of either continuing to stay involved with the business or not work any longer.
Difference #5 – The Impact on Others
Our final and greatest difference between selling a business versus selling a home is the impact that the change in control has on other people. When an owner sells or transitions a company to a new owner, many people are impacted including employees, customers, vendors, as well as the owner’s family. While the sale of a home is an important event, it will not have as a dramatic impact as the transition of a company whereby so many people depend on that business from a financial perspective.
There are certainly more than five (5) differences between selling a business versus selling a home. This newsletter was written to raise awareness to owners who are considering a transition of their company and have not fully thought through all of the implications because these owners do not have the experience and any similar associations. I hope that this newsletter has helped you see that the selling of a business is very different from the selling of your home and I encourage you to seek out experienced advice in this area so that you do not make the same mistakes that owners have made in the past who had this same assumption.
When business owners think about transitioning out of their companies, some of the first thoughts that come to mind relate to the sale of their business. In fact, many business owners believe that in order to exit their business they need to sell it to someone else. As a result, the term ‘exit planning’ is often misunderstood and interpreted by owners as a ‘sale’ of their company.
This newsletter is written to help owners to see that developing an ‘exit plan’ for their eventual transition from the business is not the same as the sale of the business. In fact, as the ‘exit planning industry’ continues to develop, a strong track record is being developed that demonstrates that owners who plan for their eventual exit fare better than those who simply view an ‘exit plan’ as a sale of the business and wait until the last minute to take action.
This newsletter seeks to differentiate selling a business from establishing an exit plan so that owners can consider the benefits of a plan for their exit as a way to protect and harvest the value that is inside your privately-held company.
Ten (10) Differences between Selling and Establishing an Exit Plan
The table below was created to provide ten differences between selling a company versus establishing a plan for an eventual exit.
|Sell The Business||Develop an Exit Plan|
|Advisor motives rule||Owner motives rule|
|Advisors are transactional||Advisors are relationship-based|
|Goal is ‘sale of business’||Goal is to achieve business owners’ stated goals|
|Process includes ‘finding buyers’||Successors/buyers are found or ‘created’|
|Sales process at ‘mercy of market’||Transfer process is controllable|
|Outside party necessary for deal||‘Internal’ transfers considered w/ external|
|Company is ‘shopped’ to market||Company examined for various transfer options|
|Negotiations center around price||Discussion include various transfer methods|
|Large advisory fees & taxes paid||Taxes & fees can be controlled and managed over time|
|Company sale – primary consideration||Personal and corporate objectives considered|
As the chart indicates, there is a great difference between the sale of a company and the strategic development of a plan for an exit. As the chart illustrates, the benefits that an ‘exit strategy’ can provide include:
– Evaluation of various transfer options
– Potential for creation of a buyer
– A controllable process happening over time
– Enhanced management of taxes and fees
– A comprehensive and objective process that includes both personal and corporate objectives to drive the overall decision-making process
These combined differences make the larger point that an ‘exit strategy’ can be developed and executed over a long period of time without the time-sensitive influence and pressure that comes from the sale of a business.
So given these large differences, let’s discuss the merits of a well-developed exit plan and show how the sale of your company may or may not be one of the last action items in the overall plan.
A Well Developed Plan for an Exit
Owners who engage in an exit planning process may or may not sell their company in the future. However, before any decision is made to sell, a process can be followed to determine an owner’s goals and the readiness of that owner to reach those goals. Further, owners are educated on different options during an exit planning process whereby the pros and cons of different exit alternatives are evaluated to get to the one that works best to help you achieve your goals – within the time frame of your choosing.
The benefits of developing an exit plan long before any consideration is given towards the potential sale of your business are many and great. Most of all, you as an owner will achieve a certain amount of clarity that the transaction that you are choosing will be the one that is best for you – this may or may not include selling the company to an outside buyer.
Consider the formation of an exit strategy from your business today and join the growing number of business owners who are learning that ‘selling’ is not their only option.
Most owners of privately-held businesses have the majority of their wealth trapped in their illiquid business. What this means is that without a path to turn the value in your business into cash, your overall wealth will continue to stay concentrated in your ownership of your business. So the fact that your business provides for a solid income and lifestyle is separate and distinct from considering how and when you will be able to turn that illiquid wealth into cash. This newsletter is written to help owners see that a business exit plan can be a vital first step towards diversifying your overall portfolio while also protecting the wealth that resides in your illiquid, privately-held business.
The Basics of Diversification
There is an old saying that applies to many business owners – that “in order to get rich, you need to own a lot of one thing, but in order to stay rich you need to own lots of different things.” Many business owners today ‘got rich’ through the ownership of their privately-held business. However, in order to stay rich, many owners will need to diversify their personal wealth through the transfer of ownership of their companies.
If you are like most business owners, your business comprises the majority of your wealth. Also, like most owners, your business is likely highly dependent upon you. Therefore, if you want to protect your overall wealth through the process of diversification, you can consider planning for the eventual transition of your business, whereby a point in time will come for you to turn your illiquid wealth into cash.
Why Plan to Sell Something So Valuable?
Many owners understand the logic of diversifying their wealth through an eventual exit but they do not take immediate actions because they have a very good thing going with the success of their company. For owners who agree with the logic of diversification but perhaps have not taken any action in this direction, we offer another question to ask yourself:
The answer for most owners to both questions is a resounding ‘no’. Not only would most owners not turn around and repurchase the business that they just sold but they would also not be looking to reinvest in a concentrated, single asset for the same sale proceeds. The obvious reason for not repurchasing your business or to re-concentrate your wealth is because the RISK of only owning one stock – after achieving liquidity – is too high. There is a single point of failure with that financial plan because the investment dollars are not DIVERSIFIED.
This is the financial reality of many owners of privately-held businesses today.
Why Most Owners Do Not Begin the Process of Diversification with a Plan
An exit plan is a written document that assists an owner with consideration of different ways to diversify their wealth by eventually becoming liquid from a transfer of ownership. Given that the sale of a business is the largest and most emotional transaction for most owners, it makes sense that a plan would come before an action that is taken. However, we find that most owners do not take action to plan for their diversification for a variety of reasons. Many business owners offer a number of reasons, listed below, for their lack of planning, including:
In each instance we see that the owner’s ‘plan’ is quite limited and does not actually diversify the owner’s family’s wealth. Perhaps somewhere in this list of common responses you see one that fits your reaction to this question of planning for diversification?
The Psychology of ‘Selling’
If there is so much logic behind diversifying wealth through an exit plan, then why don’t more owners do it? One answer lies in the psychology of an exit.
As an owner of your business you are the master of your own destiny. You have survived the odds against ‘making it’ in business and continue to fight them each and every day. For the most part, thinking about an exit strategy plan cuts against the grain of thoughts of business growth and expansion.
So, given this gap between logic and action, how do you begin to turn this bridge, this divide and start developing an exit strategy plan that protects all of the wealth that you have accumulated?
Seeking Help is the First Step in this Planning Process
The most successful owners know that they do not climb a mountain all by themselves. Rather they surround themselves with a team that knows more than they do about areas that they are venturing into.
The same process holds true for planning for a business exit. We advise that you seek out professionals with experience in this area to help you begin the planning process that ultimately leads to the protection of your illiquid wealth.
In closing, most business owners will make up their minds to do something when they are good and ready to do so. Therefore, we can only continue to impress upon the millions of business owners out there that diversification is a key component to securing the success that you have worked a lifetime to achieve. In this regard, one can say that it is never too soon to begin thinking about an exit plan, but without a plan, it could one day be too late. We hope that this newsletter has assisted you in thinking about your overall wealth and how an exit plan can begin the process of helping you protect it.
As the owner of a privately-held business, you are likely a catalyst for the ongoing running and growth of the business. The roles that most owners fill in their companies often span a number of different areas within the business. Even with an established management team, owners are often still the ‘straw that stirs the drink’ on a daily basis. Without the stirring where would your business be? And, as you consider your exit from your business, you need to answer two questions on this topic. First, ‘how dependent is my company on me’, and next, ‘who will do my job when I leave?’
What is Your Job at Your Company?
In your business are you the sales person or are you the head of operations? Or are you both? Do you innovate within your product line or do you watch over the finances on a regular basis? Or do you do some of both? Are you the leader amongst the staff or are you the owner who stays in their office in order to empower others to do their jobs without micro-managing them? Overall, how much of your company is dependent upon you and who will fill those roles after you exit from the company? Again, these are critical questions to answer if you want to have a smooth transition of the business and achieve the highest value with the fewest continued obligations from you during a ‘neat and orderly transition’.
Are You a Bottleneck for Your Business and Your Exit?
An important question to ask about the job(s) that you perform at your company is whether or not you actually slow down the growth of your business. In other words, are you a bottleneck to your company?
You likely are a bottleneck to your company and your successful exit if any / all of the following apply to you:
The Challenges to Overcome
Owners typically resist changes to how they work in their businesses for a variety of reasons. Some simply don’t want to make any changes after years of getting things the way that they want them. Other owners want to make the changes but don’t want to do the work or do not know where to begin. While others do not want to spend the money on new hires to do the jobs that these owners should not be doing. Further some owners simply do not trust other people with these critical functions.
Give serious consideration as to what is holding you back from making these changes and letting go of certain tasks that others could more easily complete. One motivation to make these changes is that your pool of potential, future owners becomes more limited if you are a bottleneck to your business and do too many jobs.
The Exit Challenge to a Bottleneck
Overall, the only person who will be willing to own your business after you is someone who not only wants the exact job that you currently have but also is as qualified as you to do that job. If you have not properly assigned and delegated critical responsibilities, then it stands to reason that in most cases, the only person who can do your job after you is someone with the experience to do so as well as the financial backing to purchase your company. All things being equal, this person, if they exist, is likely running their own business today.
Exit and Other Benefits of a Low Dependence
When you can reduce your owner dependence by distributing these responsibilities to others, you are in a stronger position to execute on an exit plan that liberates you from your business. What is also interesting about going through this exercise is that your business will likely actually run better once you begin to take a step back and empower capable people to do certain tasks without you.
We hope that this perspective will assist you in achieving a more successful exit as you further define your job and discover who can replace you at your company after you exit, along the way reducing the dependence that your business has on your individual efforts.
Pinnacle Equity Solutions © 2016
Life and business are both like the harvests in that they run in seasons. And from this truism comes the saying that “there is a time to reap and there is a time to sow”. Harvests are most successful when the seeds and growth have occurred at the right time and the end product is ready to be plucked. While the seasons in nature are driven by weather, the seasons of business are brought in terms of economics.
A Change in Seasons
The Great Recession of a few years ago can easily be characterized as the economic equivalent of a frosty, winter season. This was a time when conditions for growth were not optimal. Since the natural tendency of most business owners is towards growth there was a different mindset – one suited to that season – which developed. This was a mindset of ‘sowing’ with the thoughts that owners could reap the benefit – i.e. a successful exit – during a season of better economic times, or full harvest.
Unfortunately, a change in economic seasons is not as easy to detect as a change in the weather. The reason that this statement is true is because the factors that influence a business transition are often not fully understood by owners until they engage in the exit process.
A Harvesting Season
The chart below indicates that today, we are in a Harvesting season – or in more appropriate terms – a Seller’s Market, or Prime Selling Time. Review the chart below to see the trends that each decade has followed and how this chart illustrates a Harvesting Season today.
The Opportunity to Reap What You Sow
If you have been thinking that you would one day look to reap the benefits of your hard work, then perhaps that day is upon you. A number of years ago, the advice to owners was to think about questions such as “who will run/buy my business in three years [when the markets recover]?” and “what capital will be available for my future owner / successor to buy me out?” Owners who asked and sought to answer those questions over the past few years are in a position today to look to either identify their next owner or to executing on plans to transition the business to an owner that they had previously identified.
The Manners in Which you Can Harvest
When it comes time to harvest, you will want to get answers to certain questions, such as “do you want to give up control in a transaction?” If the answer is “yes”, then a sale/merger or leveraged recap with a private equity group may be the right exit option. However, if the answer is “no”, then perhaps a sale to a co-owner or management buyout – perhaps accompanied by an Employee Stock Ownership Plan (ESOP) – may be the way to go to take some chips off the table and set the company up for future ownership.
How a Lack of Planning Can Impact What You Reap
Many owners will look at this current season as an opportunity to harvest their business profits and will attempt to do so without any planning. Many owners will simply try to transact with a party or hire a transactional advisor to identify a buyer without any level of planning. One of the challenges in failing to plan is that owners are not anticipating the information that will be needed by their buyers in order to close a transaction. Owners who do not plan are subject to many surprises during a selling process that could easily be addressed during a planning / preparatory process.
Moreover, a properly designed exit plan integrates your personal needs along with the needs of the business. So a comprehensive planning process will include both business and personal needs.
There truly is a time to sow and a time to reap. The decisions that you made over the past few years to sow the seeds for your readiness for an exit perhaps are now ready to reap a benefit to you in this new harvesting season. We hope that this newsletter accomplished the goal of having you think through your personal and business objectives to harvest your profits at a time that fits you from a business and personal perspective.
With each New Year comes thoughts of new beginnings and resolutions. For businesses, this also comes with planning for the year ahead. This newsletter is written for business owners who run their own companies and have the majority of their personal net worth tied to that illiquid business. 2016 may be the opportune time for you to begin planning a future exit from your business. Listed below are eight (8) reasons why you should consider planning your exit in 2016.
1. The Timing is Right
In real estate, the saying is ‘location, location, location’ – with business transition planning, it is ‘timing, timing, timing’. Just as timing was important as you built your business, it is critically important during your exit. If you are ready to exit within the next three to five (3-5) years, then 2016 could be an ideal time to plan for, and potentially execute your exit. To put this in perspective, let’s look at the transfer spectrum chart below which indicates that we are currently in the middle of a prime selling time.
If you are ready to exit your business then you may want to take advantage of the fact that the chart forecasts another three (3) years of prime selling time in the transfer cycle. If you do not exit in this ‘window’ you will likely have to wait another eight (8) years (until 2023-2028) when the next ‘exit window’ opens.
2. There is Still Good Demand Today for Solid Businesses to Be Purchased by Private Equity Groups
Investment groups, called private equity groups, are continuing to purchase solid companies today. These investment groups exist to purchase private businesses and add value to them. As a result of thousands of these groups being in the market today, there is solid demand for good companies. If you can catch this wave of buyers you may be advantaged in achieving a higher value for your exit. There are two (2) caveats to this statement. First, the demographics show that a large number of owners will want to exit their business, and second, interest rates may be higher.
3. The Supply and Demand of Exiting Owners is About to Shift Dramatically
The oldest members of the Baby Boomer generation started turning 69 this year. This means that over the next five (5) to ten (10) years, roughly 3.6 million business owners per year will be looking to exit their business via a sale to a future owner. Simply put, there will be more sellers than buyers in the marketplace. Therefore, in order to stay ahead of this cycle, you might consider 2016 as a starting point for your exit planning before too many businesses create a large supply of sellers.
4. Interest Rates Could be on the Rise
Interest rates are likely to begin to creep upward after a decade of historically low levels. When interest rates rise, borrowing costs increase. When this happens, a segment of the market that finances acquisitions with debt, i.e. the private equity groups mentioned previously, is impacted as these buyers have more expensive debt. When the cost of borrowing increases, generally speaking, this reduces the levels of value that these buyers will pay for a business. As a result, some of the buying demand that exists today could begin to wane when borrowing costs rise.
5. The Role of the U.S. President is Unlikely to Reduce Uncertainty
By the end of 2016 we will have a new President, but one has to ask ‘what is really going to change?’ Uncertainty stems from a number of different factors, from economic to geo-political to global threats. Whether a Republican or a Democrat occupies the White House, there will still be challenges to the overall economy that will impact your exit through continued uncertainty that exists in the world.
6. The Entire Tax Code is Set for an Overhaul After the Next Election
The last time that the tax code was overhauled was in 1986 under President Reagan. These overhauls occur approximately every twenty-five (25) years. And, since the United States is burdened with $19 trillion dollars in debt, it is unlikely that tax rates and / or deductions and loopholes will continue to be available to those who are going through a large liquidity event, such as a business sale. It is hard to predict what the tax code changes will look like, but again, if you are early with your planning, you may be able to take advantage of certain tax benefits that may be going away with a tax code overhaul.
7. Your “Lifestyle Business” May Not be Providing you with the Lifestyle You Expected
If you are like many owners of privately-held businesses you probably have a lifestyle business, meaning that the business provides for your personal lifestyle. With tax rates having increased and the marketplace changing, you may not be experiencing the same lifestyle that you once did. Planning for your exit in 2016 may help you focus on your post-exit lifestyle and assesses your current ability to define and meet your post exit objectives. If your business value is higher today because of increased profitability, then perhaps an exit plan can help you pull the pieces together.
8. Your Business Likely Showed Improved Performance in 2015 – Hence A Trend Towards a Higher Value
The future owner of your business will ultimately care about two (2) financial components related to your company’s performance: (i) the future cash flows and (ii) the [perceived] risk of receiving those cash flows into the future. Therefore, each additional year that you can show a trend towards improved performance is one more arrow in your ‘negotiation quiver’ to argue for – and defend – a higher value for your business exit. This is particularly important if you need that additional value to meet your personal, financial goals, as presented above.
This newsletter was written to inform, educate, and provide a template and some rationale for thinking about your plans for an exit from your business. It is our hope that this objective was met and that you are further along in your thinking about forming an exit plan in 2016. Contact Frank Mancieri @ GT Growth & Transition Strategies for a free consultation as you first step in the process toward your ultimate goal.
While most business owners focus on the annual profit or cash flow of their business, it is less common devote time and attention to an equally important measurement, your business’ return on investment. An ROI measurement can help an owner determine whether their business is not only providing them with a solid lifestyle, but also whether or not they are keeping pace with the competition and making the most of their ‘risk adjusted’ returns for all of their wealth. Do you know if the risk-adjusted return on your business is high or low? Do you know if you are getting the return that the market would require for the risks that you take in your business? These are important questions because if you want to exit your business someday, a prospective buyer will base his or her buying decision on their expected ROI from the purchase of your business.
Has Your Business Provided a Return to You?
The ROI of your business can be a measurement by the financial gain provided to you over the years that you own the company. A simple calculation, provided on the following chart, can assist with understanding an answer to your company’s ROI to you.
As demonstrated in the chart, the owner of a business that can sell for $8,000,000, which had an initial cost of $200,000, has an annualized return on investment of 27%, when also factoring in the ‘excess salary’ each year. In this case, the exiting owner grew the business over a 15 year time period while also generating ‘excess compensation’ (compensation as an owner, not as a manager) for each of the years of ownership.
Will the Same Business Provide a Suitable ROI for a Buyer?
The same ROI calculation can used to measure whether or not a business will generate a return for the next owner. As an exiting owner, it is helpful to look ahead to show a buyer/successor the type of return that they can expect to get by owning the business. Having this knowledge will help you argue for a higher value when the time comes to engage with a future owner.
Put simply, a buyer or successor for your business is interested in what future return the business can generate for them, not necessarily what the business has provided for you in the past. As an exiting owner, you can improve their positioning in the succession planning process by determining what the buyer or successors’ future expected returns will be and then describe the risks involved with generating those returns.
Knowing Your Buyer’s Motives
One of the most effective ways to get comfortable with engaging buyers is to understand their motivations and the math behind their calculations. Because buyers and successors have many options for investment opportunities, an exiting owner needs to understand how and where they can be a competitive investment for the buyer.
Minimum ROI requirements for prospective buyers can vary by buyer type or fluctuate depending on other business deals available to that specific buyer. If a buyer has, for example, a 25% return expectation for your business, then they will adjust their pricing to get to that level of return. In order to reduce the potential to have a buyer lower their valuation, an owner can look to demonstrate a higher ROI by projecting what will happen in the future and selling that future story to the buyer.
How to Get Paid for A Future ROI
Owners often make the mistake of overvaluing their businesses because of their emotions and the potential that they see in the company. These owners need to change their thinking to accept that an investor will have his or her own expectations and goals for future growth. And just because your business has provided you with a nice lifestyle, this does not mean that your future buyer will see it the same way.
The ultimate question then for you, the exiting owner, is not ‘has my business provided me with a great lifestyle over the years?”, but rather ‘can my business meet the return criteria of a potential buyer or successor in my industry so that I can both get a deal done and get paid the value that I would like to receive?”
Understanding your ROI and the ROI that a future buyer can expect from owning your business is a valuable tool in designing a plan for your eventual business exit. It is therefore crucial for an owner to objectively, accurately, and fairly portray the company’s ROI, both for himself and for potential successors. This is an important way that an owner can determine the true value and health of his or her business, and that a potential successor can make an informed decision to buy your business.
We hope that this newsletter has helped you to see that the exit from your business is the beginning of someone else’s investment. The better job that you can do in explaining a buyer’s ROI, the higher the likelihood will be of having success in your exit process.
Owners who think about exiting their business should wonder who the future owner will be and what will they be interested in when acquiring the business. These future buyers will consider both the company that you run as well as, potentially, how you run it in making their determination of the value of your business and, in fact, whether they want to make the acquisition at all. This newsletter is written to help owners understand some of the personal traits that professional buyers look for when purchasing a business – items that go beyond the company, its prospects and management team and its profitability.
Who are ‘Professional Buyers’
There is a world of professional investors called Private Equity Groups (PEGs). This is a formidable group of buyers in today’s marketplace as the overall desire of investors to purchase privately-held businesses has grown. Typically a wealth individual or institution will allocate a portion of their total investment portfolio (of stocks, bonds, etc.) to the purchase of privately-held companies. And, to serve that need of investors, Private Equity Groups have formed and grown in number over the past few years, to serve as a facilitator and manager of the private businesses that they purchase.
If you are looking at an exit that involves an external buyer, in all likelihood Private Equity Groups will be a part of your process, either seeking to acquire your business as a ‘platform’ company or as an add-on to an existing ‘portfolio company’ that they own. In either case, these PEGs often are also looking for owners to stay with the business for some period of time to assist with growth plans.
Leading Personality Traits that PEGs Look for In Owners
PEGs are looking for solid ‘investments’ (not just lifestyle companies) to own and run. These include businesses that show promise for future growth, solid management, solid and repeatable earnings, low customer concentration and a host of other factors. However, before a PEG will invest, they are also typically looking for certain traits from a business owner.
Ability / Desire to Learn and Grow
A Private Equity Group that purchases the equity in your company will do so because they see the opportunity for growth. Typically, the PEG will see an opportunity for growth that the current owner cannot see so easily. The PEG brings to the ‘investment table’ experience with owning and running numerous privately-held businesses. Therefore, the PEGs often-times have considerable experience with making changes to a business to help with that growth.
However, what most PEGs also know is that owners often make horrible employees. Owners have been doing things their own way for so many decades that the idea of change is often hard to grasp. So, an owner who can demonstrate a desire to learn and grow will be sought out by the Private Equity Groups. By contrast, an owner who is too set in their ways and resists change will often discourage a Private Equity Group from making an investment or a privately-held company.
Trying New Things
A PEG should serve the role of a ‘progressive innovator’ for your company. What this means is that the PEG should bring to the business ideas on how the company can change and grow. However, these changes should happen over time – not all at once. The saying that applies is that you should not try to ‘boil the ocean’, meaning that changes should happen incrementally. However, an owner who is not willing to try new things will not do well with an investor who is looking to innovate in order to grow the business.
Willingness to Enforce Accountability
One of the elements that private equity brings to a company is enhanced professionalism of the business. Often times this translates into accountability at all levels of the organization. For the typical owner of a private business, the personal relationships that exist within their employee base make it difficult to enforce accountability. And, therefore, parts of a privately-held business will typically be run in a sub-optimal manner because of the owner’s willingness to overlook certain items and not hold employees accountable.
PEGs look for owners who are willing to enforce accountability on the path to growth and greater profitability. This can be difficult for a number of owners to adjust to.
When considering the big picture of your business exit, you may think about the idea that either someone will run your company after you or the company will cease to exist. And, if you do not have family or management who have the ability to (and / or can afford to) run the business after you, then an external buyer / investor may be needed. And, if you consider Private Equity Groups amongst those who may own your business next, you may want to think through your willingness to learn and grow, to try new things as well as to change the manner in which you run parts of your company in order to determine if you are a solid candidate for a professional investor.
We hope that this newsletter is helpful in having you think through who a future owner of your company may be and what they may be looking for from you.
When it comes time for a business owner to contemplate an exit from their business, it is important to consider the differences between a ‘good business’ and a ‘good investment’. The next owner of your company will be looking for a ‘good investment’, not just a good business. Therefore, if you want to attract a qualified buyer for your business and get the highest value, then you’ll need to create a ‘good investment’, not just a good business. This newsletter is written to assist you in identifying the differences between the two distinctions.
Hallmarks of a Good Business
Most privately-held businesses are lifestyle businesses. In other words, the business generates enough revenue and profitability for an owner to live comfortably. Often times owners focus on the personal benefits of business ownership over the potential for the future of the business. For example, business owners will often live with slow / no growth in the business as a trade-off to not having to work as hard, not having to borrow money and not dealing with excess complexity.
When a business owner has a ‘good business’, such as the lifestyle business describe above, there will often-times be a limited set of professional buyers for that business. In fact, the largest pool of potential buyers for that business may be individuals who want to enjoy the same lifestyle as the owner.
Professional buyers are not just looking for good businesses, they are also looking for good investments.
Hallmarks of a Good Investment
There are many hallmarks of a ‘good business’ that are also considered to be a ‘good investment’. The list below is by no means a complete accounting of all attributes of a desirous company, but it will provide an overview of areas that professional investors consider important when purchasing a privately-held business.
A Business That Can Run Without the Owner
Owner dependency is a major issue with professional buyers. If your company is highly dependent upon you in order to run (and grow) into the future, then buyers may not consider your company a good investment. If you think about your investments in public securities or mutual funds, those companies run without you. In fact, it’s likely that you do not know who runs those businesses because you are merely an investor. There is a separation of ownership and management. In most small businesses the owner is intricately involved with many facets of the business. While some management may be in place, this can often-times not be enough to reduce the high levels of owner dependency. Therefore, in order to make your company a better investment, you may want to reduce the company’s dependency upon you.
A Business that Has Management in Place, Successfully Pursuing a Strategy for Growth
The next attribute that will help define your business as a good investment is how empowered and successful your management team is in pursuing growth through a defined strategy. If you have managers who take initiative, make good decisions, measure and report their own performance and can be entrusted to direct themselves towards achieving strategic goals, then your company begins to look more like an investment.
A Business that Is In an Industry that Has Attracted Capital and Has Growth Potential
If your business is in a slow / no growth industry but provides for a good income for you and your family, then it may not be perceived as a solid investment for a professional buyer. However, if you are in an area of growth and outside investment is finding its way into your industry, then it may be the case that an outside investor will value your business as one that has a growth story that can be realized.
A Business that is Out-performing its Peers in Terms of Profitability
It is not enough for a company to be independent of the owner, to have empowered management and to be in the right industry. For your company to be considered a good investment, it is also important that your company’s performance is stronger than your peer group. A good investment is not just one that makes money, but one that is ‘best in class’ – a company that outdoes the competition. To the extent that you can articulate the reasons that your company outshines the competition, even better.
It is important to present a good investment to a future owner, not just a good business. There are a number of things that you can do today to determine the difference between the two. I would be happy to help you assess your own situation.
Frank (Mancieri), Chief Growth Advisor, GT Growth & Transition Strategies, LLC
There is an old saying that ‘there is no return without risk.’ Business owners accept certain risks as a part of their day-to-day existence because there is risk in owning and running any privately held business. Understanding how to measure and compare these risks can assist in understanding how to compare the risks in your business with other risks. In the context of planning a future exit, this is particularly helpful because it helps to shed light on the potential manner in which value will be placed on your business by a buyer or successor
Risk is measured in many different ways including business risks, risks of product obsolescence, competitive risks, credit risks, market risks, as well as ‘opportunity cost’ risks – to name a few. However, the most important risks to evaluate are those that an outsider will use to evaluate your company.
Numb to the Risk
Too many business owners, because they ‘live in their businesses’ are under the false illusion that the risk in their business is ‘controlled’. However, the riskiness of any business, as a whole, should be measured more accurately by examining what a buyer or successor would be willing to pay for a controlling stake in that privately held business.
An exiting owner should ask:
Outside buyers do not understand the inner-workings of a private business. Therefore, they see risk at every turn. As a result, these investors are typically looking for annualized average returns on investment from a privately-held business of sixteen (16) to thirty-five (35) percent. In fact, sometimes greater returns are required for earlier stage companies.
Converting Return Expectations into Multiples to Get to Value
Another way to look at the expected returns of an outside buyer is to translate the 16% to 35% expected returns selling multiples cash flow, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Here, the expected returns of 16% and 35% convert into multiples of 2.8 times to 6.25 times the company’s cash flow. What this means is that depending upon how much risk a buyer sees in your business, they will adjust their cash flow accordingly.
The Conversion Process
In order to arrive at the conversion of a return expectation to a multiple, you simply divide 100% by the percentage return required. For example, if a buyer expects a 25% annualized return, this converts into a four (4) multiple. However if the buyer sees less risk and only requires a 20% annualized return, then the multiple jumps to a five (5) multiple. This is by no means a comprehensive formula for calculating the value of a business. However, this simplistic method is a helpful way for owners to see how risk converts into what someone will pay for your company.
Why Buyers Lower Valuation When They See More Risk
So why does the buyer of a privately-held company require a 16% to 35% return from owning privately held stock?
There are a number of reasons but the easiest way to understand the high expected returns are due to the illiquid nature of privately-held businesses. Unlike publicly traded companies, there is no ‘ready market’ for the trading of shares of private businesses. Therefore, there is no liquidity for these investments – which raises the risk associated with owning the business.
As a part of the illiquid nature of private businesses, there is also a lack of transparency. In other words, privately-held businesses have no requirement to disclose information about their company to anyone except the government and, perhaps, their bank. In fact, business buyers look at their role as needing to uncover issues that they cannot see before they will take ownership of the company. Experienced buyers look to identify risks before an investment and when they see risks they either lower their valuation or they walk away from the deal entirely.
Business owners are well served in knowing what the marketplace of buyers thinks of the risks that will be perceive in their business. As an owner, you can create a greater opportunity to achieve a higher value for your business if you can focus on reducing the perceived risk in your business. And, regardless of the ultimate exit option that you choose, being well informed when heading into any transaction is solid advice for any owner.
In conclusion, exit planning can be a complex endeavor for many exiting owners. These plans are not a part of the typical ‘business building’ that many exiting owners are so good at achieving. Applying some of the basic concepts of finance to your privately-held business helps in the process.
We hope that you found this newsletter helpful towards assisting you in thinking through a future exit from your business.
Your business success has been the product of years of hard work, dedication and focused results (and likely a little bit of luck). As you think about a future transition of the company there are a number of factors that need to be considered because your future exit will impact a number of people who rely upon you and your company. A comprehensive plan for an exit includes a combination of personal planning and business planning to assist you in reaching your goals. This newsletter highlights five (5) key planning areas that we hope helps you organize your total planning for a future exit.
The key areas of planning are:
1. Business Planning
Privately-held businesses are constantly evolving to changes in the marketplace. As such, your business has likely undergone some significant changes in the past few years. It is important to focus on the future, looking ahead to what an exit can mean for you and a future owner. Specifically, this means making plans for your business to run without you, including reducing risks that could jeopardize a transition. A business plan for a future transition includes consideration to how the business will run without you and over what period of time these changes will be implemented. Most importantly give thought to each business decision and ask whether or not it supports your future exit / transition. By thinking about your exit as you make business decisions, you will build your business to better suit the exit that you have in mind.
2. Exit Planning
As a part of your business planning, you should consider the options available to you for your future exit. As an ancient proverb states, the best time to plant a tree was 20 years ago – the second best time is now. Now is the time to begin or advance your exit planning. Without a written [or substantially well-informed opinion] of how and when you are going to exit your business, it is likely that you will continue on the same path that you have been on for years and you and your company will not be prepared for a future transition. Your future exit has a chance to produce a lasting legacy for you and your business as well as protect your overall wealth, perhaps for generations. A solid exit plan can also be the gateway to you enjoying a newly defined life that is the reward for your business success.
3. Financial Planning
Most owners have a high financial dependency on their companies. Between their income, distributions and perks, they ‘live out of their businesses’. Figuring out how much money you need to extract from the business in order to live without the business is a key element to your business and exit planning. If you can measure your ‘Value Gap’, i.e. the difference between what you have saved today and what you need to meet your post-exit lifestyle, then you can begin to analyze the viability of your exit. This Value Gap will also be a strong indicator of the exit options that you have available to you and how and when you will need to get paid for your illiquid business.
This newsletters is written to make business owners aware of the needs for advice for the future transition of a business. According to the U.S. Census Bureau statistics, there are nearly 30 million businesses in the United States today, meaning that a majority of these businesses will require a process other than an Initial Public Offering (IPO) of stock in order to achieve liquidity or turn the company stock (or assets) into cash. Our objective in this newsletter is to bring a few of these facts to light and provide some guidance as to who may be a buyer of your business in the future.
The majority of businesses in the United States today are ‘small’ businesses – enterprise values of less than a few million dollars. The following chart illustrates the wide base of small businesses relative to the very small number of large, publicly traded businesses (organized by the number of employees within each organization) that sit at the top of the pyramid.
Implications for the Exiting Business Owner
Since a large number of business owners are Baby Boomers, this means that as the Baby Boomers begin to exit these businesses through retirement, the supply will likely outweigh the demand for business ownership.
To put this challenge into even greater perspective, it needs to be stated that smaller business owners are generally going to have a harder time with their exit than larger businesses. Small businesses are often times more dependent upon the individual efforts of the owners of the business. As a result, many owners of smaller businesses are actually not selling an enterprise, rather they are selling a job. It is helpful for owners to understand the difference and to be aware of what, if anything they are able to sell to someone else.
Today’s newsletter is written to address an important topic in planning for an owner’s transition, namely, ‘how to get to the equity in your business?’ We’ll look at how business owners view their companies and then offer some planning-base suggestions as to how to draw the equity out of your business over time, assuming that you are not selling to an outsider. We hope that this newsletter content inspires you to begin planning for how you too will get to the equity in your business.
Getting to Income vs. Equity
There are two very different aspects to getting the money out of your business. On the first hand, there is the income that you draw from the business in terms of salary, personal/business expenses, and bonuses that you pay to yourself and/or retirement plan savings. All of this constitutes money that’s coming to you from the cash flow of the business going towards the lifestyle that you have built for yourself. The second and potentially much more important aspect, is getting to the equity – the illiquid part – of your business. The equity is your ‘owner’s value’, the reward for growing your enterprise and taking the risk as a shareholder and investor.
Leading with Personal Planning, Measuring the Value Gap
As a part of the process of tapping into your equity value, it is helpful to first know your Value Gap – i.e. how much money you need to extract from the business in order to maintain your lifestyle without the business. The chart below helps to illustrate this point.
We see that Bill Brown has $1,000,000 saved for retirement but needs $7,000,000 to maintain his lifestyle. Bill’s Value Gap is $6,000,000. The question becomes, ‘How can Bill get to the equity in his business in order to close this Value Gap?’
Like most business owners, Bill is focused on running and growing his business. Bill has some money saved for retirement. However, as we can see, it is nearly impossible for Bill to extract enough ‘income’ from his business, at his age, to meet his personal financial goals – Bill needs to get to the equity in his business. The question that Bill is looking to answer is, ‘how can I plan to tap into my business equity, over a long enough time period, to draw it out to meet my personal goals (without hurting my company’s cash flow)?’
The Many Paths to Harvesting Equity Value
The first step is to realize that there are many ways to get to the equity in your business. You can find a buyer, groom a successor, or even create a buyer for the shares of your company’s stock. The most important part of this planning process is to recognize that any one of these options requires a process.
Many business owners run their businesses based on their current lifestyle needs. However, when you begin to consider who will own your business after you, i.e. your exit from your business, you need to ask yourself whether you are focused on creating a stream of personal income from your business, or whether you are actually building equity, i.e. ‘value’ within the business. The difference between these two opposing perspectives will reveal itself when your turn comes to exit your business and may have a large impact on your ability to transition your company.
Is Your Business a Job or An Investment?
An owner who builds their business with a primary focus on personal income, for the most part, has a job. An owner who builds their business by making decisions that are likely to increase their equity value has an investment. One day someone other than you will be running your business. Will that successor be purchasing a job from you or an enterprise?
Your eventual buyer or successor will likely be interested in knowing about the equity that you have built, not about the income that you have achieved within your business. And, as an owner who is considering a future exit, you want to speak in terms of equity and not just in terms of income.
You see, income can vary according to the personal needs of the owner-operator. However, equity can be expanded and value can be driven into your business once your focus moves to an ‘equity driven’ model.
The Building of Equity Value
Technically, ‘equity’ is a Balance Sheet term which is equal to your assets less liabilities; this equation reveals your owner’s equity. However, we are not discussing the financial reporting within your business, we are discussing the manner in which you make operational decisions to increase the value of your business.
Let’s look at an example to make the point. Jim owns a distribution company and spends most of his time focusing on building strategic relationships to increase sales, as well as increasing the capacity of his business to distribute more products. He does most of this work alone, without an empowered or incentivized management team. Sounds simple enough. However, Jim’s mindset is towards conducting these activities so that he can take a larger salary and bonus at the end of the year. Again, to most reading this newsletter, that sounds like a very reasonable objective. But there is a problem, a very predictable and obvious problem once Jim is aware of it.
The problem is that Jim is not spending any time considering who would be doing his ‘job’ at the company in his absence. While it is true that the company can run for a week or two as Jim takes his vacations. Or perhaps the business could even sustain for a few months if Jim were to want time off or had a physical problem that prevented him from working – these instances alone would not materially affect Jim’s income. However, Jim is not protecting the equity in his business with his decision making process. Jim’s equity, and hence his illiquid business wealth, is at risk because Jim has not focused on his business as an investment.
WhatsApp is a pearl for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?
Nobody know for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.
And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.
It has been said that ‘timing is everything’. Well in business transition planning, timing is important, but so is transferability. Today’s newsletter discusses both and is intended to provide you with some guidance as to how you can begin to design a plan for a successful business transition, which includes growing the transferable value of your business towards an exit that is a number of years into the future.
Setting a plan for an exit requires a perspective on what you are trying to achieve and when it is possible to attain such an outcome. An important consideration for every business owner is that of ‘exit windows’, or, how to time your exit to meet your business and personal goals. Once you understand the timing of your exit, there is an opportunity for you to begin planning and making decisions today based upon achieving this future exit. Without this type of planning, you are likely to be without direction for your exit, and possibly missing the next exit window.
The chart below illustrates the cycle of business exits and shows that the next likely window for exit is within the next few years. According to this ‘ten year transfer cycle’ chart, in 2015 we are inside of a window for exit that may last for another three (3) years or so – see below
So, how can you grow into your exit? Well, you can begin with the end in mind. You can begin by understanding when you would like to exit and then build the business around that timing.
Three Concepts Relating to a Transferable Business
In order to manage anything in life and in business, you need to be able to measure it. A measurement of your current value becomes very important. A plan to grow that value as you approach your exit becomes a critical part of the exit planning process. There are three (3) concepts that you should be looking at when thinking about growing into your exit. They are:
There is an art to successfully running a privately-held business which includes a balance of hard work, knowledge, common sense, experience and occasionally some luck. On the topic of knowledge and experience, it is true that everything that we learn about running a business was taught to us by someone else. At some point in time either you learned something about your business from someone else or from an experience that had taught you a lesson. So, given the truth of this statement and the importance of taking care of your most valuable asset (i.e. your privately-held business) it is also true that there is a lot that you don’t know today about a successful transition. This statement is particularly true if you’ve never experienced a business sale or transition in the past. This newsletter is written to assist you with gaining a more clear understanding of how we learn as individuals and how this can, and likely will, impact your future plans to transition your company.
The Learning Process of Human Beings
Human beings learn things in a variety of ways – through the transfer of knowledge as well as through specific experiences. Every experience and / or interaction that a person has develops an association with that event. For example, if you learn something in a book, you may recognize that concept in the real world and associate with it. Also, if you have an experience, such as falling down and getting injured, you’ll have an association with the pain that occurred the last time that you had such an experience. Running a business, therefore, is a series of learnings and experiences and, depending upon the skill and disposition of each business owner to apply those lessons, the business grows, stagnates or dies. In fact, it has been estimated that successful business owners can make 10s of thousands of mistakes before achieving success.
Your business success has been the product of years of hard work, dedication and focused results (and likely a little bit of luck). As you think about a future transition of the company there are a number of factors that need to be considered because your future exit will impact a number of people who rely upon you and your company. A comprehensive plan for an exit includes a combination of personal planning and business planning to assist you in reaching your goals. This newsletter highlights five (5) key planning areas that we hope helps you organize your total planning for a future exit.
The key areas of planning are:
Business owners considering an exit often want to know who their likely buyers will be and how much money those buyers are willing to pay. In order to forecast a realistic sale price, owners often look to standard metrics such as the ‘multiple of earnings’ – a valuation theory based on the idea that similar assets sell at similar prices. This way of thinking often leads business owners to the quick conclusion that the easiest way to increase their business value is to increase the earnings of the business. This newsletter examines that basic concept and challenges this conventional thinking by first asking the question, “Does the industry that you are in have the largest impact on the value of your business?”
The most important concept in valuation is the idea that a future buyer for your business will pay you for the cash that they expect to generate from your business in the future. A prospective buyer will only write you a check for your business if they are confident that there is a ‘future’ for your company. The price and terms a buyer will pay are driven by the riskiness of the future, as they perceive it. There are three (3) important items to consider:
In reality, in order for an owner to monetize their illiquid business, they need a buyer or investor willing to pay them for their future cash flows. Additionally, the industry the owner is tied to is one of the leading indicators of value, as it will determine how investors perceive the industry and are willing to invest in the future of that industry.
In any negotiation, being the person who makes the first move usually puts you at a slight disadvantage. The first-mover tips their hand and reveals just how much he/she wants the asset being negotiated.
Likewise, when considering the sale of your business, it is always nice to be courted, rather than being the one doing the courting. The good news is, the chances of getting an unsolicited offer from someone wanting to buy your business are actually increasing.
According to the Q2, 2014 Sellability Tracker analysis released in July 2014, 16% of business owners have received an offer in the last year, which is up 37% over Q1. Said another way, you’re 37% more likely to get an offer to buy your business today than you were at the beginning of the year.
Big companies are buying little ones for a lot of reasons and the current market conditions are accelerating their appetite: interest rates are low and stock markets are high, which provide the ideal platform for acquirers to realize a return on their investment from buying a business like yours.
So how do you ensure you are on their shopping list? Here are five ways to get noticed by an acquirer:
Getting recognized as the “Widget Maker of the Year” by the Widget Makers Association is a great way to get the attention of acquirers in your industry.
Engaging a public relations professional to tell your story to the media can get you on the radar of buyers in your industry. A lot of media relations professionals focus on the big mainstream publications, and while these are important, ensure that your PR firm also targets trade publication and industry-specific websites that are read by acquirers in your industry.
At a certain point in time, a successful business owner stops thinking about all the day-to-day operations and the strategic planning for the company’s execution in the marketplace, and starts to think about the future ownership and who will own and run their business after them. This process is often referred to as ‘exit planning’ and will often begin with the personal desires of that owner, including their personal goals as well as what they would like to see happen with the business. When considering your personal goals, it is helpful to identify whether your business is an accumulation asset or a consumption asset. This newsletter will provide details around this distinction and assist you, the business owner, in thinking through how your business asset may be transitioned to someone else in the future while helping you achieve your goals.
Many successful business owners try to answer the question ‘how do I get my company to the next level?’ Many owners exhaust themselves and their resources each year, pushing their businesses to perform at higher and higher levels. However, there are a number of ‘truisms’ about small business that, once understood and accepted can make the growth (and transition) process more effective. The five (5) truisms listed below are symptoms that face each small business that is trying to grow and transition, at some future point in time, to a new owner. This newsletter is written for those owners who are trying to grow so that they can reap certain benefits that may come when it is time for an exit.
Truism #1: Nothing happens in a privately-held business until the owner(s) decide it will happen
Privately-held businesses that are run by the founder / owner are driven by that owner’s goals and ambitions. And, what you slice away all of the strategy and other decision-making in a business, the reality is that nothing truly happens until the owner decides that it will. A privately-held business will not grow until an owner decides that it will happen. The same business will not begin a transition or exit plan until the owner feels that it is needed.
As we’ll see in the next few truisms, many owners are not motivated to grow a business, increase the value, or prepare for a transition because other motives are driving their decisions. Therefore, understanding our first truism about an owner needed to ‘authorize’ any action set an important foundation.
Truism #2: Most businesses are run for the lifestyle of the owner
Of the many challenges that face growing the value of a business, the largest one is the owner’s motivation to act. And, in this regard, it is helpful to point out that most businesses are run for that owner’s lifestyle. Therefore, if an owner is happy with their lifestyle today, they may be hard-pressed to take risks to grow the business which may impede on their lifestyle.
While there are many risks in owning a privately-held business, the reality is that the risks are worth it to most owners because the business provides the owner’s lifestyle. To that owner, the alternative of going back to work for someone else is so offensive that it is hardly an option at all. Therefore, to this owner, taking risks that possibly compromise their lifestyle is often not worth moving forward with – even if all of the logic in the world points to reasons why a business should grow and increase its value. In short, growth means extra work and risk and those are often two (2) words that do not resonate with what an owner values most.
How much did your home increase in value last year? Depending on where you live, it may have gone up by 5 – 10% or more.
How much did your stock portfolio increase over the last 12 months? By way of a benchmark, The Dow Jones Industrial Average has increased by around 13% in the last year. Did your portfolio do as well?
Now consider what portion of your wealth is tied to the stock or housing market, and compare that to the equity you have tied up in your business. If you’re like most owners, the majority of your wealth is tied up in your company. Increasing the value of your largest asset can have a much faster impact on your overall financial picture than a bump in the stock market or the value of your home.
Let us introduce you to a statistically proven way to increase the value of your company by as much as 71%. Through an analysis of 6,955 businesses, we’ve discovered that companies that achieve a Sellability Score of 80+ out of a possible 100 receive offers to buy their business that are 71% higher than what the average company receives.
How long would it take your stock portfolio or home to go up by 71%? Years – maybe even decades. Get your Sellability Score now and you will be able to track your overall score along with your performance on the eight key drivers of Sellability. Like a pilot working his instrument panel, you can quickly zero in on which of the eight drivers is dragging down your value the most and then take corrective action.
Your overall Sellability Score is derived from your performance on the eight attributes that drive the value of your company:
Hi Everyone. Happy New Year 2015!
GT Growth & Transition Strategies, LLC is looking to add 3-4 new clients in 2015. We’re looking for proactive, privately-held business owners who want to take control of their destiny by planning their future: the growth of their business and/or the “future” transition of the business. Luck is something that happens to you. Strategy is something you plan. Take control in 2015 (and beyond) to achieve your goals.
Some people will set personal goals like losing weight or quitting a nasty habit, and most company owners will set business goals that focus on hitting certain revenue or profit milestones. But if your goal is to own a more valuable business in 2014, you may want to make one of the following New Year’s resolutions:
The New Year is a time for resolutions and for looking ahead to the promise that 2015 holds. As the New Year approaches, we wanted to provide a bit of guidance on how you can begin to think about planning for your business exit. Listed below are the top ten (10) reasons why you should think about planning your business exit in 2015. We hope that this newsletter is helpful towards encouraging you to start planning for this critical transition for your company, whether the actual event will happen in the next year or in the next ten (10) years.
Owners who are thinking about an eventual transition from their privately-held business are well served in understanding the optimal timing for that exit transaction. Whether an owner is thinking about passing the business to insiders or selling the business to a financial group or a strategic buyer, timing matters because the economy moves in cycles. The economic cycle that drives business behavior and performance will also, in all likelihood, have a substantial impact on an owner’s exit. This newsletter is written to provide an update on a decade-old chart and concept that helps owners predict and plan for the timing of their optimal exit.
Introduction to the Transfer Chart
Rob Slee, in 2004, introduced the U.S. Ten Year Private Transfer Cycle chart through his book, Private Capital Markets.
In short, this chart predicts that every ten years or so, the transfer cycle (which matches the economic cycle) repeats itself, providing good and bad times to exit a business. If this is true for the current decade, then business owners may want to consider that by 2018, the window to transfer or exit your business may close in a manner similar to the way that it did in 2008.
Where We Are in the 2010-decade Cycle
To summarize the cycle that we are currently in, we begin with a review of 2008 and the last financial market decline. Similar to prior cycles, the market decline started towards the end of the last decade. However, unlike prior decades, the 2008 economic drop was a once-in-a-generation type of collapse of the world financial markets. The timing of the last drop was predictable. However, what was less predictable was the severity of the decline.
Running a privately held business is a very large challenge. On a daily basis, owners are confronted with a countless series of interdependent issues that require their decision-making abilities. One of these issues is the future ownership of the business by someone else. More succinctly stated, the issue is whether or not, you the owner of the business, are taking actions today with the decisions that are being made in the business that will increase or decrease the likelihood of having success in finding someone else who will be able to run your business in the future.
Owners who are thinking about the future and are asking the question “who will own my business next?” need to consider two (2) very important questions in preparation for a future transition. The first question is “Is My Company Transferable? The next question is “how do I go about Creating A Transferable Business™?” This newsletter provides five (5) steps that owners can take in Creating a Transferable Business™. It is written with the intention of having you think through the transferability of your business and what decisions you can make today that will make your business easier to transition to a new owner in the future.
The Five (5) Steps in Creating a Transferable Business™
The following five (5) steps can assist you in Creating a Transferable Business™. They are:
This newsletter will introduce these five (5) steps so that you, the owner of your business, can, today, begin to take action in the specific direction of Creating a Transferable Business™.
1. Fear of Failure Failure is the most obvious fear for an entrepreneur. Successful entrepreneurs never lose this fear but rather harness its energy to drive harder, faster and better. And the best know that a bad failure means a great lesson.
2. Fear of Inadequacy Many wonder if they are good enough and smart enough to accomplish greatness. Successful entrepreneurs become great learners so they can fill gaps intheir education. They also become masters of recruitment to fill gaps in their capabilities.
3. Fear of the Market Catching the market just right can be like surfing a giant wave all the way to the beach. But just like the ocean, if you miscalculate the wave’s trajectory, it will slam you into the sand headfirst and crush you. Successful entrepreneurs show a healthy respect for market forces and study the dynamics so they can capitalize.
5. Fear of Selling Although the practice of sales is a necessary requirement for success, most people detest trying to push something on someone else. Successful entrepreneurs want their product or service to be the obvious choice. And they effectively use marketing to attract customers so fewer sales pitches are required.
If your company’s revenue has stalled after a period of rapid growth, you may have fallen into The Mile Wide Trap.
Consider the case of Kim who runs a public relations firm. Kim studied marketing at school and went on to work for a big advertising agency where she spent ten years learning a variety of marketing disciplines, from public relations to advertising to direct marketing and social media.
Then Kim decided to leave her job to start a public relations firm. Given her depth of experience and connections, she quickly landed an international distributor as a client and was asked to handle their regional dealer events. She hired some helpers and her start-up agency quickly began to grow. Kim did a great job with the dealer events, so her client asked her to handle their annual sales conference. Again she delivered with style and creativity.
Impressed by Kim’s innovative approach to the event, her client asked her to handle some of the creative for their next advertising campaign. Kim had started her company to do PR, not advertising, but her client was a great client so she agreed to help out with the ads.
Then her client asked her to take a look at their website. Kim’s new employees had no experience with web design, but Kim had done some website jobs back at the ad agency. Not wanting to disappoint her client, Kim started to personally handle projects that her employees didn’t have the ability to execute.
Thank you to John Leonetti and the staff of Pinnacle Equity Solutions for the great 2-day conference this past week. Special thanks to Frank O’Shea, Mindy Jones and Jesse Giordano for their efforts on the Conference Committee organizing a great line up of learning and training experiences on industry topics, transactional information, sales and marketing, and best practices. Also, thank you to all of the speakers, panelists and sponsors who made the event possible. It was a great time interacting with current colleagues and meeting new ones. The exit planning industry continues to emerge.
I walked into the kitchen as the sun was rising above the water. My friend–let’s call him Ray–was sitting at an oversized harvest table sipping a coffee made from a machine that costs more than a small car.
The kitchen was complete with every trinket befitting a cashed-out entrepreneur. It was one of probably 20 rooms in a 7,000-square-foot mansion perched above 150 feet of waterfront. I had been invited to stay at Ray’s family home for a few days while passing through on vacation.
Gobsmacked by the setting, and without thinking very much, I asked Ray, “Do you still appreciate this view every morning?”
“Every single morning,” he said.
“Really?” I probed, thinking that even an amazing view like the one I was witnessing would become old after a while.
“Yes, really. It may sound corny, but the overwhelming feeling I get when I look out over the water in the morning is gratitude. I feel so lucky to have two healthy kids and a great wife, and to live in this house.”
Building a business is tiring work. In the beginning, it’s just you. There’s nobody to coach, cajole, or encourage you.
But you keep going anyway. If you stick it out long enough, you may hire a few employees. With full-time staff, you have a built-in motivation to meet payroll, but at some point even having others rely on you can start feeling hollow.
In some ways, having a boss is easier; someone else sets your objectives and holds you accountable. You don’t have to constantly motivate yourself to do more, because someone else is already asking.
As an entrepreneur, the motivation to always carry on has to come from inside you. To cope, a lot of us become compulsive goal setters. Our objectives become our guiding light and the reason we get up in the morning.
You should. The value of your business just went up.
Since 2012, my team at Sellability Score has been analyzing offers entrepreneurs have received to buy their businesses. Every quarter, we look at the average multiple offered, and it is now at its highest point since we started tracking offer multiples.
For the most recent quarter, ending June 30, 2014, the average offer received was four times pretax profit (offers were much higher in some industries and among businesses with certain attributes), or about 10 percent higher than the average multiple offered lifetime of 3.66 times pretax profit.
When the value of your largest asset jumps by 10 percent, it may be tempting to hurry and get your business on the market. After all, isn’t it better to buy low and sell high?
The thing many of us forget is that when you sell your company–possibly your largest asset and the biggest wealth-creating event of a lifetime–you have to do something with the money you make.
These days, that means you’ll have to turn around and invest your windfall into an asset class that is equally bubbly. The stock market has more than doubled since 2009. The price of residential real estate has been growing at a rate of 1 percent per month in many major centers. The same trend can be seen in many markets that offer exclusive beach houses or ski chalets. (more…)
Most business owners at some point in time want to know the value of their privately-held business. Further, many owners who see their ‘exit’ as being many years in the future would like to know what they can do today to improve and grow that value. This newsletter asks a rather simple question for owners to consider today, “is it better to increase your profits or to reduce your ‘transition risk’ in order to increase the value of your business?”
A buyer of a business will pay for the cash flows that they believe will happen in the future, which is measured by the overall riskiness of those forecasted cash flows being achieved.
Let’s translate this a bit further. A business is worth what someone else is willing to pay for it – that is the ‘price’ at which a business may sell. However, the ‘value’ of a business today can only be measured using certain specific ideas about how a future buyer would view the business. As a general rule, buyers will pay for future cash flows but only at a rate at which the riskiness is properly reflected. Therefore, a complete analysis of how to increase the value of your business must include both increasing profits (i.e. cash flows) as well as analyzing and reducing risks in the business.
Many owners are familiar with ‘industry multiples’ for sales of businesses. For example, many owners will understand what it means when someone says that “Jim sold his manufacturing company for ‘5 times’ the company’s earnings”. The ‘5 times’ is simple to understand. Jim’s company, in this example, had a certain amount of annual profitability and the buyer of Jim’s company paid 5 times that number. For example, if Jim’s company had $1 million in annual profit, the buyer paid $5 million for the business – simple enough.
Using the example above, many owners in the same industry as Jim will forecast a realistic sale price for their own business by looking to these standard metrics such as the ‘multiple of earnings’ under the theory that similar businesses (i.e. their business) will sell at a similar price. This often leads business owners to the quick conclusion that the easiest way to increase the value of their business is to increase their own company’s earnings. Why wouldn’t an owner think in this logical way?
However, the question that is less frequently asked is “what is comprised of the ‘5 times’ multiple and does my business have the same risk factors as Jim’s in the example above?”
To understand multiples, one must first see that a buyer is paying a certain multiple because of their perceived riskiness of the future cash flows of that business. There are many factors that impact the riskiness of a business and, therefore, impact the value.
For example, let’s assume that Jim had a solid management team in place and only worked in the business one (1) day a week. When a buyer sees that they will gain access to the same management team when they purchase the business, they see less risk in the transition of the company and that element factors into the multiple that they pay. Whereas if you are running your business by making day-to-day decisions and taking little or no vacation time, most buyers will see more risk because you represent a single point of failure for the business. In this case a buyer would see more risk and would, therefore, pay a lower price – all things being equal.
So, in an attempt to answer the primary question in this newsletter, one must ask themselves whether it is easier to increase the profitability of your business (i.e. grow cash flow) or is it easier to staff the company with an initial quality manager or two in order to reduce the risk?
There is no right answer to this question. However, this newsletter is written to challenge your conventional thinking about increasing the value of your business.
Let’s assume that you are of the mindset that it is easier to hire a manager or two than it is to increase your company’s profitability over the next few years. You might then be asking what else you can do to reduce the riskiness of your business in order to increase the multiple that you may receive. Here are a few items:
These are just a few of the ‘non-cash-flow’ components of your business that will reduce ‘transition risk’ and will help you to increase the value of your company.
Hopefully by this point in the newsletter you are seeing that there are many factors that go into the value of a business and many ‘risk reducing’ measures that can be taken to increase your value.
That being said, it is important to also point out that reducing risk is not just about increasing value, it is also about making your company more saleable overall. You see, if a buyer sees too many risks in your business it is just as likely as not that they will walk away from the transaction as opposed to reducing the overall purchase price. Many buyers don’t want to fix a business that they consider broken – it’s easier for them to find one that has less risk and is easier for them to run profitability in the future. The translation is that by ignoring risk and only focusing on increasing profits, you might actually scare buyers away, therefore eliminating the ‘gains’ that you felt you would achieve by simply increasing your profits.
Every business owner will one day exit their business. Some will get paid top dollar while others will spend years trying to ‘get out’. This newsletter attempts to make the point that it may be easier, cheaper and more efficient for you to focus on reducing risk before jumping right into the process of trying to increase the value of your company by growing profits. We hope that this newsletter has you thinking more about your future exit and what you can do today to increase the success of that future transaction.
Pinnacle Equity Solutions © 2014
Frank Mancieri, Chief Growth Advisor, GT Growth & Transition Strategies, LLC, 401-651-1585, frank@gtGrowth.com
When you look ahead to the next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?
The answer may have a profound impact on the value of your business.
Take a look at the research coming from a recent analysis of owners who completed The Sellability Score questionnaire. They looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit. When they isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.
However, the real bump in multiple came when they isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.
Nurture your niche
Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.
A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.
Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.
Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.
You can get your own Sellability Score, and see how you compare on the eight key drivers of sellability, by taking our 13-minute survey. http://www.sellabilityscore.com/b2b-cfo-1/frank-mancieri
It is a fact that a privately-held business will, in most cases, represent the largest financial asset in a business owner’s personal portfolio. This newsletter is written to have business owners consider a simple question – ‘how correlated is your business value to the overall economy?’ The reason that this question is so important to ask is because most business owners put the majority of their financial wealth at risk when they fail to view their business as an asset; in particular, as an asset that fluctuates in value. Therefore, this newsletter is designed to get you, the owner, thinking about protecting your overall wealth by thinking through a potential future date when you will transition your business – perhaps before the next economic downturn.
Investing 101: Diversify Your Assets
It has been said that there is such a thing as a ‘free lunch’ when it comes to investing – that ‘free lunch’ is the diversification of your assets. The reason that diversification is called a ‘free lunch’ is because in a liquid portfolio of investments (i.e. stocks and bonds), diversification costs almost nothing beyond some transaction costs. However, the low / no cost of diversification provides a substantial amount of benefit to the investor because the investor is not solely invested, or ‘concentrated’ in a single investment or perhaps in only a few investments.
In fact, in a well diversified portfolio, different types of assets / investments rise in value in certain markets while others will fall. Overall, the investor is provided protection of their wealth by spreading it out.
However, when a business owner’s largest asset is their illiquid privately-held business, how can they apply the same diversification mentality?
The first way that an owner can begin to address this ‘concentration of risk’ in their privately-held business is to understand how their company’s value is correlated to the overall marketplace.
Your Business Risk Relative to the Market
Let’s begin with a simple question:
For the majority of business owners, the answer to this seemingly simplistic question is an obvious ‘yes’. Most owners rely upon favorable economic conditions to increase the value of their businesses.
If this is true for your business, i.e. the profitability and value rises with overall economic conditions, then, of course, the same is true when the economy falters and the value of your business will fall when the economy slows down.
“Correlation” vs. Market Returns
If the statements above apply to your privately-held business, then it can safely be said that your business value has a ‘high correlation’ to economic conditions. As such, you are likely hopeful that the economy will improve so that your business value can increase. However, having been through a number of recessions, you also know that you cannot control the overall economy. What you can control, however, is how well prepared you are to protect and/or harvest the value of your business despite the timing of the next economic downturn.
Shifting the Riskiness of Your Business
Can the value of your business somehow be immune to the next economic downturn? Probably not – at least not 100% of the value. However, one of the concepts that you might embrace in your thinking is that of ‘shifting the risk’ to another investor. This could include taking on a partner in your business.
The average business owner enjoys the freedom and financial advantages of running and owning their own business, so they don’t want to sell it. However, they also realize that having the value of their largest financial asset tied to the overall economy is also something that makes them very uncomfortable.
Taking Chips Off the Table
If you were to think of your business the way that you think of your liquid investments, you might sell off some of them (or technically ‘raise cash’ in order to reduce the fluctuations that can occur when a downturn in the economy sets in). Private equity groups invest in privately-held businesses but also partner with the existing owner and work on growing the business together with you. This is a way that you can stay actively involved in the business without needing to keep 100% of your business value at risk.
An Abundance of Capital vs. Continued Control
Today’s capital markets are flooded with ‘dry powder’ or investment capital that is waiting to be deployed into profitable businesses. If you have a profitable business today (i.e. more than $1 million in annual profits) then you might be attractive to an investment partner such as a private equity group.
While capital alone is not a reason to transact, you may also take into consideration that with so much capital looking to be put to work, you are actually in a relatively good position to choose the form of the partner or capital that you attract to your business and, perhaps, work with these capital providers to continue controlling parts of the operations of the business while working to increase its overall value. In short, the diversification of your personal wealth might also serve as the catalyst for growth at your company.
We hope that this newsletter has accomplished the objective of having you understand that while the economy is a large indicator of the value of your business, there are planning techniques available to reduce the overall risk to your total wealth. Paying attention to not only the economy but also to the sources of capital for your business, may lead you in the direction of reducing the overall riskiness of your business while protecting your wealth.
Pinnacle Equity Solutions © 2014
Frank Mancieri, Chief Growth Advisor, GT Growth & Transition Strategies, LLC, 401-651-1585, frank@gtGrowth.com
What are your business goals for the year? If you’re like most owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. While those goals are important, there is another objective that may have an even bigger payoff: building a sellable business.
But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:
1. Sellability means freedom
One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….
2. Sellable businesses are more fun
Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.
3. Sellability is financial freedom
Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.
4. Sellability is a gift
Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.
You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.
You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.
5. Change takes time and planning.
There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable. Therefore, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.
Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Sellability Score. The questionnaire takes about thirteen minutes and your responses are kept confidential. You can complete the questionnaire by clicking on this link: http://www.gtgrowth.com/the-sellability-score/.
Frank Mancieri, Chief Growth Advisor, GT Growth & Transition Strategies, LLC, 401-651-1585, frank@gtGrowth.com
Intelligence is a work in progress. Maximize yours with these simple habits.
You might be under the impression that intelligence is a fixed quantity set when you are young and unchanging thereafter. But research shows that you’re wrong. How we approach situations and the things we do to feed our brains can significantly improve our mental horsepower.
That could mean going back to school or filling your bookshelves (or e-reader) with thick tomes on deep subjects, but getting smarter doesn’t necessarily mean a huge commitment of time and energy, according to a recent thread on question-and-answer site Quora.
When a questioner keen on self-improvement asked the community, “What would you do to be a little smarter every single day?” lots of readers–including dedicated meditators, techies, and entrepreneurs–weighed in with useful suggestions. Which of these 10 ideas can you fit into your daily routine?
1. Be smarter about your online time.
Every online break doesn’t have to be about checking social networks and fulfilling your daily ration of cute animal pics. The Web is also full of great learning resources, such as online courses, intriguing TED talks, and vocabulary-building tools. Replace a few minutes of skateboarding dogs with something more mentally nourishing, suggest several responders.
2. Write down what you learn.
It doesn’t have to be pretty or long, but taking a few minutes each day to reflect in writingabout what you learned is sure to boost your brainpower. “Write 400 words a day on things that you learned,” suggests yoga teacher Claudia Azula Altucher. Mike Xie, a research associate at Bayside Biosciences, agrees: “Write about what you’ve learned.”
3. Make a ‘did’ list.
A big part of intelligence is confidence and happiness, so boost both by pausing to list not the things you have yet to do, but rather all the things you’ve already accomplished. The idea of a “done list” is recommended by famed VC Marc Andreessen as well as Azula Altucher. “Make an I DID list to show all the things you, in fact, accomplished,” she suggests.
4. Get out the Scrabble board.
Board games and puzzles aren’t just fun but also a great way to work out your brain. “Play games (Scrabble, bridge, chess, Go, Battleship, Connect 4, doesn’t matter),” suggests Xie (for a ninja-level brain boost, exercise your working memory by trying to play without looking at the board). “Play Scrabble with no help from hints or books,” concurs Azula Altucher.
5. Have smart friends.
It can be rough on your self-esteem, but hanging out with folks who are more clever than you is one of the fastest ways to learn. “Keep a smart company. Remember your IQ is the average of five closest people you hang out with,” Saurabh Shah, an account manager at Symphony Teleca, writes.
“Surround yourself with smarter people,” agrees developer Manas J. Saloi. “I try to spend as much time as I can with my tech leads. I have never had a problem accepting that I am an average coder at best and there are many things I am yet to learn…Always be humble and be willing to learn.”
6. Read a lot.
OK, this is not a shocker, but it was the most common response: Reading definitely seems essential. Opinions vary on what’s the best brain-boosting reading material, with suggestions ranging from developing a daily newspaper habit to picking up a variety offiction and nonfiction, but everyone seems to agree that quantity is important. Read a lot.
7. Explain it to others.
“If you can’t explain it simply, you don’t understand it well enough,” Albert Einstein said. The Quora posters agree. Make sure you’ve really learned what you think you have learned and that the information is truly stuck in your memory by trying to teach it to others. “Make sure you can explain it to someone else,” Xie says simply.
Student Jon Packles elaborates on this idea: “For everything you learn–big or small–stick with it for at least as long as it takes you to be able to explain it to a friend. It’s fairly easy to learn new information. Being able to retain that information and teach others is far more valuable.”
8. Do random new things.
Shane Parrish, keeper of the consistently fascinating Farnam Street blog, tells the story of Steve Jobs’ youthful calligraphy class in his response on Quora. After dropping out of school, the future Apple founder had a lot of time on his hands and wandered into a calligraphy course. It seemed irrelevant at the time, but the design skills he learned were later baked into the first Macs. The takeaway: You never know what will be useful ahead of time. You just need to try new things and wait to see how they connect with the rest of your experiences later on.
“You can’t connect the dots looking forward; you can only connect them looking backward. So you have to trust that the dots will somehow connect in your future,” Parrish quotes Jobs as saying. In order to have dots to connect, you need to be willing to try new things–even if they don’t seem immediately useful or productive.
9. Learn a new language.
No, you don’t need to become quickly fluent or trot off to a foreign country to master the language of your choosing. You can work away steadily from the comfort of your desk and still reap the mental rewards. “Learn a new language. There are a lot of free sites for that. UseLivemocha or Busuu,” says Saloi (personally, I’m a big fan of Memrise once you have the basic mechanics of a new language down).
10. Take some downtime.
It’s no surprise that dedicated meditator Azula Altucher recommends giving yourself space for your brain to process what it’s learned–“sit in silence daily,” she writes–but she’s not the only responder who stresses the need to take some downtime from mental stimulation. Spend some time just thinking, suggests retired cop Rick Bruno. He pauses the interior chatter while exercising. “I think about things while I run (almost every day),” he reports.
JESSICA STILLMAN | Columnist
Jessica Stillman is a freelance writer based in London with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.
A recent release of findings from an ongoing research effort being conducted by Pinnacle Equity Solutions, Inc., a national leader in the emerging field of exit planning, reveals that 85% of business owners who are considering a future exit from their privately-held business currently have a Low Mental Readiness for their e