The Global Financial Crisis (GFC) has delayed the exit plans of baby-boomer business owners but their need to exit has not gone away.
The value of the average business has been limited for a few key reasons. Most businesses have been structured and operated with the tax legislation in mind; profit has been kept low to minimise tax. Little effort has been invested in removing waste from the business. Owners have generally wanted to fund their lifestyle, and even their children’s lifestyles, rather that invest in growth.
Another factor is the ability of some owners to manage a growing business has been limited, and there has been a reluctance to learn about leadership or invest in consulting services to develop growth capacity.
Here are 10 steps towards maximising the value of a business. The steps can be grouped into three distinct phases:
- Optimum performance
- Polishing the business
- Creation of the sale
Step one: Profit improvement
A key measure of how efficiently a business converts its sales is the profit of the business, which can be improved by removing waste. One of the most efficient industries globally is the automotive component manufacturing industry, and the lessons on how they achieve this can be applied to any other industry.
Step two: Growth plan
Grow the business. Do you know what metrics you should have on a ‘dashboard’ to run your business? Focus on the actions that create the results. What are your key performance indicators? Are they relevant and do the right people know what they are? Do you make sure you schedule time to regularly review your ‘dashboard’ and strategic plan? A positive trend line of sales growth can provide confidence that the sales process in the business is working well.
At the end of this first phase the business performance should be optimised. Cash is created to fund the next phase of the process, and the sales and profit trend lines show a continuous and predictable improvement.
Polishing the business
In this phase make sure that all the elements of a great business are in place. There are four distinct steps
Step three: Lock in revenue (contracts)
Make sure that wherever possible, the future revenue of the business is locked in, preferably with long-term contracts. A buyer of the business needs a degree of certainty of the five-year revenue outlook so contracts with customers need to be robust.
Step four: Lock in management (no reliance on founder)
Establish a management infrastructure that removes reliance on the owner. The management skills and experience (and processes) to lead the business in the absence of the owner need to be in place.
Step five: Brand
Ensure you have a detailed marketing plan, focusing on several key objectives that ensure your brand is supporting your growth plans. Your plan should include promotional elements (advertising, social media, online environments), as well as distribution channels, pricing levels, and product/service development plans.
Step six: Reduce debt (clean up balance sheet)
Reduce the debt levels of the business in order to clean up the balance sheet. The cash created in ‘step one’ can be used to retire debt and remove loan accounts.
By now the business should be in good shape and ready for the sales process to formally begin.
Creation of the sale
The key factor in maximising the sales price is to find a buyer who ‘needs’ the business.
Step seven: Find a buyer who ‘needs’ the business
Ideally, several potential buyers will have been identified at this point (through brokers or other industry contacts) and an analysis of why the business is essential for each potential buyer is carried out. This analysis often requires changes to the look and feel of the business. The information gained from the analysis enables a specific sale process to be developed and implemented for each potential buyer.
Step eight: Negotiate well
Engaging with the right advisers to assist with the negotiation process will maximise the success of the sale. Often the business owner needs to be coached on their role in the sale. The psychology of the sale process must be clearly defined and followed.
Step nine: Anticipate all objections and value-reducing tactics
Anticipating all the possible objections that could be raised by the buyer, and any value-reducing tactics, are just part of sales process planning. Advisers are extremely useful external coaches who often identify hurdles not anticipated by business owners.
Step 10: Manage all risks
To manage the risk in the sales process we suggest using a Failure Mode and Effect Analysis (FMEA) process.
If these 10 steps are rigorously followed over a period of two to four years, the probability of achieving a high price for the business is maximised. Leaving your run too late can severely impact on the value of the sale.