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Business Value – Getting the most from your life’s work

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Business Value – Getting the most from your life’s work

By , July 7, 2020
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Making the most of your life’s work

Many business owners have sizable portion (if not all) of their pension tied up in their business.  Yet they have no clear idea or plan for how they are going to get it the business value out of the business.  As a result they have no route to the kind of retirement they’ve been dreaming of.  If you recognise yourself in this then read on.  In this article we’ll explore how you can:

  • IDENTIFY the value of your business,
  • PROTECT that value and
  • MAXIMISE it before you finally
  • EXTRACT the value so you can live the life you have worked so hard for

 

 

Leaving a Legacy?

80% of all businesses that are “put up for sale” never find a buyer.  This leaves the business owner feeling that they’ve worked most of their adult lives for nothing.  Yet there are more choices than selling to a 3rd party or just closing your doors

Over 40% of all business owners exit because of unplanned events.   This means they aren’t in control of the way they leave their business.  Neither is their family or the employees who are often left with a mess to sort out.

In family businesses only 4% make it to the 4th generation.  Just think about that for a minute.  You spend your life building something for your kids and a legacy.  By the time grandchildren come to be of business age there’s only a 1 in 25 chance they have anything left.

All of this relates to businesses that have done the hard work of surviving the first 5 years!  Survival rates for business are scary – only 1 in 10 gets to celebrate the 10th birthday.

Does Your Business Need You Too Much?

How much time do you spend in the business?  and where do you spend it?

Usually business owners spend there time in 4 “places”

  1. Operations (the today) – where your salaried or employed staff also spend their time
  2. Support (back office) – this is overheads / cost
  3. Strategy (tomorrow) – this is where you are building the equity in your business and sadly is where many business owners spend the least amount of their time
  4. Culture (leadership) – this covers all the above and is an essential pillar of really high performing companies

So one question is “what can you delegate for immediate impact on you, your money, your time and your energy”?

You only have 3 roles in your business:

  1. Generate revenue
  2. Improve effectiveness (leadership – continuous improvement – quality)
  3. Stay legal

What can you unload to feel lighter and have more time space energy and capacity to think clearly about your future?  Because where you will be in 3, 5 10 years time will be directly related to where you spend your time, energy and thinking right now and for the foreseeable future.

 

 

Are you in danger of letting your business fade away, with nothing but a life time of hard work to show for it?

It’s a common belief amongst business owners that they can just give a business broker a call when they are ready to retire and the broker will find a buyer in a few months.  Sales rarely happen that quickly.  If you are approached with a quick offer you are getting the best value for your business?  In this scenario, are you leaving money on the table?  How do you know?

Most people go through one business exit in their life time.  The process is hard on many levels.  Physically, emotionally and mentally.  Then if you do find a buyer, it’s not usually a case of handing over the keys and getting the cash.  Buyers want to be sure of the value before you disappear into the sunset.  You’ll be asked to hold back some of the money in escrow.  You might be asked to stick around while having no control of the business you built from scratch.  Now that also assumes that all things are equal and there are no other risk factors.

Risk Factors

The risk factors buyers look for include:

  • Your systems
  • Reliance on the business owner or key staff
  • Organisation structure
  • Consistency, reliability and repeatability of your products / services
  • Reputation

In short the buyer is looking for certainty

In Succession Plus, VALUE is improved using our proven 21 steps (split into 5 stages because 21 steps is too many to remember).

V = P x M

The value of your business is based, roughly, on the Profitability and the Multiple.

Most people work on the profitability of their business as a matter of course because that what is usually paying you a salary and dividends.  The value of your business to a buyer is about more than that.  Whilst profit might be the first indicator of value to a buyer, when they start doing their due diligence they’ll soon uncover risk factors.  Any uncertainty about the future that will get them quickly reassessing their offer price. Buyers are motivated by risk factors more than profit.

Profits are invariably adjusted for a variety of “add backs”.  This is where they assess the profitability based on market rates for employees.  Adjustments will be made for the business owner if they are involved in the day to day.

The multiple is often misunderstood and can take on mythical proportions.  In listed companies it’s a defined formula that is based on something called Price Earnings Ratio.  In unlisted, private companies there is another rough rule of thumb which is the profits divided by the net assets (so if your net profit is £100k and your net assets are £25k then your multiple will be roughly 4.  It’s not an exact science.  Your business is worth what a buyer is willing to pay.

Challenges

So what about the challenges?  Because if this was all easy and straight forward you’d be doing it already, wouldn’t you?  Sometimes you know what outcome you want but you just don’t know the “how” or maybe the right questions to ask to get the answers and direction you are looking for.  Put simply you don’t know where to start.

Sometimes being “in” your business means you can’t see the route to the big picture.  After all the day to day kind of crowds out any thinking time.  And the added dimension is “its your baby” – that can mean it’s a bit harder to be objective about your role in it.  If you are constantly firefighting day to day activities you have no capacity to build future value.  If you are REACTING you aren’t LEADING – and value is built through leadership.

Perpetual 3 Year Plan

What we see typically in businesses is a 3 year plan – WHY? Well because this is far enough away that I don’t have to do anything today.  So what happens here is when the question “I don’t know where to start?” comes up – you can say “Ah in 3 years” But if every succession or exit plan is always 3 years in the future when are you going to retire?  And what happens if the unexpected happens in the meantime?

Identify value – Fact finding

Succession Plus starts with a Stage 1 Insights report – this is the result of a comprehensive fact find  in your business.  We dig deep and really get under the skin of your business through questionnaires, interviews with you and in-depth analysis of your numbers.

This gives you (and us) great insight into the current state of your business and the opportunities for improvement both in profitability and over all value.  AND it gives you an implementation plan for achieving what needs to be done to get your business value to the best it can be.  Typically we see a doubling of the potential value of businesses is achievable.

On the journey you will need other experts involved.

The 21 steps identifies what they would be doing for you and the questions you need to ask to get the best out of them.  No more wasted fees because of lack of clarity or understanding whats needed – this is laser focused on YOU getting what you want out of your business and getting your business serving YOUR needs.  Imagine you’re running your business and not the other way round?

Of course this needs a mindset change – its not just the business that needs to get exit ready – you do too.  It’s often the hardest part – letting go and getting out of your own way.

Jo Fairley – Green and Blacks – cried herself to sleep when she lost control of her company having sold it for £30m until her husband said “you can have control or you can have the money” – she stopped crying.

The other big challenge is overcoming inertia – to just start.  The sooner you do the sooner you lock in the value of your company.

 

Summary

 

So how do you get started?  Well one thing you can do right now – this minute – is download the white paper on 15 tips to maximise your business value.

You’ll also find a great personal valuation tool on there which will give you a brief indicative valuation for your business which might surprise you.  And you can download a free chapter version of the book ENJOY IT which lays out the exact steps we take to get your business from where you are now to where you want to be and shows the multitude of choices available to you that you may not have thought about.

 

And if you don’t do any of that then there is one thing you can do TODAY that will, if you act on it, have an immediate effect on YOU and your business – look at what you can delegate  to enable you to focus on your 3 primary roles of generating revenue, becoming more effective and staying legal.

 

 

Christine Nicholson

Christine Nicholson

Partner

Christine is a Chartered Management Accountant with a Law degree who brings 25 years of wisdom, know-how, and experience of working with SME’s. Her long and varied career has included working overseas, rescuing technology companies, building a healthcare business from scratch and running a zoo.

She started her first successful multi-million turnover business in 2002 and has grown business ventures for others including a bankruptcy to 8-figure exit in 18 months. Christine’s engagement consistently gets her clients increasing their turnover with improved profitability and fewer working hours.

She has saved clients thousands and increased the value of their businesses by millions. Since 2008 she has generated over £100m of crystallised value in business exits.

Christine is also an author of 3 books on Finance, Business Management and Technology businesses. She is a seasoned speaker and Professionally Accredited Member of the Association of Business Mentors.