Growing your business value for exit
Strategic business exit planning
In our previous article on business exit planning we encouraged you to begin planning your transition from the business as early as possible in your business lifecycle. Too many business owners wait until they’re burned out, ready to retire or forced to rush by some unexpected event. If you wish to realise all your exit goals and capitalise on the wealth invested in your business give yourself plenty of time by beginning your plan long before you actually want to sell!
Additionally, to begin planning your exit process we discussed, the importance of setting exit goals with your end in mind, why quantifying your business and financial resources and determining the Asset Gap is critical to a successful business exit, and the benefit of assembling a team of advisors to work collaboratively with you to build a strong plan.
The next step is all about growing business value to close the asset gap between what your business is currently worth and what it must be worth to satisfy your exit goals. Growing business value drives growth and is key to your ability to exit when you want and for the money you need.
Business value can be thought of as the amount of money you would get for your business if you sold it. It consists of a two component equation: Value = pre-tax profit x a multiple of pre-tax profit.
The more profit you make the more valuable your company is – but the other side of the equation is what is the multiplier? Is it 2 times pre-tax profit or 9 times pre-tax profit? This figure can have huge impact on the value of your business.
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In growing business value it is easy to focus on profit, and forget about the value drivers that influence the multiplier figure upwards, making a profitable exit more likely.
So what are the business value drivers that influence the multiplier figure upwards?
To answer this question a good starting point is to consider the work of John Warrillow, author of the international bestseller Built to Sell: Creating A Business That Can Thrive Without You. He identified, through research on over 6,000 businesses, that there are eight factors that will increase the value of your business by driving the multiplier figure upwards.
These eight factors are ways to help you evolve your business to give you freedom of choice – to sell at maximum value, or to achieve other exit goals such as to be able to work sensible hours for the same or more revenue, or to stand back from your business almost completely.
So what are these eight factors? I must emphasize that these aren’t magic wand/quick fix answers in the majority of cases. These are areas that you will need to work on over time.
1. Financial Performance
This is particularly important if you are looking to sell. You will need to show any potential purchasers that your sales and profit projections for the future are based in sound historical fact. They will have in their minds what return they want on your business and also how risky they think it is. And not having comfort over your projections increases the risk to them and therefore decreases the value of your business and what they are prepared to pay. So make sure your numbers are defensible. Also it’s also incredibly valuable for you as a business to have a professional accounting system established within the business, together with a budgetary process that enables you to measure performance against your budgeted figures.
Action: Establish an accounting function and system within the business. Consider investing in a financial audit to add credibility to your numbers. Create a budget and measure performance against it.
2. Growth Potential
Growing companies receive higher offers. If you can demonstrate consistent growth, and potential for further growth by identifying opportunities such as operating in a different market, or cross-selling products and services to existing customers this will drive up the value of your business.
At the same time it is important to ensure that the business is scalable – that a substantial increase in sales does not lead to short-term problems with staff, cash flow, premises etc. Your ability to scale is dependent on you establishing systems and processes within your business and then teaching your employees to follow them.
Additionally, a business with built in scope for huge increases in demand is much more appealing, especially for a buyer with plans for growth.
Action: Create an Opportunity Map identifying the options for profitable growth – the ways in which the business is going to grow, and be able to answer the question – have you done anything yet? Ensure the Map is credible. Systematize your business and train your employees to use them. Build the capacity to service the increased demand.
3. The Switzerland Structure
This factor is about maintaining independence. i.e. you shouldn’t be overly dependent on a customer, supplier or employee. You should have a diversified range of customers and not have any one customer who makes up more than 15% of your revenue, and you should be able to switch supplier.
Action: Review your customers, suppliers and employees to see if you need to take any action to reduce your dependence on them.
In our next article, we will continue this discussion of growing business value, specifically, looking at the other 5 factors that will increase the your business value by driving the multiplier figure upwards.
If you’re planning to exit your business then increasing the business value to it’s maximum potential is essential. Seek expert professional support to help you with this process – the costs are essentially free as they add exponential value to your business exit.
Blunt business advice on building business value from Yorkshire Powerhouse
Now you’ve read our article about increasing your business value – have you any questions?
Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:
When exit planning from your business, the core considerations include how much, when to exit, what mechanism to use and who will buy the business Read >