Improve Your Valuation: Unimportance

I have been going through a few ways of improving the value of your business. This time I want to talk about your value as an owner to the business. If you look at my business, it is about me and my expertise. That is what you get when you hire me. The problem is that this means that I cannot sell my business to someone else.

Why is that? Well, my customers bought my service because of me. There are no two ways around it. If someone bought my business, they would be missing the thing that they bought. It just comes with my type of business and I am comfortable with that.

Suppose I wanted to change my practice to something that was saleable? What would I do to make this happen? I think you understand from the title of this post. I need to make myself unimportant to the business. That is not to say that I would not have or deliver value to the customer. I simply need to make the customer buy something other than me. Let me use an example from another Professional Service - Accounting. When you go to a large CPA firm, you know that the person that you chose will not be doing the bulk of the work. There is a staff that will handle most of the work. The firm may assign a CPA to your account different than the one that you originally bought from. Why does this work? There are two elements of the sale that make this possible. First, the company has a number of systems that ensure the quality of the work and the effectiveness of the employees. This means that you can depend on the quality of the work independent from the person performing the work. Second, the skill of the firm is additive. This means that a number of specialists are available to everyone on a fractional basis. So a person working on your tax return can get an expert opinion from a specialist without you having to pay specialist rates for the entire return.

As with a smaller firm, this highlights 2 of the 3 ways that firms can become more valuable as the owner becomes less important. These 2 are systems and people. By using systems, your customers can be assured that the quality of the products and services that they buy are not dependent on you. This is extended by the use of other people to execute these systems to help scale the business. To be clear, these systems are not only those that are customer facing but internal ones as well. I work with a Property Manager that is working on systemizing his Work Orders for maintaining properties. This includes not only working with tenants and owners but vendors and internal processes as well. This effort is a focus to reduce the number of Work Orders and the length of time that they are open to improving customer satisfaction. This involved changes and standardization of several sub-processes. The work is still in progress but already there are about 2/3rds fewer open Work Orders.

Finally, the third leg of this stool is outsourcing. There are many parts of a business that are important but the owner's participation is not. Think of this as an exercise with a Covey matrix. Getting rid of processes that do not require the owner's time is a great way of building value in two ways. First, it means that a buyer can maintain the existing systems without any transition. This simplifies their job in taking over all the work that goes on. Second, this will force the owner to do more valuable work in and on the business. By doing this, the owner will improve revenue and profits over time.

So, it is important to be unimportant. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, and Strategic Planning

Change Your Business - Change Your Life!

Improve Your Valuation: Revenue

There are some simple things that you can do to get a better valuation of a business that you want to sell. The obvious is to increase Revenue and Profit. I want to talk more about subtler things that you can do to improve your valuation. In this post, I want to talk about the kind of revenue that you get and how it impacts your valuation.

To start with, I want to define three basic types of Revenue: One-Time, Repeat, and Recurring. One-Time Revenue is straightforward. This is transactional Revenue that does not repeat. Car Sales would be a classic example of this. Automobiles are not replaced often and so each sale is likely between a dealership and a person. My current car is 16 years old and so I hope that the dealer was not expecting Revenue from me over that time. There is sometimes brand loyalty between an individual and a car maker. In this case, a family might periodically buy from the same dealer for multiple family members. In my family, I had a cousin who owned a Plymouth dealership. My parents bought several cars and trucks from him over a 20-year period. This is Repeat business. Finally, as cars became more expensive, automakers started leasing cars to buyers. This allowed the customer to rent the vehicle over a long period of time with an option to purchase at the end of the agreement. This has created Recurring revenue for automakers. They get a payment every month from the lessee.

The value of these different types of Revenue is placed in exactly that order. One-Time is the least value. Repeat is more valuable than One-Time. Recurring is the most valuable. To understand why these different Revenue types are worth different amounts, let us look at each type. When you buy a company that has only One-Time Revenue, you must sell and market to close each individual deal. Repeat customers are pre-sold, but a change in ownership may cause them to re-think their purchase behavior. Recurring revenue is generally linked to contracts. This means that a percentage of the revenue is guaranteed for a period. If you were purchasing a company, would it be appealing to know that all the next 12 months of revenue was already sold?

At this point, most people object to me that they cannot create a different kind of revenue stream for their business. I point at the automakers and note that they have created a huge Recurring revenue stream from a business that was One-Time 30 years ago. Some creative ways of doing this must be used to help small businesses get through this process. A great place to start is loyalty cards. These are "points" programs that you might see at a Sandwich shop. You get the 10th one free. In the end, this is a 10% discount for repeat customers. This can be extended into Recurring Revenue for a Massage Therapist if they purchase a "Massage A Month" program that gets billed to the customer's credit card. Maintenance Agreements are other great ways to get Recurring revenue. This way customers pay you what is essentially insurance to defray larger incident costs.

There are many ways to move up the Revenue food chain. If you need to talk to someone about how to do it for your business, give me a call. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, and Strategic Planning

Change Your Business - Change Your Life!

All Good Things

This is not about the end of my blog or anything like that. What I want to write about here is that at some point you and your company will part ways. Either you will sell it, close it, or die while still running it.

For most small business owners, their business represents a tremendous investment of their time and money. If they were not running their business, they could be employed by someone else and earning a living that way. They could invest their dollars in other ways and potentially make good money doing that as well.

What this means is that everyone should be looking at the amount their business will generate for them at a Sale, if any at all. This could mean the difference between retiring normally and working until the time that you pass.

This will be a series about how to create a business valuation that meets your needs. If you are unclear of what you need from your business to retire, then visit a Financial Advisor. Most of them will do a free retirement plan. Just like any type of retirement planning, the sooner you think about a transaction the more likely that you will get out of it what you want.

Once you have that number that you need from the business, it is time to work on your valuation. For most small businesses, this is a multiple of the cash flow from the business plus net assets. To be clear, cash flow is the Net Profit from your business adjusted for any Capital Expenses. Since a number of the deals that I look at are in the Internet Service Provider space, Capital Expenses can be considerable. If that is not significant in your business, then it is just Net Profit. Assets would include any bank accounts, receivables, payables, fixed assets, inventory, and intangible assets that a business might have.

Both of these portions of the business are a bit more negotiable than one might think. It requires some accounting and some thought on how to get to an effective valuation on both fronts. For Net Profit, it turns out that many small business owners run some household expenses through the business. This needs to be changed in order to arrive at the right amount of Net Profit. There may be other factors that are added back (like underpayment of the owner as CEO). For Assets, both Fixed and Intangible Assets are more difficult to quantify. Intangible Assets are hard to quantify (What are your digital assets worth?). Even Fixed Assets can be tough. Do we look at the depreciated value or the replacement value?

All of that should be thought out before you want to sell your company. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Building the Value of Your Business

I work a lot in the business of mergers and acquisitions, and it leads me to want to talk about a one-off topic here. When I evaluate a business for what I think it is worth, I start with a basic formula:

Value = Multiple * Cash Flow + Net Assets

I use Cash Flow instead of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) because I work with several industries that have a significant number of fixed assets and invest in these assets regularly. There are two points of debate when we talk about this formula. First is what is the Multiple. Second, is what are the net assets. The Multiple is always a discussion and for most small businesses they number runs between 2 and 5. Net Assets are a discussion because there are multiple ways of valuing the asset.

In the past, I posted a series on Inorganic Growth. Inorganic Growth is the purchasing of other firms to help accelerate your growth. The alternative is Organic Growth which is all about growing the existing business. The goal of both is to expand the Cash Flow but come with some risks. A well-cited statistic is that 75% of all acquisitions "fail". I think this number is understated as success should be about generating more Cash Flow than the purchase price of the firm. Organic Growth often requires investment before profit expansion. A typical method would be to hire additional Sales Staff. This Sales Person (or People) need to get paid before they bring in new customers. Depending on your typical Sales Cycle, this can be a long time.

A lower risk alternative is to look at the Asset side of the equation. The most obvious thing to do to grow Assets is to acquire the building that your business is located in. For a large business, this is not generally a great idea. Their investors want them to invest their capital in their primary market. For a small business, the investors might be just the owner. By buying a building, the owner is diversifying his or her business investment. It provides a potential for additional value at the sale - though not at a Multiple. The owner may also decide to keep the building and keep the cash flow from leasing the space. Finally, there is a tax advantage in the deduction of the Depreciation from paying off the building.

So, I hope that helps Owners think about how to expand the value of their business. Have a great day!

Jim Sackman

Focal Point Business Coaching

Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

Inorganic Growth: Go it Alone?

I hope through this series that I have given you some ideas about this notion of inorganic growth.  There is a lot of potential value here.  Business Growth is absolutely attainable.  So why do so many small businesses not go through this path?  The answer is the risk.  There are so many true stories of failed acquisitions that people are gun shy.  And the truth is that this is a risk.

So what is the best way to mitigate the risk?  The best thing to do is get good help.  Let me go over the elements involved in the process to make sure you know where to go.

There is the Strategic Planning Element.  You might have a Board of Directors or Advisors.  Those are great people to talk to first.  If you don't have this kind of help, you may consider it.  The viewpoint of an external observer can help provide a different perspective on any plan.

There is the Deal Element.  Each transaction is a significant effort in valuing the business and performing due diligence.  Do you really want to read every contract?  Do you have the time or proficiency to go through the Financial Statements?  There are M&A Advisors out there that can help make sure that you are getting the right deal.

There is the Execution Element.  Assuming you have a good plan put together, you might wish to hire a Project Manager with M&A Experience.  This helps keep all the things that have to change on track.  This goes from the large as Communications Plans to the minute like Address Changes.  If you don't have the extra time, then you might want to consider getting help.

All of these advisors can be built into what are called Deal Costs.  Anytime there is a transaction like this, there are costs incurred.  There is nothing for free.  But the help involved above is well worth the price of getting the deal right.

I am one of those Advisors who can help companies in any of the 3 elements. 
 
Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!

 

Inorganic Growth: Applying Leverage

 

So we are at the point we are going to try to redeploy the capital that we have saved in the transaction by our Cost Replacement strategy.  I am going to talk about the ways to deploy this money in a Revenue Enhancement mode.  The challenge with Cost Reduction is that all companies are different in their ability to save cost.  This makes it difficult to come up with a plan that will work for most if not all businesses.

On the other hand, Sales and Marketing are functions of every business.  These are areas that can have capital applied to them effectively and so make a great Leverage model to talk about.

Now, you can hire additional Sales People or increase the value of the partnership to Sales Channels.  These are both viable, given that you are really hiring them to increase the number and quality of the prospects that you get.  What this means you are using these resources primarily for Lead Generation which is a Marketing function in any case.

So, we are back to the ways to increase Lead Generation so that the business will expand.  Choosing to increase the Sales budget, but this should be compared to other increases in the Marketing Budget.  One thing to think about when you do think about it is Scaling as it relates to Lead Generation.  Many Marketing activities (Cold Calling, Networking, Referrals as examples) require an investment of time as a resource.  This means that the ability to scale these depends on people and time.  One of those examples, Cold Calling, can be outsourced for scaling purposes.  But Networking and Referral Marketing are both tough to scale because of this.

What this means is that you should look at any Marketing Strategy (SEO, PPC, Radio, TV, Print) that uses money and generates leads first.  There will be an ongoing expense for a campaign, but these time frames can be limited.  This allows an owner to measure the results and reallocate the money to other areas that are working better. 

So, there you have it.  A first step in growing a business that you have acquired is to take the savings and apply it to Marketing and Advertising.  You may have come up with some better ideas on the cost side, but Marketing should be in consideration in any case.
 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business - Change Your Life!