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.

Want to be More Valuable Than Your Industry Peers?

The value of your company is dependent upon many things, including your industry.  When we look at businesses within the same industry, there are major variations in valuation.  Here are 10 things that will make your company more valuable than its industry peer group. 

1. Recurring Revenue

The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a buyer.  Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable than those of your competitors.

2. Satisfied Customers

Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.

3. Diversification

Acquirers will pay a premium for companies that naturally hedge the loss of a single customer.  Ensure no customer amounts for more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.

4. Growth

Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your overall industry. 

5. Predictability

If you have mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to an acquirer than an industry peer who does not have a clue where their next customer will come from.

6. A Management Team

Companies with a management team or second-in-command who has agreed to stay on post sale are more valuable than businesses where all the power and knowledge are in the hands of the owner.

7. Something Unique

Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable than a company that sells the same commodity as everyone else in their industry.

8. Location

If you have a great location with natural physical characteristics that are difficult to replicate (imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate), you will have buyers willing to pay a premium for you business in its location.

9. Media Hype

Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry.  If you are the darling of your industry trade media, expect to get a premium acquisition offer.   

10. Clean Books

Companies that invest in audited statements have financials that are generally viewed by acquirers as more trustworthy and therefore worth more.  You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.

Like a rising tide that lifts all boats, your industry typically defines a range of multiples within which your business is likely to sell for; but whether you fall at the bottom or the top of the range comes down to factors that have nothing to do with what you do, but instead, how you do it.

5 Ways to Increase Your Odds of Receiving an Unsolicited Offer

In any negotiation, being the person who makes the first move usually puts you at a slight disadvantage.  The first-mover tips their hand and reveals just how much he/she wants the asset being negotiated.

Likewise, when considering the sale of your business, it is always nice to be courted, rather than being the one doing the courting.  The good news is, the chances of getting an unsolicited offer from someone wanting to buy your business are actually increasing. 

According to the Q2, 2014 Sellability Tracker analysis released in July 2014, 16% of business owners have received an offer in the last year, which is up 37% over Q1.  Said another way, you’re 37% more likely to get an offer to buy your business today than you were at the beginning of the year.

Big companies are buying little ones for a lot of reasons and the current market conditions are accelerating their appetite: interest rates are low and stock markets are high, which provide the ideal platform for acquirers to realize a return on their investment from buying a business like yours. 

So how do you ensure you are on their shopping list?  Here are five ways to get noticed by an acquirer:

1. Win an award

Getting recognized as the “Widget Maker of the Year” by the Widget Makers Association is a great way to get the attention of acquirers in your industry.

2. Hire a PR person

Engaging a public relations professional to tell your story to the media can get you on the radar of buyers in your industry.  A lot of media relations professionals focus on the big mainstream publications, and while these are important, ensure that your PR firm also targets trade publication and industry-specific websites that are read by acquirers in your industry.

3. Host an event

Consider hosting an event (e.g., conference, tradeshow, summit) for your industry and invite representatives from potential acquirers to attend.  Being invited to an industry event can be flattering for acquirers and it is a good way to get them to notice you as an industry leader.

4. Join a board

If an executive from a company you think would make a natural buyer for your business is serving on a board of directors, consider joining the board.  Serving on a board together can be a great way for an acquirer to notice you and your company without you having to say you’re for sale.

5. Grab lunch

Consider inviting a senior executive from a potential acquirer to share a meal under the guise of discussing trends in your industry.  At the very least, you may glean some useful information about how big companies are seeing your industry evolve.  At best, your lunch mate may realize that your company could play a key role in helping them grow.

The sale of your business is a delicate dance where it is usually better to be the courted, rather than the courter.  Acquirers are on the hunt for new businesses, and having them notice you will put you in a position of strength when you get to sit down at the negotiation table.

Breaking Down Barriers

Are you passing your business on to the next generation?  Will you be selling to management or an employee group over time?  Would you like to maximize your net proceeds on a sale to an independent third party buyer?

Whether you plan on selling your business to an internal party over time or to an external third party for maximum proceeds, your success depends on how much effort you put into your planning and preparation.

Getting started is often the hardest part.  We learned from Newton that, “An object at rest stays at rest and an object in motion stays in motion….”  Excuses are your biggest roadblock to getting started.  It’s too early for me…  I’m too busy...  It’s too complicated…  It’s too expensive... and so on.

What’s really behind these excuses?  Understanding this may be just what you need to set in motion something that will “stay in motion” until your goals are achieved.  

Here are some tips for overcoming the most common excuses that are preventing you from getting started:

1. Your mind - Your mind can be your main ally when it comes to achieving your goals.  If, however, your mind is not programmed for success, it will do more to derail your efforts than to help you.  Visualize where you want to be after you exit your business and how it will feel when you get there.  This will give you the motivation to act.
2. Your fear - Change makes most of us nervous – even if it is a change in the right direction.  You may not be consciously aware of the fear you have over leaving your business.  Until you conquer this fear, your exit planning efforts will be blocked by self sabotage and procrastination.  Tackle your fears by believing that something must change, that you must change it and that you can change it.
3. Your commitment - We live in a commitment-phobic world, so it's no wonder that people routinely abandon their goals.  If you truly want to achieve your goals when you exit your business then your commitment to the process is critical.  The margin between success and failure is bridged by your commitment.  Don't give up until your goals have been achieved.  If you don't give up, then you'll never fail.  There are two options in life, excuses or results.  Which do you want?  
4. Your patience – Exit planning takes time and there are a number of issues to address.  It took time to build your business and it will take time to exit the business – that is if you want to exit on your terms.  When you find your patience wavering, review your goals - are they specific, measurable, realistic and attainable?  Remember, slow and steady wins the race.  You will be surprised with how much can be accomplished within a three year period after 12 quarterly meetings!
5. Your support network – Taking on this task alone will leave you less challenged, less accountable and more likely to fail.  There are many helpful resources out there.  Reach out to experts to assist you through the process.  Do some research and speak with colleagues and/or other business owners that have been through the process successfully.  Surround yourself with positive and supportive people.  Look for a professional advisor with exit planning credentials and experience to guide you through the process and involve the specialists where and when needed.

Contact us at jason@vspltd.ca or www.vspltd.ca to help you kick-start the exit planning process.  We can help you set your exit plan in motion and assist you with the implementation to ensure you exit on your terms at a time of your choosing.

1.  Inspired by Daryl Devonish, Co-Owner, Body Pump Inc. (www.bodypumpinc.com). 

Will Your Goals Be Thwarted by These Excuses?

All business owners exit their business eventually.  Planning is critical if you want to ensure a successful transfer of your business - whether that transfer be internal (i.e. to another shareholder, a management group or the next generation) or external (i.e. to an independent third party).

According to a recent CFIB study, less than 10% of business owners have a formal written plan, 40% have an informal plan and over 50% have no plan whatsoever. [1]  Why have so many business owners avoided planning their exit?  

Does this include you and, if so, what is holding you back?  Here are the top 5 excuses that prevent business owners from beginning their exit planning:

Excuse #1: It’s too early for me to plan for succession

Fact: It is never too early.  Planning should begin at least 3 to 5 years prior to exit because there are many issues that require time to adequately address.  Identifying your exit option early (e.g. internal or external) is extremely important.  Identifying how much you will need financially when you exit is critical.  Allowing sufficient time to enhance the value of your business and ensure proper tax plans and structures are in place to minimize tax on the transfer before exit is also vital.  Beginning your planning early could mean the difference between success and failure.  

Excuse #2: I’m too busy 

Fact: You are never too busy to do that which is important - it’s a matter of prioritization.  If ensuring a successful transition to the next generation or maximizing your net proceeds on the sale to a third party is important to you then you will make time for the planning that is necessary to ensure these goals are achieved.  If you are truly serious about meeting your transition goals and understand the importance of planning then you will make it a priority.   

Excuse #3: It’s too complicated and I don’t know where to begin 

Fact: It can be complicated but that has not stopped others from starting their exit planning.  There are many helpful resources out there.  Reach out to experts to assist you through the process.  Do some research and speak with colleagues and/or other business owners that have been through the process successfully.  Surround yourself with positive and supportive people.  Look for a professional advisor with exit planning credentials and experience to guide you through the process and involve the specialists where and when needed. 

Excuse #4:  It’s too expensive

Fact: Exit planning is an investment that should form part of your “wealth management” budget.  You pay professionals to “manage” your portfolio of publicly traded securities.  According to The One Percent Solution, privately held business owners should invest 1% to 2% of the value of their business each year on exit planning initiatives (e.g. business valuation, value enhancement initiatives, life insurance, tax and estate planning, etc.) [2]  This investment will pay off in the form of a higher business value (or price received) and less taxes paid, resulting in more money in your pocket - not to mention the decrease in stress knowing that your affairs are in order.  

Excuse #5 – I don’t want to think about leaving my business

Fact: You may not want to think about leaving your business but you will leave your business one day.  The departure from your business will be voluntary at at time of your choosing or it will be involuntary as a result of your death, disability, disaster, divorce or disagreement.  Would you rather exit your business on your terms or have your family deal with your unexpected forced exit?  Who will run the business?  Will it be salable?  Will it be dissolved?  Will there be taxes to pay?  Start planning now so you can choose while you still have the control to make a choice.     

If you would like to sell your business within the next 5 years, you have a tremendous opportunity to sell for a significant premium - provided you conduct the proper planning!  Those business owners that ignore planning could end up selling for a significant discount or face liquidation altogether.

Are you part of the 50% of business owners that have no plan whatsoever?  If so, what is holding you back?  Join me next time when we address how to overcome what is holding you back.

1. Source: CFIB Research Report November 2012 “Passing on the Business to the Next Generation”

2. Source: The One Percent Solution, Z. Christopher Mercer, 2007.