Driving Value with the Switzerland Structure

Increasing the value of your business requires an understanding of the 8 key value drivers.  The first two value drivers, Financial Performance and Growth, were discussed last month.  This month we address the third value driver, Switzerland Structure. 

Switzerland Structure refers to how dependent your company is on any one customer, supplier or employee.  The greater the dependence, the greater the risk and the lower the value. 

 
Customers 

What would happen to your company's profitability if you lost a customer who accounted for over 50% of your total revenues?  Potential purchasers perceive companies that are overly dependent on any one customer to be much riskier to acquire and may be dissuaded from acquiring the business.  At best, they may offer to acquire your business for a deeply discounted valuation multiple. 

 
To maximize the value of your business, strive to have your top 5 customers account for less than 20% of total revenues.

Suppliers

What would happen to your input costs if a major supplier that you are dependent on decided to increase costs or restrict volumes?  Companies that are dependent on any one supplier for a significant portion of purchases are perceived to be much riskier companies to acquire.  Potential investors may stay away from your business altogether or offer to acquire the business based on a much lower valuation multiple.

To maximize the value of your business, strive to acquire your inputs from at least three or more different suppliers.

Employees

What would happen to your business if your sole sales rep, who is responsible for over 50% of the company's revenues and has personal relationships with your customers, resigned?  Companies that are dependent on a key employee are riskier companies to acquire and will likely sell for a reduced valuation multiple.

To be as valuable as possible, your company needs a sales team - not just a single salesperson.  Hiring a single sales rep will only keep your business reliant on one person - you need to build a sales team.  Here are three tips for building a sales team:

1. Charge customers up front - sales reps are expensive to find and train.  Consider charging some or all of your customer bills up front so you will have more cash to build your sales team and more time for them to train up.

2. Carve territory into small chunks - carve up your market into sales territories or service lines that provide enough opportunity for multiple sales reps to make money.

3. Hire a second rep as quickly as possible - start by hiring two sales people, not just one.  Sales people thrive on competition, and in order to be a sellable company, you need to be able to demonstrate to a buyer that your sales are driven by a sales team and not just one high performing salesperson.

Businesses that are not dependent on any one customer or supplier and can easily replace their top salesperson are more than twice as likely to get an offer to buy their business as those companies who are overly reliant on a single customer, supplier or salesperson. 

Would you like to know where your company ranks under the Switzerland Structure value driver?  Take 13 minutes to complete the Value Builder Score and receive your score out of 100.

Empirical evidence shows that companies with a Value Builder Score of 80+ receive offers that are 71% higher than the average business!  Simply put, reducing your company's dependence on any key customer, supplier or employee will increase the value of your business.

Driving Value with Growth

To increase the value of your business an understanding of the 8 key value drivers is essential.  The first key value driver, Financial Performance, was discussed previously.  Now we address the second key value driver, Growth. 

Increasing the likelihood for growth and the anticipated growth rate will increase the value of your business.  It will also attract a greater number of potential purchasers for your business.

It is one thing to say that your business has growth opportunities.  It is another thing to actually demonstrate that your business is scalable.  Showing that you had a growth plan in place and that you successfully implemented that growth plan gives your current growth plans more credibility.  This adds tremendous value in the eyes of a potential purchaser.

The Takeaway 

If you want to increase the value of your business and have never prepared a written growth plan, do one today!  Prepare a written growth plan for the coming 1, 3 year and 5 year periods.  If you want your future growth plans to be credible, you must document your current growth plan, the implementation strategy and the results.  You should also obtain an independent business valuation today so you can benchmark the future value enhancement results. 

Growth = Size and Scalability

Larger businesses are perceived to be more substantial and stable organizations than smaller companies.  These businesses have found a way to grow beyond the efforts of the owner(s) and become less reliant on the owner(s). 

Investors consider smaller companies to be riskier than larger organizations and this additional risk manifests itself as a lower valuation multiple being applied to the company's annual cash flows/earnings. 

A company with a scalable business model is much more valuable.  But, does your business have the infrastructure necessary to scale its operations?  What are your company's options?  Consider the following:

1. Geographic Scalability - applying your business model in another city

2. Cultural Scalability - applyling your business concept in another culture

3. Horizontal Scalability - selling new products/services to existing customers

4. Vertical Scalability - providing existing products/services to new customers

Or, you can turn to The Ansoff Matrix which considers the following four growth strategies:

1. Market Penetration - selling existing products to existing customers

2. Product Development - selling new products to existing customers

3. Market Development - selling existing products to new markets

4. Diversification - selling new products to new markets

The first two items are lower risk options given that existing customers are generally the ones who know and like the business the most and are often pleased to find out that the business offers something else they need.  Let's take a closer look at these two options:

Existing Products to Existing Customers (Market Penetration)

Consider a hardware store with a key cutter hidden off in the corner.  Despite the huge mark-up on cutting keys, sales are very low because nobody can see the key cutter.   By moving the key cutter up front beside the cash register customers begin to see the cutter and realize that the hardware store cuts keys.  Not surprisingly, many more keys are sold to existing customers, which increases the overall revenue per customer.

New Products to Existing Customers (Product Development)

Consider a BMW dealership whose typical client is an affluent family man in his forties.  After saturating the market for wealthy forty-something men, the dealership decided to think of the customer as the financially successful family rather than only the patriarch.  Instead of trying to sell more BMWs into a market of diminishing returns, the owner bought a Chrysler dealership so he could sell minivans to the spouses of his BMW buyers - a new product to the existing customer. 

Existing and loyal customers trust and respect the business and its representatives.  Identifying and meeting a separate or supplemental need for those customers will result in sales growth and value enhancement.  

Would you like to know where your company ranks under the Growth value driver?  That's where the Value Builder Score comes in where business owners complete a 13-minute questionnaire to receive their Value Builder Score out of 100. http://score.valuebuildersystem.com/en#started  

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!   Simply put, improving your company's Growth Potential will increase the value of your business.

Driving Value with Financial Performance

Do you want to increase the value of your business?  Are you focused specifically on increasing the value of your business or are you simply hoping that its value will increase as a by-product of focusing on increasing sales or providing 5 star customer service?

A recent client was focused on just that - increasing sales and providing 5 star customer service. Sales did increase but at the expense of margin reductions.  Our client was accepting lower prices to attract new customers and increase sales volumes to existing customers.  Over a three year period, there were no significant changes to the bottom line.  As a result, the company's value did not increase. 

Value is ultimately driven by a company's future income or cash flow expectations.  Increasing your operating cash flows and minimizing the risk associated with achieving and/or exceeding the anticipated cash flows will increase the price an acquirer is willing to pay for your business. 

I recently introduced you to the Value Builder SystemTM, a statistically proven coaching program to help you increase the value of your business that starts with obtaining your Value Builder Score. 

 
The first value driver addressed in determining your company's Value Builder Score is Financial Performance.  Your company's financial performance includes its history of producing revenue and operating cash flows combined with the professionalism of your record keeping. 

 
Increasing your company's annual operating cash flows can be achieved by increasing revenues and/or decreasing costs. 

 
To increase revenues you can increase your prices or increase volumes. Some strategies to consider to increase sales volumes include:

1. Selling more existing products to existing customers (market penetration);
2. Selling new products to existing customers (product development);
3. Selling existing products to new markets (market development); and
4. Selling new products to new markets (diversification).

To decrease costs you can look at ways to reduce direct material and direct labour costs which will help increase your gross margins.  You could also focus on reducing other operating expenses and overheads to improve your net profit margins.  Various outside consultants can assist in this area. Companies like Salvis Group can help improve operating systems/processes to improve efficiency and reduce costs.  Companies like Expense Reduction Analysts can identify general and administrative cost savings to improve your bottom line.  There are also companies that specialize in providing research and development tax credit recoveries to increase your company's operating cash flows.

Improving the quality and integrity of your financial reporting (e.g. monthly, quarterly or year-end financial statements) can also help increase your company's value.  This can be accomplished by improving your accounting information system or upgrading to a review engagement or audit.  Potential purchasers may be willing to pay more for a company with a quality financial reporting system that produces accurate and reliable financial statements and other financial reports.

Wouldn't you like to know where your company ranks under the Financial Performance value driver?   That's where the Value Builder Score comes in where business owners complete a 13-minute questionnaire to receive their Value Builder Score out of 100.

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!  Simply put, improving your company's Financial Performance will increase the value of your business.

Over the coming months I will continue to expand upon how the other key value drivers can increase the value of your business.  I will provide examples for each and discuss what you can do to improve your company's ranking in each of the 8 key value drivers.

Summarizing the 8 Key Value Drivers

You may not be looking to sell your business any time soon.  You may not have started planning for the departure from your business despite the fact that all business owners will one day exit their business (voluntarily or involuntarily due to death, disability, disaster, divorce or dispute).

Are you, however, looking to increase the value of your business and continue to build your wealth?

Value is ultimately driven by a company's future income or cash flow expectations, and the future is inherently uncertain.  Increasing your operating cash flows and minimizing the risk associated with achieving and/or exceeding the projected operating cash flows will increase the price an acquirer is willing to pay for your business. 

I recently introduced you to the Value Builder System(TM), a statistically proven methodology for increasing the value of your business.   Business owners can complete a 13-minute questionnaire and receive their Value Builder Score out of 100. 

In order to truly understand your Value Builder Score you need to appreciate where your company stands in each of the following 8 key value drivers:

1. Financial Performance - your history of producing revenue and profits combined with the professionalism of your record keeping.  Greater revenues and profit margins lead to higher value.

2. Growth Potential - your likelihood to grow your business in the future and at what rate.  A proven track record of meeting and/or exceeding prior growth targets (revenue and profits) and a solid business plan with future growth projections will increase value.

3. Switzerland Structure - how dependent your business is on any one employee, customer or supplier.  Minimize your company's dependence on a key employee, customer or supplier to lower your risk profile and maximize value.

4. Valuation Teeter Totter - your ability to manage working capital and continue to generate positive cash flow.  A strong balance sheet with excess working capital and positive cash flow from operations on a monthly basis will increase value.

5. Recurring Revenue - the proportion and quality of automatic, annuity-based revenue you collect each month.  The more revenues you have locked up under long-term contracts or under an automatic subscription basis, the higher the value.

6. Monopoly Control - how well differentiated your business is from competitors in your industry.  A strong niche and/or competitive advantage in your marketplace will increase value.

7. Customer Satisfaction - the likelihood that your customers will re-purchase and also refer you.  Increase your number of satisfied and loyal customers that refer you to others and you will increase your company's value. 

8. Hub & Spoke - how your business would perform if you were unexpectedly unable to work for a period of three months.  Minimize or eliminate your company's dependence on you, the owner, and you lower your risk profile and increase your company's value.

Wouldn't you like to know where your company ranks in each of these key value driver areas?  Armed with this information you can zero in on the value drivers that need improvement and identify where to focus your efforts and attention to increase the value of your business.  That's where the Value Builder Score comes in. www.valuebuildersystem.com  

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!  Simply put, improving your company's performance on these 8 key value drivers will increase the value of your business.

Join me over the coming months as I expand upon how each of these key value drivers will serve to increase the value of your business.  I will provide examples for each and discuss what you can do to improve your company's ranking in each of the 8 key value drivers.

The Value Builder System - A Systematic Approach to Increasing Business Value

To further enhance my 17+ year career in business valuation as a Chartered Professional Accountant, Chartered Business Valuator, Accredited Senior Appraiser and Certified Exit Planning Advisor, I recently attended the Value Builder System training program in Toronto  (www.valuebuildersystem.com).

The Value Builder System is a statistically proven methodology for increasing the value of a business.   Business owners complete a 13-minute questionnaire and receive their Value Builder Score out of 100.   Companies with a score of 80+ typically receive offers that are 71% higher than average scoring businesses.  This questionnaire focuses on 8 key attributes that drive the value of a business.   The resulting assessment addresses the specific factors that will increase the value of your business.

The Value Builder Score and resulting Value Builder Assessment are fantastic tools for business owners to identify opportunities to enhance the value of their business.   What I like about the Value Builder System is that it was created by someone with actual experience building and selling four separate businesses, the most recent of which was a market research firm, and vetted by various M&A and valuation professionals.   John Warrilow's background and experience in market research has allowed him to analyze the results of more than 20,000+ Value Builder Score questionnaires and show that there is adirect, quantifiable relationship between your Value Builder Score and the value of your business. 

 
As an experienced business valuation professional I can attest to the fact that the Value Builder Score is truly based on 8 of the key factors that drive business value - factors that we at VSP consider in each business valuation we perform.   It is these 8 key value drivers and how they affect a company's Value Builder Score that we will be sharing with you over the coming months.  I hope that you will stay tuned...

August 1, 2015 Book Release - The Undiscovered Planning Tool for Business Owners

Many business owners will admit that they do not know the current value of their business.  Worse yet, those who claim to know the value will grossly overestimate or underestimate the value of their business, with serious repercussions.

Understanding the value of one’s business is critical. 

I have worked with business owners and their professional advisors (e.g. accountants, lawyers, etc.) for many years on matters involving business valuation.  I am often called when there is an immediate need to determine the value of a business or security – which could be in the context of an actual transaction, a legal dispute, a corporate reorganization or a matrimonial separation.

It became apparent to me that a business valuation can be a very powerful planning tool for business owners.  Despite the tremendous benefits, I find that obtaining an independent business valuation is still a largely undiscovered planning tool among business owners.

I started this blog a few years ago with the intention of disseminating valuable information to the business and legal communities regarding various topics related to business valuation, including the use of a business valuation as a planning tool.

Getting an independent business valuation done now provides the shareholders with a valuation template for future updates.  It also provides the basis for shareholders to discuss major assumptions underlying the value conclusions and key drivers effecting value.

An independent business valuation is something that should be done before it needs to be done and is extremely useful for a number of reasons.

• It helps manage value expectations.

• It helps enhance business value.

• It helps avoid legal disputes.

• It is integral for exit planning.

• It is required for tax and estate planning.

• It is vital for contingency planning.

I elaborate on each of these throughout The Undiscovered Planning Tool for Business Owners.  I will also share some experiences involving business owners who have successfully incorporated an independent business valuation into their planning as well as actual situations illustrating the consequences of not including an independent business valuation into the planning process.  Finally, I address some of the common reasons why business owners avoid exit planning and how these barriers can be broken down. 

If any of this resonates with you, my hope is that you are motivated to be more proactive, positive and successful when it comes to setting and achieving your goals.

For more information or to pre-order your copy today www.undiscoveredplanningtool.ca 

Want to Maximize Your Net Proceeds? Don’t Neglect Your Working Capital!

Cash flow measures the cash coming in and going out of your business whereas income is an accounting interpretation of your company’s net earnings or loss over a period of time.  For example, if you charge $10,000 upfront for a service that takes three months to deliver, you would recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to perform the work.  But since you charged upfront, you receive all $10,000 in cash on the day your customer decides to buy. 

This positive cash flow cycle improves the value of your company because when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital (i.e. the cash your company needs to fund its immediate obligations like payroll, rent, etc.).  Both cheques, however, are drawn from the same bank account.  Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you, the seller.   

The inverse is also true.  If your company is a cash drain, an acquirer will have to inject working capital into your business on closing day, which will reduce the purchase price for the business (i.e. reduce the amount paid to you as the seller).

If you want to maximize your net proceeds on sale it is important to manage your cash flow and ensure a positive working capital position on closing.  There is value associated with excess working capital by virtue of being able to either: i) liquidate current assets and extract cash from the business without affecting ongoing operations; or ii) borrow this amount from a lender (e.g. bank) using current assets as collateral and then extract the cash from the business without affecting ongoing operations.  

In an actual transaction the buyer and seller will negotiate a "normalized" working capital amount required for ongoing operations (e.g. based on actual historical balances, AR and AP collection policies, inventory turns, industry averages, anticipated growth, etc.).  Any amount over (under) this "normalized" working capital will be reflected as an increase (decrease) to the purchase price on closing.

One Thought For Improving Your Cash Flow

There are many ways to improve your company’s cash flow and, as a result, its value.  One often overlooked tactic is to spend less on the capital assets your company needs to operate. 

In the restaurant business, for example, it may take three bankruptcies at a single location before any restaurant can make money.  The first owner of a restaurant walks in and pays cash for a brand new commercial kitchen thus depleting his cash reserves before opening night.  Within a year, the restaurant owner runs out of cash and declares bankruptcy.

Along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the new equipment from the first owner’s creditors for 70 cents on the dollar, figuring she has made a wonderful deal.  But the outlay of cash is still too great and she too is out of business within a year.

It’s not until the third owner comes along that the location actually survives.  He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.  

The moral of the story - find a way to reduce the cash you spend on your capital assets.  Can you buy your equipment used at an auction or online?  Can you share a very expensive piece of machinery with another non-competitive business?  Can you rent instead of buying?

Profits are a very important factor in determining your company’s value but so is the cash your company generates.  Don’t neglect your company’s cash flow and working capital if you want to maximize business value and ultimately the net proceeds you receive on the sale of your business.