The present value of the cash flow is a way of pricing out your company. A high certainty that the company will produce steady, predictable cash flow. Cash flow is king! Predictability only creates more value.
A buyer is willing to pay your price if you have a plethora of tangible and intangible assets and systems that function like a Swiss watch.
A “Swiss Watch” of a company needs to produce the consistent cash flow without you. As an owner you want to sell your business and move on. In many cases, a purchaser may want the owner to stay on and run the company for a period of time. However, if your company is able to produce a cash flow without you, it not only allows you to get your price, but allows you to get out of dodge.
It is worth your while to put together a talented management team, that can not only keep the cash flow consistent, but has the ability to keep the cash flow machine working even if you are not there. Your key management team may be the most important element of your business.
Whether buyers are strategic buyers, or financial buyers, they will be looking for value drivers. From the beginning of your business ownership, these are the things you need to start working on.
- Key management group
- Loyal client base with diversification (most of your firms revenue should come from more than 10% of the clients)
- Efficient production and manufacturing facilities
- Leading edge products or services
- Supplier network
- Intellectual property rights (patents, trademarks, trade name)
- Steady, predictable solid profits and cash flow
- Proven growth record
- Effective workforce in place
- Transferable franchise or license
- Key location or territory
- Barriers to entry for a startup
- Research and product development team
- Company name
- Exclusive territory
- Above industry average financial ratios
- Systematized business processes/documented so continuing success is not dependent on any particular person (including the owner)
These are the areas of your business you need to develop and maximize in order to demonstrate the potential for steady predictable growth in the future.
Since the price you will be asking for your business is relevant to your successful retirement (to fill the retirement gap), you will want to spend the time in the areas which will increase the value of your business. Usually, they will be Industry-Specific Business Benchmarks.
Knowing how your competitors are using their resources and the efficiency which they are utilizing them can give you ideas about the strategies being used, and strategies you can compare to your methods. If you are utilizing your resources better than your competitions, you will be able to negotiate a better price for your business.
One important issue an owner can spend their time on, is getting the right people to fill the right positions in their company, while removing the wrong people from positions.
Situations are always changing and can change the dynamics of the business. For example; the retirement of a key owner or other key employee, the unexpected loss of a key person due to death or disability can pose a significant financial hit to any company. Planning can reduce the adverse impact.
Continuity of leadership is important. Having a backup for the key positions would be ideal. Sometimes you don’t have the personnel to accomplish this. A company training program can be a valuable tool for the long-term growth of the company. Cross training is worth the time. Having personnel filling in for important jobs when needed is a valuable element for the business growth.
Trader Joe ‘s is a very good company and a great example of a company with interchangeable job descriptions. Employees learn multiple jobs and task. They rotate their jobs every few hours on the employee’s shift. They create teams, with captains and the team helps with on the job training for the e different jobs. Their education is ongoing. Trader Joe’s has a bench ready to go. This is also done with their management team. Their candidates are always being educated to move up the line and into the position.
Board of Directors
Having an active Board of Directors can help with guidance in implementing employee growth. This is next level management. This is a value driver which is of importance to the growth and value of the company. It is what a potential purchaser looks for in a company that they may be interesting in purchasing.
The board helps provide management continuity and immediate oversight in triggering events, such as divorce, death, disability, or withdrawal. The board can be made up of key insiders and some outsiders who have insight to your business, but not necessarily in your business or industry. Continue reading “Building Your Leadership Team And Going Deep!”
I read somewhere that over the next number of years, at least one in every four small businesses will be sued or threatened with a lawsuit. The odds are great that it will come from within the company.
Will your death, disability, or withdrawal cause a dispute? In many cases it can come from not having communicated the exit or transition plan for the company.
Your Corporate Board of Directors
The Board of directors in your company is crucial to the short and long-term success of the company. The board helps in the avoidance and resolution of disputes. The board can help direct the company’s planning, officer selection and the compensation. The board can help in dispute avoidance, dispute resolution and overall corporate management.
Disputes, can come from compensation agreements, benefits, health co-pays, benefits paid. These are many other ares which a dispute can occur. The hope is that there is a board of directors to help with the resolution.
When the owner dies, becomes disabled or just wants out of their business, and there is no business continuation or a buy and sell, the risk of a dispute rises. A buy and sell agreement will establish the rules in the event a trigger that sets off a change within the business. Remaining partners will need to know what the value of the company stock will be sold for. The surviving family will need to know what the value of the business is and what the family expects to do with the company values. Without a solid written plan, there are unanswered questions and confusion. Continue reading “Your Exit From Your Company!”
If you permanently left your company today, would it continue with little effect on cash flow? If so, would you consider this a transferable value? Transferable value is a driver that is critical for business growth.
A company management team is instrumental in growing cash flow and business value. When a business has the capabilities of having little disruption with its cash flow when an owner leaves, you have a valuable transferable value. A key component of building transferable value is Next-Level Managers. Usually they are experienced working for larger companies. They know how to grow companies and know how to attract people with experience and the skill to help run a company. This level of management will demand more money, perhaps ownership as a condition of employment.
Next level management (NLM) and future changes!
- To attract NLM, it involves training and coaching for the existing management. When adding NLM it may involve replacing current managers who underperform.
- The decision to replace existing management is difficult and hard for many owners, as current management members have been loyal to the company. However, they may be moved to another position with the same type of responsibility. They are good employees, but NLM do a much better job in the management position.
- Engage management consultants and outside resources to create more growth. NLM work well with these professionals.
- Owners provide leadership and motivation for management. Owners should design plans that provide strong incentives to management to remain with the company beyond the owner’s exit.
- Motivate employees to perform at higher levels, create a culture.
- Financial incentives designed to grow cash flow or business value is more likely to achieve the value or cash flow necessary to support the owners’ exit goals and value growth of the company.
- Top management must stay in the business when owners leave, or they don’t have a transferable value and will not achieve the goals when the owner exits. Incentive benefit plans help keep top management employees involved after the exit of the owner.
- The use of a “non-qualified deferred compensation plan” or NQDC Plan which involves a benefit formula and vesting schedule, highly motivates management to stay on.
- When you cobble the benefit formula to a performance benchmark it is possible to increase cash flow and profitability for the company.
- The vesting schedule in the benefit it makes it hard for the top management person to leave. They will leave too much on the table. The vesting schedule give the employer the benefit of keeping a top level management. The employee benefits as the company can offer a richer benefit knowing the reward the employee receives is tied into the company’s profitability.
- The appeal of incentive plans for key employees (management) is understandable: To create transferable value, someone other than the owner must be similarly motivated to grow value and the cash flow necessary to achieve the owner’s exit goals and continue the company beyond the owner’s exit.
Operating Systems That Enhance The Transferable Value Of A Company!
Continue reading “Building Business Value Techniques!”