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Archive for April, 2009

Working On — Not In — Your Business

Step Three

A number of years ago, I met with Diana Duff, the owner of Major Machining, Inc. (MMI), a machine shop. She wanted out. I suspected that her severe case of “early onset burnout” was due to the departure of her three-person management team six months earlier. These employees had not just left the company, they had set up a competing machine shop funded by the many MMI customers they took with them.
MMI was in shambles — it had no value because its owner had ignored the most important Value Driver — key employees. Duff could — and should — have considered a variety of tools to motivate and keep the company’s top employees.
 
 

 

 

 

What are Value Drivers? And why are they so important to you and your company? Value Drivers are the various characteristics of a business that professional buy-out experts believe drive business value upward and for which they are willing to pay top dollar. It is vital for you to know what these value drivers are if you want to successfully exit your business.

In Steps One and Two of The Seven Step Exit Planning Process™, you establish your Exit Objectives and determine the value of your business. Driving business value upward is a necessary step if, as is so often the case, you determine that the value of your company is not sufficient to satisfy your financial objective. During Step Three, you create the additional business value and cash flow necessary to help achieve your financial objectives.

To increase business value, you must target those same elements of a business that professional buy-out experts believe drive a business’ value upward and for which they are willing to pay top dollar. These elements — characteristics that both help to reduce risk and improve return — are commonly referred to as “Value Drivers.”

Value Drivers come in two varieties: generic (common to all industries) and industry specific. The generic Value Drivers are:

  • A stable and motivated management team;
  • Operating systems that improve sustainability of cash flows;
  • Operating profit margins, at least as good as industry average;
  • A solid, diversified customer base;
  • Facility appearance consistent with asking price;
  • A realistic growth strategy;
  • Effective financial controls; and
  • Good and improving cash flow.

Your industry also has specific or unique Value Drivers. For example, if you have a distribution company, a potential purchaser would look at the strength of the manufacturers you represent, the number of inventory turns per year, and the level of technical expertise your sales force possess.

For MMI, a number of Value Driver tools and techniques could have been used to motivate and keep key people. These tools included:

  • Stock option, purchase or bonus plans subject to forfeiture if the key employees left prematurely;
  • Non-qualified deferred compensation plans — with vesting — to encourage key employees to stay;
  • A richer benefit package; or
  • A defined succession plan, which included the key employees

All of these tools can be designed not only to motivate and keep your top people — an essential Value Driver itself — but to reward them based on their efforts and success in driving business value upward. Look at your own business. Do you have an incentive system that:

  • Is substantial in the eyes of the key employee?
  • Has written performance standards, the attainment of which by the key employee not only results in a bonus to the key employee, but also increases the value of the company?
  • Is part of a defined, written plan, communicated to the key employee?
  • “Handcuffs” the key employee to the business by making it difficult for him to leave the business without forfeiting significant financial benefits?

As you can see from MMI’s example, creating and fostering Value Drivers is crucial whether you simply wish to put more money in your pocket every year, or whether you want top dollar by selling your company.

It bears repeating that we believe you should concentrate on Value Drivers because that’s what professional buyers may deem important and if they deem it important, it probably is. After all, they should have considerable experience in analyzing what increases a company’s value.

How do you implement Value Drivers in your business?

  • First, learn more about Value Drivers by contacting us.
  • Talk to your advisory team members, especially your financial/insurance professional, your CPA, and perhaps business consultant or attorney.
  • Stand above the fray at least one-half day per month. Look at your business through the eyes of someone interested in buying it. What do you see that would cause you to pay top dollar for your business? What would cause you to pay less for your business? When answering these questions look both at what your business is doing, as well as at what it is not. Viewing your business in this way is what we mean by working on your business, not just in it.

By increasing your knowledge, by working with capable advisors, and, most importantly, by thinking about what the business needs to become more valuable, you can work to put into place the elements necessary to drive the value of your business upward.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

 

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Posted on April 17th, 2009 under Building Value, Exit Planning, Exit Planning Digest. Tags: , . Comments: 3

Troubled Waters Part 1

By Holly A. Magister, CPA, CFP®

The first quarter of 2009 was brutal on virtually all fronts. During my twenty-five years of practice working with Entrepreneurs, I have never witnessed more chaos in the marketplace. Never.

Clients, vendors, employees and other resources that once were reliable relationships, a “known quantity” so to speak, have made moves that no one would have predicted–even 90 days ago. So, here you are…the Entrepreneur without a roadmap. What is one to do?

I believe that as an Entrepreneur you must apply four principles as you navigate these troubled waters…Find Courage, Draw from your Resources, Eliminate the Unnecessary, and Look for the Humor. Without doubt, looking for the humor may be the hardest principle to apply because nothing appears to be very funny at this point. We will get to that principle, however today’s blog is intended to highlight the first principle Courage.

In one of my recent blogs, I shared my belief that it is critical to Make No Assumptions. The first principal “Finding Courage” is necessary if you plan to “Make No Assumptions”. Not all Entrepreneurs are capable of making no assumptions and frankly the real winners are the ones who have enormous amounts of courage!

What does courage look like? In my travels, I have found numerous courageous Entrepreneurs. They know they must be brutally honest with people they love. Sometimes they must remove an employee that simply is not (and has not been) productive. Often they truly love that employee. I hear comments like “This is really tough, he is my son’s best friend since grade school…We all went to their daughter’s wedding.” But the truth is this employee is not cutting it and he is the bad apple in the barrel. You know who they are. You do not have to think about it for even a minute. Nonetheless, that bad apple is spoiling your barrel!

Courageous Entrepreneurs also know they are the driver of their business. It was their dream and their vision that drove them to start the business and it their passion that drives them to navigate these troubled waters today. They know they must follow their gut about clients, vendors, employees, and their other resources as they move forward. Yes, the input from others is important. However, the courageous entrepreneur knows deep down inside the people whom are valuable to them and their business.

One of my mentors is recovering from brain cancer surgery and continues to work with me as my coach. His incredible courage teaches me. As he was returning to his work with me only three months post-surgery, he wrote the following note and I want to share it with you: “Find the resources, make the time, come dressed to play, and be ready to win. If a fifty-six-year-old guy with a brain tumor thinks it’s important enough to dress up and come play, you should just come to see if I can still throw the ball.” He is the epitome of courage and one of my most precious Resources.

I will cover principal number two…Draw from your Resources…on my next blog. Until then, I know you will be courageous in those troubled waters.

Read Troubled Waters - Part 2

Posted on April 13th, 2009 under Building Value, Business Growth, Economy. Tags: , , , , . Comments: 1

What Is My Business Worth?

Step 2

For many owners, the answer to one question determines their eagerness and ability to leave their companies: “How much is my business worth?” This question is indeed critical and answering it is the second step of your seven-step Exit Plan.

Take Ron Nee, the owner of Landscaping Supply Company, as an example.

Ron was ready — and had been for several years — to sell his company but he felt it was worth little more than its net asset value — his industry’s rule of thumb when valuing his type of company. While that value was not inconsiderable ($2 million), Ron wanted more. So, he continued to work in the business well past the point where he found it to be either fulfilling or energizing. In doing so, Ron committed a serious but common ownership mistake: working after the fun and challenge are gone on the mistaken assumption that the company can’t be transferred for sufficient value.

Because Ron failed to get a proper and professional business valuation, he also failed to realize that his business could have been sold for significantly more money than his industry’s “rule of thumb.” And these failures were cumulative, for, in the end, he failed to exit his business when he wanted and for as much money as he wanted and needed.

How can you help to avoid Ron Nee’s predicament?

  • Understand first that there are different types of valuations, performed by different types of valuation advisors, for different reasons.
  • Appreciate that different appraisers charge vastly different amounts for a valuation; and
  • Realize that the questions you need to ask now are what type of valuation do you need and who should perform it? The answers depend on how ready you are to leave your business.

If you are ready to exit the business now, (meaning last Friday) you need more than just a thumbnail sketch of value. You need a thorough valuation which includes a marketability component: Can your company be sold today at its appraised value?

An experienced appraiser active in today’s merger and acquisition marketplace can give you an accurate answer to that question.

An accurate answer can tell you if your business is as ready to be sold as you are ready to leave it.

In Ron Nee’s case he hired a certified valuation analyst whose thorough valuation included what the business would be worth in today’s mergers and acquisitions market.

Expect to pay $5000 to $15,000 depending on the complexity of the valuation and whom you select to value the company.

On the other hand, if you and your business are several years away from ownership transition, a full-blown valuation may well be unnecessary. Instead you need a value approximation or range of value — a “ballpark estimate” of what your business is worth today. Think of an annual valuation as a test of whether the business is on track and of the distance to the station.

Depending on the size of your business and the need for certainty, your CPA can provide this type of valuation approximation for a modest fee.

Had Ron Nee started with a “ballpark” valuation, he would have discovered his business was likely worth significantly more than he thought. He could then have paid a professional valuation expert to determine the value and marketability of his company which would have opened the door for him to sell his business at that time.

“Ballpark” valuations, thorough valuation and marketability appraisals all have their place. Don’t skimp on paying for an accurate valuation, but don’t get one before you need it.

Why is a valuation necessary in this early stage of your Exit Planning? Simply because you and your financial and tax advisors must be able to determine if your financial objective can be met by a sale or other transfer of your company, to whom and when. Only a current business valuation can supply this vital information. Remember that the recent collapse of the mergers and acquisitions marketplace teaches us the valuable lesson that it takes both a strong company and a strong market to maximize business value.

Bottom Line: If you can realize your financial and other objectives today based on the current value and marketability of your business in today’s market, why delay your exit?

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

 

Complete Series
 

 

 

Posted on April 1st, 2009 under Building Value, Exit Planning, Exit Planning Digest. Tags: , , . Comments: 1

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