9 Tips for a More Valuable Business This Time Next Year

The beginning of a new year is a time of rebirth and resolutions.  It is a time to reflect on last year’s achievements and to set goals for the coming year.

 

Some people set personal goals like losing weight or quitting a nasty habit, and most business owners set business goals that focus on hitting certain revenue or profit targets.  If your goal is to own a more valuable business in 2014, you should select one or more of the following New Year’s resolutions:

 

1. Take a two-week vacation without checking in with the office.  When you return, you’ll see how well your business ran without you and where you need to make a key hire or create a new system;
2. Write down one process per month.  You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow.  Resolve to document one system a month and by the end of the year you’ll own a more valuable business;
3. Offload at least one customer relationship.  You may be your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person.  By the time you sell, none of your key customers should think of you as their relationship manager;
4. Cultivate a new relationship with a new supplier. Having a "go to" group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business.  By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs;
5. Create a recurring revenue stream.  Valuable companies can look into the future and see where their revenue is going to come from.  Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract;
6. Find your lease (and any other key contracts).  When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord.  Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company;
7. Check your contracts and make sure they would survive the change of ownership of your company.  If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract "surviving" in the event of a change of ownership of your company;
8. Start tracking your Net Promoter Score (NPS). The NPS is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company.  It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence; and
9. Get your business professionally valued. All goals start with a benchmark of where you are at today, and by understanding your company’s current value (from the perspective of a potential purchaser) you can identify which aspects of your business to work on to increase its value.

Many business owners will set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are rudimentary.  Instead of just building a bigger company, consider making this the year you build a more valuable one.

 

Building a more valuable business becomes critical if you are planning to exit your business in the coming decade and want to maximize your net sale proceeds.  Contact us at jason@vspltd.ca or www.vspltd.ca for an independent business valuation or to see if you qualify for our VSP Exit Starter Program in 2014.

 

 

How to Double the Value of Your Business in Two Years

As we approach the beginning of a new year I reflect upon our firm’s achievements and challenges over the past year.  Celebrating accomplishments and monitoring progress towards goals are vital to your continued focus, commitment and motivation.

 

How did your business do this year compared to your original goals?  Are you on track to exit your business at a time of your choosing?  Has your business increased in value over the past year?  Would you like to double the value of your business within a two year period?  It may be challenging, but it can be done. 

 

Smaller start-up companies can increase in value quite quickly, particularly if they are able to create their own market or are successful at penetrating and finding a niche in an existing but growing industry.  Increasing the enterprise value [1] of a larger and more mature company, however, is generally much more difficult. 

 

Two of our clients at VSP this past year actually doubled their enterprise value within a two year period - and these clients were not small, start-up companies.  Having conducted a business valuation two years earlier, we were asked to update our valuation this past year.  One was required for tax purposes and the other was required for planning purposes in connection with a potential shareholder buyout.  One business has been a service provider for 15 years and had over $30 million in annual sales.  The other company has operated as a manufacturer for over 40 years and had over $50 million in sales. 

 

You may be wondering how two mature businesses in separate industries were able to double their enterprise value in two years.  A quick review of our valuation analyses reveals the following top 5 common factors contributing to this achievement:

 

1. A Business Plan - both companies had business plans in place two years earlier which included financial projections showing modest growth rates in sales and EBITDA going forward;


2. Recent Growth - both companies experienced recent growth and actually exceeded the sales and EBITDA targets set out in the financial forecasts from two years earlier;


3. Future Growth - both companies had updated their business plans from two years earlier and increased their financial forecasts going forward.  The fact that earlier projections were documented and the company actually exceeded targets enhanced management’s credibility with respect to the growth projections going forward;


4. Tangible Asset Backing - in order to support the recent and future growth, both companies had reinvested in the business thereby increasing the net tangible operating assets over the past two years; and


5. Reduced Risk Profile – as a result of both controllable (i.e. internal company specific) and uncontrollable (e.g. external market conditions) factors, both companies decreased their risk profile (i.e. lower discount rate or capitalization rate) thereby increasing the valuation multiple.
 

Any increases in redundant assets owned by your business (e.g. non-operating assets such as excess cash or marketable securities) or decreases in interest bearing debt outstanding will increase the value of your equity interest over and above the increases to enterprise value noted above.

 

It may not be easy but concentrating on these 5 factors will go a long way towards helping you double your business’ enterprise value in a two year period.  If you are planning to exit your business in the coming five years now is the time to get focused.

 

An independent business valuation can help measure your value increases over time.  This becomes critical if you are planning to exit your business in the coming decade and want to maximize your net sale proceeds.  Contact us at jason@vspltd.ca or www.vspltd.ca to see if you qualify for our VSP Exit Starter Program or want to document your value increases over time with an independent business valuation.

 

 

1.  Enterprise value represents the value of business operations attributable to both equity and debt-holders.

The Key to Timing the Sale of Your Business

When is the right time to sell your business?  This can be a difficult question to answer.

In Deciding to Sell Your Business by Ned Minor, Mr. Minor suggests that you should sell your business "at the point when you achieve your definition of financial independence."

I encourage business owners to consider timing from the perspective of: i) the business owner; ii) the business; and iii) the market.  In a perfect world, each of these will be in alignment when timing the sale of your business.  Let’s consider each in turn.

 

1.  The business owner - when will you be ready to sell? 

To help answer this question, ask yourself if you still have the same level of energy and passion you once had for your business.  You should also address what you plan to do after you exit your business.  Only you will know when you are emotionally and psychologically ready to leave your business.


Keep in mind that your age, energy level, passion, health and willingness to stay on after a sale can impact the value of your business.  In many cases, holding on too long can serve to reduce the value of your business.


Ideally, you should sell just before the point in time when your passion and energy level for your business begin to wane.

2.  The business - when will your business be ready to sell?

A proper plan is necessary to ensure that your business will be ready for sale when you are ready to exit and the successful implementation of this plan will take time - at least 3 years. 


To ensure your business is ready for sale at its peak value you should assemble a pre-sale diligence binder that provides all information necessary to ensure a smooth sale process.  To maximize value, this binder should show, among other things, a track record of steady growth (i.e. for at least 3 years) and a business plan setting out how you will achieve continued growth.  Showing a buyer that there are high barriers for potential competitors because of your industry niche, competitive advantage or proprietary technology will go a long way towards commanding a premium price.


Ideally, you should sell your business after a period of steady growth (i.e. at least 3 years) and just before a plateau.  This creates the allure of future growth which drives up value.

3.  The market – when will the market be ready for you to sell?

With proper planning, you can have some control over 1 and 2 above.  The market, however, is one thing you can’t control and its future is inherently uncertain and unpredictable.  Keeping up with the level of activity in your industry can help you time your sale.  Speak with others in your industry, read trade journals and industry publications, join an industry association, speak with valuators and M&A professionals to get sense as to how hot or cold the market is in your industry.

Markets can be volatile with high peaks and low valleys.  Ideally, you want to sell at a peak when demand and market multiples are high.  Clients often ask me how the markets are doing and where market multiples are compared to past years.  In Canada, there is limited information on private company transactions.  Looking to the U.S. as a proxy, however, and conducting a search of all transactions for companies with positive earnings reveals the following results over the past decade: [1]

	Number of Transactions	EV / EBITDA Multiple		EV / Sales Multiple
Year		Harm. Mean [2]	Median	Harm. Mean [2]	Median
2004	701	3.85	5.54	0.43	0.57
2005	793	3.66	5.63	0.44	0.60
2006	725	4.40	5.94	0.45	0.65
2007	814	3.83	5.88	0.48	0.66
2008	483	4.49	6.16	0.45	0.67
2009	302	3.76	4.76	0.41	0.59
2010	354	3.60	5.70	0.49	0.66
2011	395	2.65	5.80	0.44	0.73
2012	744	2.20	2.92	0.37	0.52
2013	350	2.32	3.20	0.23	0.51

It is interesting to note that average EBITDA multiples have been declining since 2008 with the exception of a slight uptick in 2013.  Average sales multiples have also been trending down for the past four years and actually dropped below 0.4 times in 2012 and 2013 for the first time since pre-2004.  It is also interesting to note that market activity (i.e. total # of transactions) dropped off in 2008 and, with the exception of 2012, does not appear to have returned to pre-2008 levels.

Keep in mind that this data aggregates transactions from all industries and that results will vary depending on the industry in which you operate.

In light of this trend and the expected significant increase in the supply of businesses for sale over the coming decade (i.e. some 550,000 businesses in Canada), it will be that much more critical for business owners and their businesses to be prepared.  Only the most attractive and salable businesses (i.e. those that are prepared) will sell for a premium. Those that are not prepared risk selling for a significant discount or face liquidation altogether.

 

If this concerns you, our Exit Starter Program can help. To see if you qualify for our VSP Exit Starter Program, contact us at jason@vspltd.ca or www.vspltd.ca.

1.  Source: Pratt’s Stats private company database. 2013 figures up to October 25, 2013.

2.  The harmonic mean tends to mitigate the impact of large outliers and aggravate the impact of small ones.

The Perfect Storm for Enhancing Value

Growth is a major value driver for many businesses.  A well documented growth story with a positive outlook for continued future growth (i.e. a sound growth plan) is very appealing to a potential purchaser.  Having a competitive advantage in your industry is another key value driver because providing something unique or proprietary is extremely attractive to a potential buyer.  Together these two value drivers create the perfect storm for enhancing value.

 

Researchers at the Sellability Score have recently studied the results from over 5,000 business owners who completed the Sellability Score questionnaire.  For those companies that had received an offer from an acquirer, the average offer price was approximately 3.5x pre-tax profit. 

 

This multiple improved to an average of 4.3x pre-tax profit after isolating those businesses that had a historical growth rate of 20% or greater.  As expected, higher growth companies commanded a higher multiple than their slower growth counterparts.  This multiple jumped even further to an average of 5.4x pre-tax profit when those companies that claimed to have a unique product or service for which they have a virtual monopoly were isolated.  These niche companies enjoyed an average multiple that was 50% more than the average companies and 20% more than the higher growth companies.

 

What is your growth plan for the next three to five years?  Will your growth come from selling additional products and services 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.

 

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 supplementary product and service lines, often at the expense of your core strengths or market niche. 

 

Keep in mind that a strategic purchaser for your business is looking to acquire something they cannot easily replicate on their own.  A purchaser 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.

 

These same purchasers, however, may be willing to pay a large premium for access to a new or proprietary product or service that they can sell to their existing customers.  Larger, mature companies have customers, systems and distribution channels, but they sometimes lack innovation.  As a result, many choose a strategy of acquisition as a way to buy their innovation.

 

Focusing on your niche is an area where the long-term value of your business can be 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 value seeking company finds a way to deliver profit in the short term while simultaneously focusing their strategy on a finding and exploiting a niche that will drive up the value of the business.

 

You can increase the value of your business by documenting your historical growth and developing a sound growth plan.  If you want to supercharge your value, however, your growth plan should focus on creating a virtual monopoly in your marketplace by developing and securing your industry niche.

 

To find out how sellable your company currently is and what you need to tweak to improve its sellability, take Sellability Score via the questionnaire on our website.  You can complete the questionnaire here http://sellabilityscore.com/vsp/jason-kwiatkowski.

 

To see if you qualify for our VSP Exit Starter Program or to find out the value of your business, contact us at www.vspltdca.

A Must Read for Business Owners - Deciding to Sell Your Business

I recently finished an interesting book that all business owners should add to their reading list.  "Deciding to Sell Your Business – The Key to Wealth and Freedom" by Ned Minor [1] explores the notion that all business owners must first decide to sell their business before embarking on the actual sale process.

 

Mr. Minor is co-founder of a Denver-based law firm which focuses on designing and implementing exit strategies for privately held business owners.  Minor has coached hundreds of business owners in this area for over 30 years.  In Deciding to Sell Your Business, some of the fundamental questions that Minor addresses, along with a sneak peak at his responses, include:

Q.  What will I do after I sell my business?
A.  "You will have so many demands on your time that you will wonder how you ever found time to run a company."

Q.  Why should I sell my business?
A.  "You should sell to achieve wealth and freedom while you are still young enough to enjoy it."



Q.  When should I sell my business?
A.  "You should sell at the point when you achieve your definition of financial independence."

Many of the issues addressed in our VSP 6 Step Exit Planning Process are also explored in Deciding to Sell Your Business.  After reading Deciding to Sell Your Business, Minor suggests that business owners will likely find themselves in one of the following situations:

You are emotionally ready and your company is ready for sale at maximum price
You are emotionally ready but your company is not ready to be sold for maximum price
You are not emotionally ready and your company is not ready
You are not emotionally ready but your company is ready
You are ready to sell but a sale of your company will never generate financial independence
Your company will always generate a salary for you but it is not saleable

If both you and your business are ready, Minor suggests that you assemble your Advisory Team and initiate the sale process.

 

If you are ready but your business is not, Minor recommends calling a meeting with your Advisory Team to discuss value drivers and develop a value enhancement action plan, one that will help you achieve a target company value that will yield the desired net sale proceeds.  This is also Minor’s suggested course of action if both you and your company are not ready for a sale.

 

If your company is ready but you are not ready, Minor suggests that you determine where you want your company to be (i.e. the next level for your business) and assess how long it will take to achieve.  Once attained, you should then reassess your state of readiness and that of your company to ensure both are in alignment.

 

If you are ready but selling your company will likely never get you what you need then you should consider selling out and buying into another venture.  Minor suggests that you keep trading up until you own a company that has the growth capacity to be sold at a price that will enable you to achieve your financial independence.

 

If you think your company is not saleable, it is Minor’s experience that there is usually a buyer for every business.  To entice a buyer, however, you may have to carry back a significant portion of the purchase price and/or may have to remain in the company for a longer period of time after the sale.

 

If you want to prepare for the significant transfer of business wealth expected over the coming decade you must begin the planning process early.  Reading Deciding to Sell Your Business or attending the VSP Exit Starter Program would be a great place to start.  To learn more about Mr. Minor or to order your copy of Deciding to Sell, visit  http://www.minorbrown.com/attorney/ned-a-minor.html.  For details regarding the VSP Exit Starter Program contact us at jason@vspltd.ca or www.vspltd.ca.

 

 

1.  First Edition, 2003, Business Enterprise Institute, Inc.      http://www.minorbrown.com/our-services/deciding-to-sell-your-business.html

The VSP Exit Starter Program – Your Wealth Transfer Survival Guide

Are you planning to exit your business in the coming decade?  Have you started preparing for a successful internal transfer (e.g. family, management, employees, shareholders) or an open market sale to a third party?  Do you want to maximize your net sale proceeds and achieve your goals when you exit?  Do you want to be prepared in the event of a forced exit due to disability, divorce, dispute or death?

 

If these questions don’t concern you then read no further – this program is not for you.  If, however, these questions have crossed your mind and do concern you then the VSP Exit Starter Program may be perfect for you.

 

An unprecedented transfer of business wealth is expected over the coming decade.  Going to market unprepared will result in selling for a significant discount or a possible liquidation altogether.  An internal transfer to family, management, employees or other shareholders can fail miserably without proper planning.

 

You can kick start the planning process by letting the professionals trained and experienced in exit planning, business valuation and value enhancement guide you through a structured process in an economic manner with minimal time commitment and interference in your day to day responsibilities.

 

Over the course of the following four half-day sessions you will develop your personalized action plan and begin to assemble your exit planning binder to ensure you are: i) able to leave your business on your terms; and ii) prepared for an unexpected and forced exit due to disability, divorce, dispute or death:

Half-Day Session	Topics Covered
#1 – Laying the Foundation	The 5 key initial questions you must address Detailed review of the 6 step exit planning process Building a competent professional advisory team
#2 – Business Valuation and Value Enhancement	Business valuation basics How to value your business The key to enhancing business value and salability
#3 – Developing the Action Plan	Strategic planning session Revisiting goals, identifying obstacles Brainstorming strategies to overcome obstacles Prioritize and identify action planning items
#4 – Building the Binder	The exit planning binder The internal transfer / succession binder The pre-sale due diligence binder

Through private or group sessions you can join an elite group of business owners that are not only committed to the planning process but also recognize that implementation is the key to success.

 

Group sessions include a personalized Sellability Score Report which allows you to gauge how attractive your business currently is to a potential purchaser.  Most business owners find this to be a great starting point as it highlights some of your company’s current strengths and weaknesses in terms of its "sellability".

 

Private sessions allow you the option of sharing relevant information to find out from experienced business valuators the value of your business given the private and confidential nature of the discussions.  As I have discussed in the past, an independent business valuation is the first step in the value enhancement process, helps to avoid costly legal disputes and manages value expectations which improves the likelihood of completing a sale transaction when the time comes.

 

Group sessions will begin in March 2014 and registration is limited to an exclusive group of 10 businesses.  To find out if you qualify for the VSP Exit Starter Program and for pricing information, contact us at www.vspltd.ca or 905-305-VSPL (8775) or jason@vspltd.ca.

Smart Business Owners Share a Common Goal

Are you on track to meet your business goals for 2013?  What are your goals for 2014?  How often do you actually write down your goals for the coming year? 

 

I find that business owners generally do have predetermined revenue and/or profit targets.  While those are important, there is another goal that can have an even bigger payoff: building a sellable business.

 

You may say that you are not ready to sell.  That’s not relevant.  Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to exit your business:

1.  Sellability means freedom

 

A fundamental factor for determining 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 is not much to sell.  Making your company less dependent on you by building a management team and creating policies and procedures 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 details: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses, etc.  The boring details of company ownership take the enjoyment out of owning a business.  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

 

Do you check your brokerage statement each month to see how your portfolio is doing?  You’re not necessarily looking to sell your portfolio but, 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 that you could one day monetize.  You can monitor your progress with periodic business valuations prepared by an independent business valuator.

4.  Sellability is a gift

 

Imagine that your child has just graduated from college.  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 lemon.

5.  Nine women can’t make a baby in one month

 

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.  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.  As a result, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.

 

To find out how sellable your company currently is and what you need to tweak to improve its sellability, take the Sellability Score via the questionnaire on our website.  You can complete the questionnaire here http://sellabilityscore.com/vsp/jason-kwiatkowski.

 

To learn more about our VSP Exit Starter Program or to find out the value of your business, contact us at www.vspltdca.