Your guide to making your business worth more so you have a richer, happier future.
A Cautionary Tale
Once upon a time, not long ago and not far away there was an ordinary man, called Trevor, who had built up his business over nearly 20 years. He employed nearly 100 people and generated about £10m in revenue. In business terms, he was doing well. Personally, he was going through a tough divorce, and he had a couple of children in the mix so it was challenging. He met a new lady and was starting to think about his next phase of life. One where he didn’t work 16 hours a day, recognising that work had been a big part of his marriage collapse.
While the mechanics of the divorce were going through, he bought a house for himself and his new lady. As it needed a bit of work doing, he started doing some of it himself. He’d realised that he couldn’t run his business alone anymore and had started to mentor and mould the next layer of management to step up to bigger roles. The reality was he was still a linchpin in the business but he was trying to make himself indispensable.
One day while he was fixing and cleaning guttering in the new house, he fell off the ladder. Despite seeming to be not too badly injured over the next 7 days he developed sepsis and eventually died of his injuries. This is a sad story in itself but it quickly became a tragedy. You see Trevor didn’t have a will. He didn’t have a shareholder agreement or any of the business protection in place. And as he wasn’t yet divorced and that meant he soon to be ex-wife was still his next of kin. She was the sole beneficiary of EVERYTHING.
She didn’t know how to run the business, but she also didn’t want to let anyone else run it. After a few months, the newly empowered management got fed up of the interference and left. Within 18 months the business was so diminished it had almost no value and eventually closed its doors. When Trevor was alive the business had been valued at £7m. His wife was offered this almost immediately after Trevor’s death but she felt that the business was worth a lot more and so decided to try and get more. When he died the business slowly died with him, leaving no value and 100 people looking for other jobs.
More than 55% of all business owners will leave their business due to similar circumstances to Trevor. They may not fall off ladders, they are diagnosed with cancer or knocked down by a car. They fall off their new super bike. Whatever happens, it wasn’t planned and the consequences can be devastating for both the business owner, their family and their business.
Like Trevor’s wife, many of the business owners have a figure that they believe their business is worth – it’s usually not based on anything scientific or factual. It is usually based on what has been invested in terms of time, money and sacrifice. Too often the sacrifice element plays a big part in the calculation. Yet so few business owners are actually prepared for an exit – which might occur because of unexpected or unplanned circumstances.
One fact remains constant – the more dependant your business is on you, the less it is worth. And if something happens to you now, how will your business survive? And as importantly, how will you extract the value from your business?
How ready are you and your business for what comes next?
What Do You Really, Really Want?
As well as not thinking about unplanned events, most people (it’s not just business owners) never give much thought to what they want out of life after work. I am sure we all dream of an ideal retirement but I am as guilty as the next person of putting off really thinking about what I want and what I’ll need in terms of resources. When I really got into gear on this, it was quite an eye opener.
When you first start out in business you get caught up in the frantic start up stage. Then in the blink of an eye a decade passes and you’ve become a slave to your business. But STOP! Your business is there to serve your needs not the other way round. If your business has the primary purpose of providing for your needs now and in the future, what are those needs?
To get on top of this you need to look at your personal financial circumstances and start planning for the money you need to have a post-business life. How can you fund household expenses, holidays, school fees, a new car every 3 years etc? With the help of a good financial planner, you’ll quickly realise how far away (or ahead) of where you need to be you are. And you are now ready to look at what needs to happen in your business to allow you to gather the resources you need. It might surprise you.
Having decided what is it you want from your business, then it’s time to think about timing. NOW is the very best time to start so you are ready for not only unplanned events in your life but also an unexpected opportunity to sell. If a buyer approaches you, don’t be on the back foot reacting, be on the front foot being proactive – being ready is a great sign to buyers that you are running a professional business. That adds value.
Now is a great time to discover what your business is really worth. Knowing what impacts the value gives you a head start on your strategic planning for the future. Understanding why your value is impacted more by some activities than other is important to know so you can choose what to put your time and energy into.
If you know what your business is worth you can make educated decisions on when is a good time for you to leave – after all if £500k now would make your life perfect, why slog it out for the possibility of £5m in 10 years time then die before you enjoy it?
5 Key Areas for Insight
Whilst PROFIT is an important part of the value of a business, it is only one of a multitude of factors that a buyer considers when acquiring a company. Putting yourself into the buyer’s shoes is a good start. This allows you to understand the areas of your business that add a genuine, material return on investment.
Anyone looking at your business wants clarity and comfort for what they’re investing in, lending to or buying.
Thinking like a buyer means you know what activity is most likely to maximise the value of the business. This makes you and the business ready to achieve a successful exit.
There are 5 key areas a buyer looks at in your business:
- Financial Viability
- Governance and Compliance
- People and Roles
- Business Planning
Giving priority to the issues that are extreme or urgent and resolving them quickly means you are reducing the risks. You are protecting the value of your business.
Actions = VALUE
Implementation takes time and effort. It is why most business owners don’t take the necessary actions. After all, if it was easy everyone would be doing it. Not taking action diminishes the value of their business as a result.
Identifying which levers to pull to change the value of the business only result in increased value if those levers are actually pulled. When action is taken, it’s not unusual to see the value of the business increased by 20%, 30% and even 40% or 50%. But where do you start?
How financially viable is your business? The COVID pandemic has identified major gaps in many businesses. Especially in cash reserves and the impact of disruptions to trade. Your business model may be sliding you into slow bankruptcy. If you constantly “rob Peter to pay Paul” it’s a clear sign of a broken business. It often takes a crisis to identify this.
It’s the same for many in recessions, which are the finally tipping point for businesses that have been hanging on but have to fold.
Never under estimate the value of knowing your numbers and being able to respond to a change in your financial viability. Most business owners don’t get regular financial reports that allow them to make effective decisions. If this is you, start today. Get monthly management accounts within 5-10 days of the month end. It’s OK to start with a really basic P&L, balance sheet and cashflow forecast – but these are the 3 minimums you should be getting. You then have a fighting chance of seeing the true viability of your business. You might be shocked by what you see.
Governance and Compliance
If your business is performing well financially, it probably has some risks and non-financial issues. Identify those so you get a very clear view of where your business is at. And more importantly where it’s heading. Some non-financial issues you might what to consider are:
- Are you legally up to date with HMRC and other requirements?
- Do you have a strategic plan that’s documented and acted upon?
- Are your people the right skills and roles (and paid accordingly)?
- Have you got the right financial reporting in place to make decisions?
- How do you address risk management, such as Business continuity plans and Insurance?
Acquirers always look at what you’ve done as an owner to address these issues. Anything that’s missing makes a buyer look in more depth at your business and put you on the back foot during the sale process. These factors ADD VALUE!
Making sure you are legally up to date AND do not have a trail of past misdemeanours shows a buyer that you’ve been running a professional company and reduces the worry factor when the due diligence process starts.
Having a strategic plan that everyone can understand and buy into brings your team together. It allows everyone to see the long term goals and work towards them. This leads to more team work, better efficiency and a happier place to work. A strategic plan removes uncertainty and gives clarity on the targets and direction the company is going in. People make better decisions faster when they have a road map.
Having a strategic plan also allows for reduced reliance on the business owner – this one action alone adds huge value to the business. Side benefits are usually reduced business owner stress, great team coherence and improved efficiency and performance. Happy staff lead to happy customers, leading to greater profitability and easier customer retention.
People and Roles
How easy would it be for you to just handover the keys to your business and walk away with your proceeds? Exit readiness is about how dependant the business is on the owner. If you don’t delegate to your staff then you aren’t ready.
Separating the 3 roles that a business owner typically takes on is essential for getting exit ready. The 3 roles are Shareholder; Director and Employee. Usually these roles are blended and bundled together so that it’s difficult for anyone to know which role the business owner is performing at any one time. Here’s a quick summary:
- Shareholder – you OWN the business, you don’t control the day to day, you set the strategic direction and the expectation of the return on your capital. There are very separate liabilities, responsibilities, rights and duties.
- Directors – you CONTROL the business, implementing the strategy to give the shareholders their return while also looking after all the stakeholders such as employees, creditors and legal requirements (Health and safety, compliance etc). There are extensive legal liabilities, responsibilities and duties.
- Employees – a fair days pay for fair days work. Most business owners are in a job. It’s essential to recognize this job role also has responsibilities and should be treated as any other employee is in this role.
Get all of this right BEFORE thinking about selling and you will save £’000 and a lot of time.
The way your business operates and generates revenue is one of the key criteria your buyer looks at in the very early days of a sale process. Having a plan and knowing what’s possible in the future shows potential buyers that there is future additional value. Equally is shows the buyer that you understand your business. Some buyers are looking for recurring revenue, for example. Others are looking for ways to scale and add value. The shape your business is in shows buyers what they have to invest to get the growth / scalability or diversification they are looking for.
Many acquirers look to finance the purchase of your business in some way. YOUR BUSINESS creditworthiness has an impact on their ability to raise finance. If you are raising finance, your creditworthiness influences how much it costs you in interest.
The balance of debt in your business compared to the share capital and reserves is a key measure used in banking assessments of credit worthiness, especially when seeking additional or extensions of existing debt facilities. How easily can your business repay the loan capital and interest from available cash flow? How long does it take to pay the debt back? And what happens to the debt is you were to close the business? These are all questions that anyone looking at your business will want to be able to answer with certainty.
Any serious acquirer investigations how your business shapes up against the industry in general. It helps them when they see your business in the context of the wider market. It answers the question “how good is this business really?”
Many businesses think they are top of their game without actually looking at other businesses in the same sector or with similar operating models. It’s easy to say “we are the best”, it’s not so easy to know. Acquirers use the due diligence process to find out where the risks are in the business. Having policies and processes in place where the right people are doing the right thing at the right time mitigates any concerns an acquirer has.
Buyers want certainty – on sales and leads, of customer and staff retention, of growth opportunities (for some) and of reputation. Show them you’ve thought about this and it serves you and your business well.
When you know exactly what the business is worth today you can start planning where it needs to get the best value. More importantly when you know the key drivers, issues, risks and gaps it allows you to see where you can improve the value of your business. You see the link between activity and increasing the value of the business over time.
Taking the right actions helps you to build the value of your business and make it easier to sell on better terms.