Categories
Exit Planning

How an Owner Can Create a Smooth Business Exit

Selling your business is a once in a lifetime event.

Regardless of how you exit your business, the process is time-consuming. A great deal is on the line financially, and that can cause anxiety. You can reduce the stress of a business exit by getting expert advice and creating a plan.

Business Exit Strategies

Here are 7 effective strategies that can make a business exit go smoothly.

1. Understand What Purchasers Value

The first strategy is to consider the value of your business from a buyer’s point of view. What company traits are valuable to a buyer?

Competitive differentiation and uniqueness in the market

Companies that can build brand awareness are seen as more valuable. Apple, for example, offers products that consumers view as different (and better) than the competition. As a result, buyers are willing to pay more for their products.

Track record of sales, positive cash inflows, and net profits

Cash flow is just as important as profit. A profitable business that struggles to collect cash is less attractive to a buyer. Build a firm that grows sales and drives cash inflows.

Recurring revenue streams

Consider this quote from the Harvard Business Review: “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.”

Valuable companies generate repeat business, which leads to a consistent stream of revenue. They can focus their marketing efforts on new clients, rather than replacing customers who stop buying products. 

Carve out a profitable niche

Many successful businesses establish themselves as the best company in a specific niche. They can develop a deep knowledge of customer needs and preferences. A niche business may also encounter less competition.

2. Restructure company to uncover hidden value 

Once you understand the metrics that motivate a buyer, take steps to increase the value of your business. 

Make the effort to reduce customer dependency on you, the owner. Organize your staff so that others can develop client relationships, and explain to your customers that the change will provide them with a higher level of service. If more people on your staff work with clients, problems can be addressed faster.

Analyze your company operations, and document all routine tasks in a procedures manual. Using a manual reduces confusion about each task, and serves as a training tool for your staff.

Assess your accounting system, and use technology to save time and to produce accurate financial statements. Use software to manage accounting, invoicing, and other tasks.

Consider the key people in your business, and make any needed changes to improve your team.

3. Improve Your Team

Your managers produce value, because they make smart decisions to grow sales and profits. If there’s a gap in your organization that is holding you back, find a manager who can fill the position. Delegate more of your management tasks to your team.

Create an advisory board. You need a group of independent thinkers who are willing to spend time with you. Meet with your advisory board on a consistent basis, and ask for feedback about your business.

4. Review Contracts and Agreements

Review your contracts with partners, employees, vendors, and customers. Many of these agreements must be changed when you sell your business. Find out where your contracts stand now, so you can make plans for an eventual sale.

Create incentive compensation plans for valuable employees, so they stay after a business sale.

5. Assess a Sale to Management or a Relative

Selling the business to employees, management, or a relative can lead to a smooth transition. You know the people involved in the transaction, and your staff may have more confidence with the new leadership.

The sale will only succeed if the transaction makes financial sense for you, and if the buyers have the leadership skills to run the company. You have a personal relationship with these people, and saying ‘no’ to a potential sale may be emotionally difficult. 

Make sure that the sale makes financial and management sense.

6. Selling Your Interest to a Business Partner

If you’re in business with a partner, consider formalizing an agreement that outlines how one partner can sell his or her business interest to another partner. The agreement can include valuation metrics used to value the business. If you put an agreement in place now, the sale negotiation will go more smoothly down the road.

7. Selling Assets

Finally, you may sell company assets, rather than the entire business. Assume, for example, that you want to use machinery and equipment to start another venture. You might sell your customer list, building, and warehouse assets to a buyer, and keep the other assets for your new business.

A business exit requires careful thought and planning, and a business broker can be your trusted advisor throughout the process. Business brokers can help with these issues:

  • Use industry knowledge and marketing efforts to find buyers
  • Understands the seller’s motivations, and potential obstacles to a sale
  • Find buyers who are ready to provide documents for due diligence
  • Pricing: Use metrics to determine the business price
  • Research: Analyze the sales of similar companies, and industry trends
  • Negotiates the final price on seller’s behalf

Work With a Trusted Advisor

At Raincatcher, our business brokers focus on the seller’s needs, not our own.

Our objective is to educate the seller about their options. If it makes sense to work on the business, we will recommend affiliates that we partner with to help the owner maximize the value of their business. The Raincatcher team has worked with thousands of businesses, and we all have that small business entrepreneurial spirit.

Raincatcher works with other professionals, which may include an exit advisor, valuation expert, accountants, and attorneys. Our firm uses industry-leading proprietary valuation resources to value your business.

We will operate as your trusted advisor throughout the entire sale process, so you can sell your business at an attractive price.

Categories
Buying Exit Planning Selling

The Buyer Lens – What Gets Buyers Excited About Your Business

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When we talk to business owners who are ready to sell their business we spend a lot of time reframing their view. There’s a big difference between being an entrepreneur who’s built a business and the same business owner who’s decided to sell their company.  We talk about looking at their business from the buyer’s lens and what’s important to them. About restructuring their business into a “built to sell” company and uncovering their hidden value that attracts buyers who will pay you what your business is worth.

This is an important step for an owner.  Buyers are looking at a specific set of drivers that show the value of the businesses they’re evaluating.  A common set of criteria if you will that separates the average companies from the great ones. Over the years, we’ve done a lot of research and learned through our own exit planning and brokerage teams what’s a nice to have versus an almost universal need of most buyers.

Here’s what we’ve discovered:

  • Financial Performance. Your financial performance is critical and might be a deal breaker right out of the gate if you don’t meet the buyer’s investment criteria. It’s why you need to make sure your financial and accounting records are clean and up-to-date. It’s your company’s best representation of your performance over time. Errors and irregularities are often deal killers right from the start.
  • Customer Satisfaction. We all like satisfied customers, and buyers are no different. But they look at this a little differently.  Strategic buyers hunt for companies that have a high potential for growth, because they know they can scale them.  The key is measuring your customer’s satisfaction with your business in a unique way to showcase companies with a high potential for growth. To do this, we like to get our customer’s net promoter score by capturing their customer’s response to this question, “On a scale of 0 to 10, how likely are you to repurchase from our company and refer our company to your friends and colleagues?”  People who give you a 9 or 10 rating are your promoters, those who give you a 7 or 8 are your passives, and people who give you a 6 or below or your detractors.  You take your percentage of promoters and subtract your detractors percentage to get your score.  Let’s say you get 100 respondents from your confidential survey, and 50 give you a 9 or 10, and 18 give you a 6 or below.  You’d have a net promoter score of 32 (50 minus 18).  Since the average business scores a 15, and world-class brands score a 50+, that’s pretty good and definitely better than average.
  • Growth Potential. Buyers are looking for companies that have the potential for growth and  having the right product and service mix in the right markets.  It’s also, putting on the buyer’s lens, an indicator of how rapidly they could grow your business by bringing in their working capital and size to scale.
  • Recurring Revenue Potential. Some buyers are willing to pay two to three times revenue for companies that bring in a large part of their revenue through subscription models, which is significant.  When you compare that to most valuations multiplying your net profits by a multiple to arrive at your company’s worth (I’m oversimplifying, but you get the idea).  We’ve written a blog that goes over the nine subscription models that is worth a read, especially when you see the potential for your company and the value created.
  • Monopoly Control. Most of us have played Monopoly or at some point heard of it.  It’s a simple board game where you build houses and convert them to hotels, with the goal of making all or most of the money from your fellow game players.  You want to corner the market and create a monopoly, hence the name.  Buyers are wanting to see that your company and your products and services – your brand – is defendable against your competition.  And they want to understand your unique value proposition that resonates with your customers.  That separates you and makes your customers raving fans who want to not only buy more of what you sell, but they want to tell their friends and colleagues, too. (see how these intertwine?)
  • Owner Freedom. We’ve spent a lot of time on owner-dependency and its impact on your company’s value.  Businesses that are dependent on their owners, even synonymous with them, are essentially worthless to buyers.  Buyers know to be successful with an owner-dependent business they’ll need the owner to come work for the buyer for upwards of five years for the buyer.  This structure is an earn out, and a percentage of the sales price for the business is held back and earned by the owner when they meet agreed-to growth targets over time.  Reducing your business’s dependence on you, the owner, will have an immediate impact on the value of your company, and it will allow you to get all or most of the purchase price up front, which is significant.
  • Business Dependency. If your business is dependent on any one (or a few) key customers, suppliers, or employees, you’ll raise an immediate red flag with buyers. There’s risk in buying your company.  What if you get most of your products or inventory from a key supplier, and the supplier raises prices or takes a lot longer to deliver?  How about if they walk away from you?  Is there a key customer who brings in 40% of your revenue and decides after the sale of your business to take their business to a competitor?  Will the buyer have to fire a lot of employees to get the operations in line with the reduced sales? And what if a key employee leaves the company upon learning that the business has been sold?  Is there a key employee who sells a majority of your products and services? These are all risks that buyers think about, and they will likely walk away from deals when they see these issues, or they’ll significantly lower their asking price to compensate for the risk.
  • Positive Cash Flow Engines. We say this a lot, and you’ve heard it before as an entrepreneur: “Cash is king.” Companies that bring in a lot more cash for every  sale they make are very valuable and sought after by strategic and financial buyers. These businesses can really scale and need a lot less working capital to run, since they are flush with cash.  Remember, you want cash coming in much faster than cash going out.  When you’ve created a positive cash flow engine for your company, you’ll increase the value of your company, and you’ll attract buyers who hunt for these situations.

As mentioned, there are several important drivers that a buyer looks for when purchasing a business. If you would like to learn more you can take our 13-minute assessment, which gives you a value score on a 1 to 100 scale. Businesses that score an 80 or above have been proven to sell for 71% more than businesses below that score. We will review the assessment results with you and develop an action plan around the eight key value drivers, helping you prepare to sell your business.

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Categories
Exit Planning

Maximizing Your Business Value with Recurring Revenue Streams

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When the SaaS model came out – Software As A Service –  big global software companies scoffed at the idea.  No one is going to run their business “over the internet” and actually trust someone else to manage the IT and infrastructure.  Combine that with the low-cost, which seemed to imply low quality, smallest feature sets and of course “little benefits.”

This was ten years ago, and my, have things changed.  The biggest ERP shops in the world – Oracle, SAP, WorkDay – are all scrambling to shift to the SaaS model, which has been a tough transition.  Their entire sales model need to change, commission modeling and incentive management, not to mention their go-to-market strategies.  How do you replace multi-million-dollar sales of in-house software and consulting, expensive user license agreements, including lucrative maintenance contracts that last years?

 It’s the world we live in and take for granted now.

The power is in the monthly recurring revenue, the subscription model that is based on a monthly fee per user per month.  The more users you get on your subscription model platform, the more monthly revenue you make.  When you combine that with paying for the service in advance, sometimes requiring an annual license paid up front, and you can see two things.  A very valuable purchase price with a lifetime value many multiples above a single sale, and a positive cash flow engine that brings in a lot of cash up front every time you sell more of your product and service.

It’s a no brainer when you look at it this way.

So, let’s transition to your company.  You might be thinking, “Steve, there’s no way a subscription model works in my industry.  It’s not how we do things, and plus, we’re a commodity.”  That might be true…. In the past.

I always respond this way: “It’s because no one has thought of a subscription model yet that differentiates you from your competition (important) and resonates with your customers.

It’s really that simple.

And here’s another truth.  Buyers are mining the available companies for sale and hunting for companies where their revenue comes from a subscription model.  Especially if that subscription model requires a low customer acquisition cost, is easy to onboard, has a high customer retention rate and lifetime customer value, and the holy grail – generates a positive cash flow engine.

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Categories
Exit Planning Selling

The Changing Role of The CFO In the Underserved Small Business Community

Denver, CO, March 10, 2018:  Small business owners are striving to compete in a rapidly evolving, competitive landscape.  They’re seeing the new trends in Big Data and the leverage gained when they can unleash the power of their financials to make better, more timely decisions.  Large companies are now expecting the CFO to take a more dynamic role in the organization, leading their finance department and providing operational leadership to help their companies run more effectively. So how does the small business community learn from their larger counterparts and take advantage?  There are several key changes to the role of the CFO that business owners should be aware of.

How has the finance discipline changed over the years?

The CFO role is a vital missing element in many small businesses, and its role is more important than ever.  The knowledge and experience that a professional CFO brings to the owner and CEO have expanded beyond accounting and financial reporting.  Today, many companies are choosing to combine the CFO and COO roles, so executives are becoming more familiar with operations of the business.  They’re evolving, learning what key metrics are necessary to measure operational performance and how those metrics can be evaluated to improve results, now and in the future.

The Evolution:  The CFO’s role has transformed in recent years.

Small business owners typically run their business using QuickBooks, usually relying on a bookkeeper or maybe a Controller to record their business transactions and provide financial reporting.  They rely on their CPAs for tax advice and might stretch the relationship to answering questions on more complex accounting matters, but what about understanding the numbers and using that information to run the day-to-day.  What they need is a CFO who can provide operational insight into the data that is captured, building data collection systems and key metrics that measure operational performance.  This is the evolution – CFOs today are more curious by nature, and they roll their sleeves up and talk to people in all areas of the business. They’re asking new questions, like “how can I help you make your business better?” and “what can I do to give you more insight into your department so you can make more effective decisions?”  Good business owners will look for CFOs who embrace the new change in their role, who are curious about the business and how to run things more efficiently.

With the explosion of the Cloud and the ease of deploying SaaS application systems, the small business community can now leverage technology to level the playing field. They’  are able to compete with larger competition and they are expected to win.  They’re thought of as equals with their larger counterparts and expected to bring to their company a level of sophistication that was never thought of before.  This new dimension creates new layers of operational complexity and business requirements, and for the first time, the ability to capture real-time data automatically that was manually collected in the past.  It necessitated a shift in the CFO’s role, and CEO’s are looking for CFOs who want to look beyond just the accounting data and financial reporting.  They want strategic thinkers and business partners who leverage best practices and a system of controls that create more value for the company.

New Requirements: The CFO is required to do more in today’s fast-paced market.

I like to tell people that in order to be a CFO in this new landscape, you have to channel your energy into driving business performance.  You have to be forward-thinking, using your penchant for analysis and financial reporting to beyond the numbers.  CFO’s today need to do a walkabout, talking to people at all levels within their organization and asking them how they can help them do their jobs better.

I’ve always said that “what gets measured, gets done,” and it’s all about finding the right things, at the right points in a process, that measure both good and bad results.  When CFO’s help their managers identify metrics that matter and align these metrics with the tools and systems that collect that data for measurement, they become a valuable, strategic partner at all levels within the business

In the past, CFO’s may have not collected data on the number of calls it takes to successfully reach a prospect, or the relationship between shop-floor temperatures and daily production levels (or reductions in scrap).  It’s focusing on the one thing that makes a difference and identifying the key points along a process that optimize performance, drive improvements, increase revenue, reduce expense, speed up production, and more.  Each business is different, and CFO’s who are creative and naturally curious will do well in this new environment.

If anything, these dialogues help bridge the gap between finance, operations and IT, which are oftentimes startingly separated in spirit and in fact.  Opening communication and helping the business recognize that processes cross lines of business, regardless of the organizational structure, improves people’s understanding of the upstream and downstream implications of business decisions, process changes, and more.  The CFO acts like a conductor, orchestrating small improvements at first that translates into real results over time.

Categories
Exit Planning

Putting Your Best Foot Forward – Strengthening Your Accounting Records

Guiding business owners through our exit planning program, we always begin our discussion with a review of their financial records. Business owners are interested in selling their businesses, but their accounting records are many times not up to par. There are many levels of business acumen and financial knowledge, of course, and we oftentimes have conversations like this:

Us: “Please describe how you leverage your financial records to make business decisions?”
Owner: “Oh, I have my online banking on my phone, and I can see all of my transactions. We download the transactions into Quickbooks, and we can see what expenses were paid and what cash we received from customers. I can see how much money I’m making, too, which is great.”
Us: “That’s great. How do you review your financial statements to help you make operating decisions for your business?”
Owner: “Our bookkeeper prints off the financial statements and tells us how much revenue we did and how much money we made. We know our business, so we make decisions based on how much cash we have and how many sales we made.”

Obviously, I’m oversimplifying a common problem, but we’ve found that many business owners are not unleashing the power of their financials, using the information in their accounting records to make effective business and operational decisions. It is even more simple than that.

Most business owners are not professional accountants, let alone CFOs. It goes with the territory. An idea sparked a business, and the owner rolled up their sleeves to make it happen. Keeping up the books was a necessary evil to do their taxes, and it often got in the way of building and expanding the business, meeting new and existing customers, and dealing with employee development issues.

As the business continued to grow, the books did not grow with it. While many of our clients are on Quickbooks or Xero, both cloud-based accounting software applications, which is a start, they’re using the cash basis of accounting to record their transactions. This does not give you an accurate picture month-to-month of your revenue and expenses, which should be matched at the time the transaction occurs, not when cash is received or payments are made. This is vitally important.

For example, let’s say that you make your rent payment on a monthly basis for next month’s rent, and in one month, you paid two rent payments to the landlord. In one month, you would show no rent expense, and your profits would be too high. The next month, you’d have two payments of rent hitting the books, and your profits would be artificially deflated. Proper accounting would have you create a Prepaid Rent account for the next month’s rent that you paid in the current month, which would properly reverse the following month. That reversal would also record the rent expense in the proper month. By doing your accounting this way – using the accrual method – you have a proper view of revenue and expenses on your Income Statement (also called the “Profit & Loss Statement”), and your Balance Sheet is accurately presented as well.

One of the steps in our Reach Your PEAK exit planning system is performing an assessment of our customer’s accounting records, which oftentimes requires a clean-up effort. It’s critical that business owner’s use the accrual method of accounting when recording their financial transactions, as we discussed. It’s even more important that their accounting records are accurate, complete and defendable, especially when you put your company on the market for sale.

Why is that?

Buyers look at a prospectus that presents the company for sale, and the prospectus includes financial statements and other accounting data to highlight a company’s financial performance. Most buyers and their advisors are savvy business people, and they’ll have a strong foundation in finance and accounting. Your financial statements are like your resume that you present for a job. If you’re resume has typos and grammatical errors, it will get thrown in the waste basket, even if you were the most qualified person for the position. Much like a resume, your financial and accounting records are your best representation of your company and its financial performance over time. If there are inconsistencies and inaccuracies in your financial statement presentation, interested buyers will have a lot of questions, often renegotiating the Seller’s asking price down or walking away entirely.

It’s food for thought.