Build your roadmap for business value creation.

Build your roadmap for business value creation.

September 2011 Newsletter
by Dave Saunders,CPA, CMA
Partner, B2B CFO®

As a business achieves success, the focus of the owner needs to shift from minding day-to-day operations to building the value of their business so that it will one day meet their retirement needs. Fortunately, there are processes and analytics that will allow you to critically examine your business and identify factors that will result in an increase in business value.  Developing the roadmap to building value in your business involves a disciplined and systematic multi-step approach to building tangible business value.

Businesses are started with visions of success and the hope that they will one day make their owners wealthy through cash flow and their eventual sale. The unfortunate reality is that less than 20% of companies listed for sale are ever sold. While many owners will consider selling their business at some future point, few develop formal plans for how to consistently build business value and even fewer plan for how to make their business attractive to a buyer.

The first step in positioning your company for an eventual exit and in building sufficient value to meet your retirement objectives is to understand the motivation of the buyer. Generally, those sophisticated buyers you are hoping to attract aren’t looking to buy jobs for themselves. Strategic buyers are looking for an investment with the expectation that they will achieve a return appropriate for the level of risk. Their perception of the value of your business will increase when you can provide evidence of sustainable growth, cash flow and profits. You will also need to demonstrate the capability of your management team and the sustainability of operations after your exit from the business.

Next, it is helpful to assess your current situation and develop an understanding of the current value of your company and where your business is right now. A valuation can be an important tool to help you understand not only the value of your business, but more importantly it can provide insight into your performance compared to a valuation peer group and highlight areas where your value is either increased or decreased against your peers. The same factors that create these premiums or discounts will be viewed by potential buyers as adjustments to the risk level of investing in your business. Higher perceived risk results in higher expected rates of return and thus a reduced business valuation. Looking at your business through the eyes of a potential buyer should begin yielding insight into those areas of your business where you can make improvements, reduce risk and build value.

The next step is to analyze the strengths and weaknesses of your company and identify high impact areas for improvement. It is important to analyze the company from both an internal and external perspective. The internal analysis should focus primarily on your resources, capabilities and processes and the dependence of the business on you.  The external analysis is very similar to a traditional SWOT analysis and should assess your market position, opportunities, revenue streams and competitiveness.  Each of these items will be critically examined by a potential buyer during their due diligence assessment of your company. Performing your own due diligence assessment in advance can provide you with insight into where best to focus your attention to increase business value.

Once you have identified areas of improvement and gained insight into the potential that your business has, you can develop a financial and operations based strategy for increasing business value. Your strategy should consider the types of investments, resources and processes required to drive growth, improve profitability and increase cash flow. Your strategy should also address how you, the business owner, will disengage from the day-to-day activities of minding the business and focus on managing the business to increase value and achieve your retirement goals. At this stage it is important to establish goals, engage the right resources to deliver results, measure progress and introduce management processes that help the organization transition into a more professionally run – and buyer friendly – company.

It is never too soon to begin improving the value of your business and developing your exit strategy. Selling your business is just one of the options available to you in exiting your business. Taxation, lifestyle and estate issues will all be important in determining when and how you leave your business. Fortunately, if you plan ahead, your business value improvement strategy will have already shown you how to maximize the value of your company and enable you to be more confident that a liquidity event can take place at a value that meets your objectives.

Do you need help with improving the value of your business or developing an exit strategy?  B2B CFO® , the world’s largest CFO firm, can be your partner and help guide you through the Business Value Improvement process and the Exit Strategy process using techniques and resources unique to our firm.  If you would like to learn more, please send me an e-mail or call me at 480-433-1310.

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