Posts Tagged ‘family’

Selling Price of Your Company – Goal or Output

Thursday, December 2nd, 2010

A statement early in Larry Bossidy and Ram Charan’s book (see 5 Reasons I Love Execution) caught my attention. They say that “increasing shareholder value is an output, not a goal”. I’ve always said that increasing the value of your company is 1 of only 2 rewards for being a business owner i.e. it is a goal.

But, when I thought about it, I realized the logic really runs like this.

• The income a company generates from its operations, on an ongoing basis, represents the real value of the business to a purchaser.
• Which is why the value of an owner managed businesses is determined – most frequently – using a multiple of operating income.
• So, if management find the right strategy and execute it well, operating income will increase.
• As a result of that, all other things being equal, the value of the business will increase.
• The goal, therefore, is to find – and execute – the right strategy. Do that and owner/shareholder value takes care of itself and is, in fact, an output.

This is true regardless of whether the shareholders are a small group of family members or the public at large.

Around the time that I read Bossidy and Charan’s statement I attended an excellent seminar at the accounting firm SB Partners LLP called “Preparing Your Business for Sale”. One of the partners, Trevor Hood, a CA and CBV, explained clearly and thoroughly how businesses are valued. He finished by listing 2 sets of variables, 1 of which is under the control of management, which affect a valuation.

When I looked at the controllable variables later I realized that all of them related – directly or indirectly – to strategy. For example, markets, customers, competitive superiority, technological innovation, human resources, production and operating systems are all components of strategy.

Many of the other variables under management control – e.g. documenting policies and procedures, financial reporting, managing gross margins and costs/expenses, building an effective management team – are fundamental to successfully executing a strategy.

Even the variables Trevor correctly described as uncontrollable – economic conditions, industry trends, legislation etc. – all have to be considered during strategy development and/or business planning.

At about this point all of this thinking became very satisfying. Trevor’s variables are amongst the areas we focus business owners on when we work with them to build value in their companies. And since our whole purpose in life is strategy development and implementation – strategy made practical – it was all very reassuring………..

Then I saw an article, “Sell the Business, Sail into Retirement,” on the Globe and Mail web site. It talks about the number of businesses that will change hands in the next few years as the baby boomers retire. The article quotes a survey, which says that selling will be the most popular exit strategy.

But, the author goes on; activity is down, not up. Why, because although valuations have gone down because of the recession, owners’ still expect to get the prices that applied 3 years ago. (We encounter this “expectations gap” quite regularly.) But the good news is that low interest rates and easier lending conditions are pushing valuations back up.

We’re not sure that we buy into the comment about easier lending conditions – yet. But it is possible that it will happen in time for, or to coincide with, the boomers’ retirement.

So, what does all of this mean?

If it’s time to sell; and if valuations are going up; and if value is an output, or result, of a good strategy effectively executed then business owners need to demonstrate that they can execute better than ever before.

All of which reinforces the point that execution is, at the very least, a big issue for businesses today; it is the major job of the business owner/leader and it is a discipline which, if mastered, will give a business competitive advantage.

I’m glad we’re in the strategy business!

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4 Tips for Making your Exit a Graceful One……

Saturday, January 30th, 2010

About 4 years ago CIBC World Markets published a study which said that more than half of the owners of small businesses were expected to retire within 15 years.

At the time, 3 points paticularly caught my attention. The fact that the sale of their business was expected to generate roughly 30% of retirement income for self-employed people was the first (I am a Scotsman after all). The second was that approximately 40% of business owners were expected to sell their companies to outsiders or non-family interests. And finally, less than 50% of the business owners had a clear plan for exiting their business.

From what I can see not much has changed. You may find this hard to believe but there will come a day when the call of the golf course/boat/cottage/grandchildren etc. can no longer be ignored and even you will either want to sell your company or pass it on to someone in your family. So here are 4 tips based on the experiences of the companies we’ve worked with since the study was published.

Tip # 1. Plan your exit early and carefully. That way you’ll get the biggest financial return for the years of sleepless nights, missed vacations and everything else that you’ve invested.  You don’t ever want to look back and say “I could have got more for the company”. Even if you know who your successor will be, start early, don’t risk waiting until health or other issues pressure you to complete a deal and get out.

Tip # 2. For most of us, selling or passing along our business is a once in a lifetime experience, so talk to people who has already done it – or who have advised those who have done it. Think about things like how long a transition period you want – will you leave immediately after the transfer of ownership or will you stay on for a predetermined period of time? Consider how you would like the purchase price to be paid – are you willing to have some of it come from future profits? Talk to your personal financial advisor. Get him/her to update your calculations about how much you’ll need for retirement.

Tip # 3. Get the help of specialists to value your company and to structure the sale or transfer in order to handle the tax and legal issues effectively. The accountant who does your financial statements and the lawyer who does your contract work may not have a lot of experience buying and selling companies. Find someone who specializes in the valuation of companies (he/she may have the CBV designation).  If the valuation comes in below what you think the company is worth they’ll help you understand why and tell you what you can do about it (Another reason to start early – give yourself time to take a few simple steps that could increase the selling price.) They’ll also make sure you don’t overlook things like the value of any intellectual property you leave in the company. Similarly, find an accountant and/or lawyer and who works daily with the tax and legal aspects of the sale/acquisition and transfer of businesses. If you don’t know anyone we can recommend some specialists we’ve worked with.

Tipo # 4. Many business owners believe that it will only take a few months to dispose of their company, once they’ve decided to get out. That’s an incorrect assumption. Even with a successor waiting in the wings, it takes many months to put everything in place. If your buyer is an outsider rather than an employee or a family member it will take longer to complete the sale. Finding a buyer and then negotiating with someone you don’t know will take even more time.

To build and run a profitable business you have had to do many things well. Don’t let the last thing you do with that business be one of the worst.

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