Wondering How To Grow Your Business in DC, Virginia and Maryland?
If you stop to think about it, there are a host of great reasons to grow your business:
- Growing businesses attract enthusiastic and skilled employees.
- Valuable businesses spin off income to their owners.
- Growing businesses are more fun to own and run.
- Bigger businesses enjoy more economies of scale.
- It is easier for growing businesses to secure loans necessary to continue growing.
Today, however, let’s focus on how to grow your DMV business for a specific purpose: selling or transferring it. Why? Because you will one day exit your company. To do so successfully means that you exit for the amount of cash you want on the date you choose with your business in the hands of the successor you choose. For that, you need a plan: an exit plan.
Exit On Your Terms
Sure, there are a few lucky owners whose companies find a cure for baldness, produce a diet pill that actually works or develop the next must-have app. With little preparation, the owners receive extravagant amounts of cash for their companies.
For the rest of us, it is exit planning that makes us winners in the end. Our exit plans ultimately convert our largest asset into the cash necessary to live our post-exit lives as we desire – while also leaving legacies to our families and communities. It is the work we devote to an organized exit planning process that makes it possible for us to exit our companies on our terms.
What Makes A Business Valuable?
If you answered, “That depends on who’s asking!” you get it. In the context of growing a business to be sold, you don’t define value, buyers do. Keep in mind that “buyers” include more than private equity groups (financial buyers) and strategic buyers (competitors, adjacencies, suppliers, etc.). The buyer you choose might be one of your children or a key employee. Or, your buyer might be all of your employees (via an Employee Stock Ownership Plan).
No matter what type of buyer you choose for your company, there is one non-negotiable characteristic that every buyer demands:
Your company must be able to run successfully without you.
If you make every critical decision and are the sole reason customers do business with your company, short of that miracle diet pill, buyers just aren’t going to be interested, much less pay millions of dollars for your company. Put yourself in their shoes: would you?
As long as you are solely responsible for the success of your company, your company is not terribly valuable.
How Do You Change That?
We suggest that you devote the same skill, talent and creativity you used to build your business to developing the following elements in your business. We call these elements “value drivers,” and each has to do with either risk or return. These elements either reduce a buyer’s risk in purchasing your company or increase the probability that it will enjoy future growth.
Some of the most common value drivers are:
- A solid, motivated management team
- Business operating systems that create, support and sustain cash flow
- A loyal and diverse customer base
- Recurring revenue
- A realistic, yet robust, growth strategy
- Effective financial controls
- Healthy and growing cash flow
- Facility whose appearance is consistent with eventual asking price
Let’s look at each.
Solid Management Team
If your company has a great management team, you know how long it took to put it together and how valuable it is. I assure you: buyers do too. That’s why every prospective buyer will first ask, “Who monitors the company’s key performance indicators? Who makes the buying decisions? Who’s responsible for bringing in all the clients?”
Remember, this is not your wedding. The last answer a prospective buyer wants to hear from you is, “I do.”
In a small company, there may be only one person on the management team: the owner. But if you are to build a company that has value to anyone but you, you need a team capable of running the company successfully without you.
Once you assure a prospective buyer that your company’s success is not all about you, brace yourself for Question #2: Are your company’s management team members willing to stay after you leave?
Buyers place great value on management teams because successful, staying management teams increase the chances that your company will be successful under new ownership. Sophisticated buyers know that if your management team has successfully grown the company, prospects are good for continued success.
Business Operating Systems (BOS) That Sustain Cash Flow
We typically measure the success of a management team by the cash flow it produces: how much and how consistently. But the talent of managers alone is not responsible for healthy cash flow. Management teams rely on reliable business operating systems.
Think about a franchise business for a moment. There isn’t much risk in opening up a McDonald’s or Starbucks. Their underlying business operating systems are so robust that systems are more critical to success than the managers. If, like a franchise, your company’s systems are capable of generating revenue consistently, they have value to a buyer. If they generate increasing amounts of cash flow year over year, they are hugely valuable.
Although your company does not likely need McDonald’s-level operating systems, your goal should be to put in place both capable management and highly efficient business systems.
A Loyal and Diverse Customer Base
While great management teams and excellent business operating systems are key, if your company’s cash flow is dependent on one or two customers, you’ve got a big problem. Would you buy a company knowing that the customers responsible for its success might find other vendors on the day after closing?
To insulate your company from the loss of any single customer, you should work to make sure that no one customer is responsible for more than 10% of total sales.
To this point, we’ve really been talking about revenue: the people, the systems and the customers who produce it. Now let’s talk about recurring revenue, that Holy Grail of company owners and buyers. Predictable revenue is great, but revenue that recurs because it arises from a contractual agreement (subscription) or payment schedule? That’s music to a buyer’s ears.
Look around. Look at meal-preparation (e.g. Blue Apron), personal products (e.g. Birchbox or Harry’s) jewelry rental (e.g. Rocksbox), movies (e.g. Netflix) television (e.g. Hulu) or healthy snacks (e.g. Graze). While subscription products and services aren’t new (Harry & David’s Fruit of the Month Club has been around since 1936), they’re expanded into every area of our lives.
Recurring revenue turns your company into a money machine.
A Realistic Growth Strategy
Having a written document that describes how your company will grow is important to buyers because they’ll refer to it as they calculate (using a discounted cash flow analysis) the future value of your company. Buyers use their estimates of future value to make their purchase offers.
You want your growth strategy to make a strong argument for all of the ways your company will grow. Don’t assume that buyers will understand all the growth opportunities for your company. Your written growth strategy (using pro forma statements) is your opportunity to show off the potential of your business.
Effective Financial Controls
Management teams rely on strong operating systems, but they also rely on accurate financial data to measure the success or failure of company performance. Financial controls contribute to the accuracy of the data that appears on budgets, income statements, P&Ls and cash flow statements.
If you are going to claim that your company is consistently profitable, your financial statements will either support or undermine your claim. During due diligence, buyers will review, no dissect, all of your company’s financial data. If something is “not quite right,” a buyer may stick around and reduce its offer, or more likely, head for the hills.
Think about it. If you tell a prospective buyer that because your company made $2.5 million last year, $2 million the year before and $1.8 million the year before that, you expect it to grow at the same pace for the next three years, don’t be surprised to hear, “That’s great! Prove it.”
If you then pull out financial statements that your Uncle Lenny prepared using varying standards, were sloppy and riddled with unsupportable numbers, would you blame the buyer for taking off?
Giving buyers confidence in your financial controls and statements is not difficult: ask your CPA firm to verify them or subject them to a full, certified audit.
Healthy and Growing Cash Flow
Those buyers who hate risk? They look for cash flow–stable, predictable cash flow–and love earnings that are on the upswing. As we mentioned earlier, buyers use cash flow to determine how much to pay for a company. Great and increasing cash flow helps buyers sleep better at night and open their wallets a bit wider during the day.
If you are thinking about leaving your company in the next three years or so and your company’s cash flow isn’t growing and growing quickly, we have a number of ideas about how you can increase it.
With the management team, financial controls and operating systems that your company has in place, could it increase its profit margins if it increased its revenues? That’s the question a buyer will ask: Can we take what’s here—the systems and the people—and do it on a bigger, more profitable scale?
Facility whose appearance is consistent with eventual asking price
Take a walk around your facility, both inside and outside. What do you see? Is the place clean and comfortable? Does the equipment tell a prospective buyer that you’ve invested in keeping current or are creating a museum?
Prospective buyers will see your facility. If it looks as if Bob Cratchit works there, yet your asking price conjures up his employer, Mr. E. Scrooge, the disconnect will not go unnoticed. It isn’t unreasonable for buyers to want the businesses they buy to look or reflect their sale prices.