Every company will need a growth story.
Many business owners come to that point in their lives when they know it is time to sell their company. Whether their decision is due to health, fatigue, boredom, burnout or retirement, the fact remains they want out. At that point, the composite characteristics and attributes of each business paints a picture that is viewed by the business community, competitors, creditors, employees, suppliers, clients and potential buyers. That picture can tell a story of dynamic growth, inactive stability, or decline. It should be the story of a thriving company culture, perceived chance, and growing enterprise value.
More often than not, owners are not prepared for the rigors of a robust due-diligence process brought on from potential buyers eager to hear the “success” story – causing galore deals to fail. We advise clients to think like buyers and ask themselves . . . “what do buyers look for when buying a business”?
When investors screen for and perform due diligence on businesses, they spend an excessive amount of time analyzing the products or employment, market size, competition, evaluation dynamics, client experience, financial history, proformas, and strength of the management team. They do this because these are the important factors that will help them preserve capital and earn an acceptable return on investment.
A strategic business plan including a growth plan need not be about “hockey stick” projections. In fact, it doesn’t necessarily mean getting bigger; rather, it means getting better. And, in that regard, every company should have a growth story showing the ability to analyze and overcome adversity and continue on a positive growth path.
In corporate finance language, getting better means up the present value of future cash flows. The set of strategic actions should increase cash flows, extend their duration, and/or improve certainty. changing the flight of these factors by making strategic decisions makes the business better.
Seven Actions that Improve Business Value
- Strengthening relationships with clients
- Diversifying suppliers
- Investing in technology to improve efficiency
- Putting redundant systems in place
- Making client experiences easier, more efficient, and productive
- Accelerating new product or service offerings
- Expanding into new transmission and geographies for growth or diversification.
Investing in a capable team, efficient processes, and systems that allow the business to operate severally of any one person further achieves the goals and improves the business value. The market place is dynamic, and competition makes it difficult, if not impossible, to generate superior returns on capital indefinitely unless owners and managers watch for growth opportunities.
Growth affects culture, chance and value
Orienting a business toward growth can empower the work force and attract lesser talent. Managers take direction from their owners and, without a directive or incentive to “think outside the box”, the future will look like the past. In our engagements, we often encourage owners to install retention plans that incentivize key employees to stay with the company through a dealing.
In about every case, we find that positioning interests serves as a catalyst for new ideas and creates a sense of urgency. It is no surprise that cost nest egg are easier to find, and expansion opportunities become more attractive to managers when they perceive that owners are receptive to new ideas. Plus, it is more fun than just repetition yesterday, and that dynamic alone makes it more engrossing to employees. Making this a priority ahead of, rather than during a dealing, can help the value accrue to the current owner rather than the new one.
Creating excitement for the future of the business has an added benefit. During the sale process, information is shared through statements of facts (i.e. memorandums, information sites, etc.) and through communication with management (i.e. management presentations). piece it is important that the former is organized to position the business positively, the latter offers the best chance to form an emotional connection with the buyer. When managers have the chance to share their excitement in the future and can inspire a buyer’s confidence, the perception of risk decreases, and the perception of
Regardless of how it is expressed, at the end of the day, value is a function of the perceived future cash flows of the business. To illustrate the impact of growth on valuation for example, if a business is growing at 2% annually, assumptive $2.5 million in operational profit and a cost of capital of 10%, the discounted cash flow analysis implies an intrinsic value of $21.75 million. Growth in cash flow, either as a result of lower compensation, accumulated prices, or lesser volumes, drives belief higher.
Developing the growth plan
A good growth plan will separate revenue growth into achievable actions that have been vetted through information and analysis. The plan might include current market penetration, product or service extensions, geographic expansion, complementary acquisitions, or potential price increases. The size of each chance and the likelihood of success will only be limited by competition, client demand, and business infrastructure.
Given the limited resources of middle market or small businesses, the capability to size each chance accurately may not exist externally. exploitation a third party accomplished at customizing market studies and user research to the specific inevitably of a business can give owners the valuable information needed to prioritize initiatives efficiently.
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Likewise, the cost structure can be affected by focusing on and endlessly observation the cost of growth. Revenue growth by definition will provide leverage on fixed compensation, piece evaluation, the use of new technology, and process improvements can drive down variable compensation. Combined, revenue growth and operational cost improvements drive lesser future margins and higher value. Increasing shareholder value is never easy and there is generally no “silver bullet.”
Rather, success requires a combination of initiatives, and by breakage down each of these growth strategies into actions, the numbers or results can follow. Business planning is a dynamic process with no target end point.
Those organizations that prioritize continuous improvement and consistent growth will be best positioned to maximize shareholder value.
As you prepare to sell your business, remember what Rod Stewart aforementioned about 50 years ago. “Every Picture Tells a Story”. As a business owner, you can determine how your business picture will look. The picture you paint will finally determine your business’s enterprise value.