Exiting your business can be a minefield or a goldfield – it depends on your point of view. But whatever your perspective there are five important lessons in maximising the value from your business.
As accountants, we like our jargon and you can probably guess one of our favourites: “de-risking the business”. The best way to de-risk any business is to create a number of options. This can include diversification of operations, customers, suppliers, locations, and seeking many potential buyers. As Grandma used to say “don’t put all your eggs in one basket”.
She also used to say that haste makes waste. And no more so than in business. In our experience, a three-to-five year timeframe is the ideal. A hurried sale hurts you on two counts: the more time you have, the easier it is to build sustainable value; and the more time you’ll have to create options for yourself.
Know your numbers
Do you enjoy playing Russian Roulette? Probably not, yet we find so many business people operate their companies without a real knowledge of what’s in the gun. In most cases, business value is largely driven by future maintainable earnings, so under- standing what drives value in your business is essential.
The advice is simple. It’s the doing that’s hard. To ensure you get the real oil on your business we recommend developing three key performance indicators.
First, cash is king! We find that cashflow is by far the best indicator of the health of a company.
The second is growth and the third is return on investment. A company must measure its ability to grow and know the real opportunities in the market place left to capture. A purchaser will look for a business with the chance to capitalise on untapped markets, not one that has already reached its peak. Return on investment will tell the buyers how much profit they can expect back from their investment. The higher the business risk, the greater return an investor would expect. This key ratio helps measure business ‘attractiveness’.
Who’s the person in the mirror – a ruggedly attractive individual? Or something else? It’s hard for anyone to answer that question objectively. It’s the same with business. The business worth is determined not by your hopes and dreams but by what someone else will pay for it.
To avoid disappointment, get an early estimate of the value from your accountant. If nothing else, the valuation process will often highlight areas for improvement. Then, as the improvement process winds up, get a formal audit from an independent auditor. This level of objectivity will build confidence in the buyer’s mind. If I am buying an asset that is going to make me money, I will be much happier to pay for it if I can see it has a good track record of making money as well as good future prospects.
Don’t DIY it
Kiwis' love affair with DIY is one of our endearing features – it certainly got Sir Edmund Hillary up the last part of Mt Everest. Apparently there’s still a Hillary Step up there in the ice and snow. What’s less acknowledged is the team that Hillary was a part of, from fellow climbers to logistics personnel. For every Edmund there’s a Tensing. Who makes up your team? All businesses need the skills of a variety of different professionals to succeed; profession- als in areas such as accounting, law, finance, marketing, HR and risk management. The reality of most New Zealand businesses is that they are too small to have all the skills on the payroll.
Prepare for a journey – not a destination
Business improvement is an ongoing exercise. While a business sale may look like a single event, those that have been through the process understand that even an event like the sale is actually made up of a whole lot of little steps that happen over what, in some cases, is many years. It’s like the joke about how you eat an elephant: One bite at a time.
Aaron Wallace is a business improvement specialist and director of Hayes Knight.
This story originally appeared in Succeed.