Just been to an excellent seminar by John Daly of RSM Tenon, Corporate Finance on how to maximise your business growth. This Mamapreneur is very inspired! The seminar basically contained the key steps to growing your business and achieving the best possible price for your business on exit.
What is your business WORTH?
If you are thinking of exiting your business at some point, you need to think about your potential buyer, who will need to value your business in order to make you an offer. Potential buyers use 3 main methods to value a business:
1. Net Assets (this is more relevant for property type businesses);
2. Discounted cashflow (to use this, you identify future cashflow and apply a discount to it) ; and
3. Earnings based valuation.
The main thing to remember is that accountants are not wholly responsible for valuing businesses. Market forces value businesses; it all depends on what a buyer is willing to pay for a business that matters.
Earnings based valuation
Maintainable Earnings X Price Earnings Ratio = the Business Valuation.
This is also known as Earnings Before Interest and Taxation (or EBIT). This figure will also take into account the salary of an owner of a business. This highlights a very important point! Buyers are not keen on businesses that are reliant on the business owner. Therefore, buyers are looking for a CREDIBLE MANAGEMENT TEAM. The ideal situation would be for the business owner to almost be a “general manager’ of the business, as the Buyer can replace a General Manager.
Price Earnings Ratio
This is basically a multiplier of earnings. Trade buyers will typically look at a multiplier of between 4-8. A BRILLIANT TIP is that if your potential Buyer is a PLC, then this is ideal, as quoted companies normally have a higher multiple (average is 15), therefore they might offer a multiple of something like 11 instead of 8.
How do you INCREASE the VALUE of your business?
There is an industry term called MAXIMISING BUSINESS VALUE (MBV). This is the KEY to preparing your business for exit. Between 1 and 5 years from sale, you should be focused on this.
So how to you achieve MBV for your business?
You need an OWNERS PLAN!!
OWNERS PLAN – what do you want to achieve?
1. Personal Objectives
2. Business Objectives
3. Interaction between the two
5. Business vision (definition of success)
6. Increase business attractiveness
7. Shareholder agreement needed?
The absolute KEY to creating a valuable business is to define the BUSINESS VISION. Once you have a very firm idea of where you are going and the success you are going to create, this vision then trickles down throughout the business to your management team and staff. It is crucial.
You also have to think carefully about how you can increase your business attractiveness.
How do you do this?
1. You need a CREDIBLE MANAGEMENT TEAM
2. You need to create a DEFENSIBLE BUSINESS
3. SUSTAINABLE (PROFIT) GROWTH TREND
4. WORKING CAPITAL
With a credible management team, the business should be able to continue without you.
If you have a defensible business, this means that it is fairly difficult for any potential competitor to steal your business or idea. It is a good idea to try to grow your business in this way.
Make sure that you have good working capital for at least a period of 2 years before selling.
Acquisitions is a great way of growing the business however make sure that you don’t do an acquisition in the year of disposal.
TEN TOP TIPS
1. Corporate Structure – Buyer/Tax
2. Legal/Finance – tidy them, especially tax, accounts, contracts, leases, title, licences etc
3. Be aware of MBO’s – you don’t want to encourage your management team to buy out the business if you have the chance of a trade sale
4. Trend – manage a sustainable growth trend
5. Owners – need to have the “Yosho Test” – could the business operate without the business owner for 6 months?
6. Working Capital – fix it 2 years before exit
7. Customers – it is absolutely ESSENTIAL that the business is NOT reliant on individual accounts.
8. Take corporate finance advice if approached
9. Recognise when to sell
10. Flex the variables