business owners Tag

“As shocking as it may sound, I believe that most owners of middle market private companies do not really know the value of their company and what it takes to create greater value in their company … Oh sure, the owner tracks sales and earnings on a regular basis, but there is much more to creating company value than just sales and earnings”
     Russ Robb, Editor, M&A Today

Creating value in the privately held company makes sense whether the owner is considering selling the business, plans on continuing to operate the business, or hopes to have the company remain in the family.  (It is interesting to note that, of the businesses held within the family, only about 30 percent survive the second generation, 11 percent survive the third generation and only 3 percent survive the fourth generation and beyond).

Building value in a company should focus on the following six components:

• the industry
• the management
• products or services
• customers
• competitors
• comparative benchmarks

The Industry – It is difficult, if not impossible, to build value if the business is in a stagnating industry.  One advantage of privately held firms is their ability to shift gears and go into a different direction.  One firm, for example, that made high-volume, low-end canoes shifted to low-volume, high-end lightweight canoes and kayaks to meet new market demands.  This saved the company.

The Management – Building depth in management and creating a succession plan also builds value.  Key employees should have employment contracts and sign non-compete agreements. In situations where there are partners, “buy-sell” agreements should be executed. These arrangements contribute to value.

Products or Services– A single product or service does not build value.  However, if additional or companion products or services can be created, especially if they are non-competitive in price with the primary product or service – then value can be created.

Customers – A broad customer base that is national or international is the key to increasing value.  Localized distribution focused on one or two customers will subtract from value.

Competitors – Being a market leader adds significantly to value, as does a lack of competition.

Comparative Benchmarks – Benchmarks can be used to measure a company against its peers.  The better the results, the greater the value of the company.

Three keys to adding value to a company are: building a top management team coupled with a loyal work force; strategies that are flexible and therefore can be changed in mid-stream; and surrounding the owner/CEO with top advisors and professionals.

Owners are often asked, “do you think you will ever sell your business?” The answer varies from, “when I can get my price” to “never” to “I don’t really know” to everything in between. Most sellers may think to themselves when asked this question, “I’ll sell when the time is right.” Obviously, misfortune can force the decision to sell. Despite the questions, most business owners just go merrily along their way conducting business as usual. They seem to believe in the old expression that basically states, “it is a good idea to sell your horse before it dies.”

Four Ways to Leave Your Business

There are really only four ways to leave your business. (1) Transfer ownership to your children or other family members. Unfortunately, many children do not want to become involved in the family business, or may not have the capability to operate it successfully. (2) Sell the business to an employee or key manager. Usually, they don’t have enough cash, or interest, to purchase the business. And, like offspring, they may not be able to manage the entire business. (3) Selling the business to an outsider is always a possibility. Get the highest price and the most cash possible and go on your way. (4) Liquidate the business – this is usually the worst option and the last resort.

When to Start Working on Your Exit Plan

There is another old adage that says, “you should start planning to exit the business the day you start it or buy it.” You certainly don’t want to plan on misfortune, but it’s never to early to plan on how to leave the business. If you have no children or other relative that has any interest in going into the business, your options are now down to three. Most small and mid-size businesses don’t have the management depth that would provide a successor. Furthermore liquidating doesn’t seem attractive. That leaves attempting to find an outsider to purchase the business as the exit plan.

The time to plan for succession is indeed, the day you begin operations. You can’t predict misfortune, but you can plan for it. Unfortunately, most sellers wait until they wake up one morning, don’t want to go to their business, drive around the block several times, working up the courage to begin the day. It is often called “burn-out” and if it is an on-going problem, it probably means it’s time to exit. Other reasons for wanting to leave is that they face family pressure to start “taking it easy” or to move closer to the grandkids.

Every business owner wants as much money as possible when the decision to sell is made. If you haven’t even thought of exiting your business, or selling it, now is the time to begin a pre-exit or pre-sale strategy.

What is the value of your business? There are many ways to approach that question — based on complex formulas or just a good hard look at the balance sheet, but no answer based purely on numbers is going to be exactly right. Even factoring in that most popular of abstracts — goodwill — the true essence of an operation is not likely to be revealed.

To find the real value of a business, we must go to its very heart: the attitude, work habits, managerial style, customer/marketplace savvy, and community reputation of the person in charge. The business owner or manager is the final, and most cogent, indicator of business worth. Check out the following healthy signs, and then listen to the heartbeat of your own business and its leadership style:

Optimistic Attitude

Many business owners today are more pragmatic and take pride in being less of an “incurable optimist.” The owner of yesterday wasn’t afraid to follow the words of Willy Loman in Death of a Salesman: “A salesman has got to dream, boy. It comes with the territory.” A decline in optimism is an unfortunate trend. In a world driven by technology and scientific analysis, it’s easy to forget the importance of the right attitude. If business owners aren’t positive, how can they expect customers and employers to be? The owner who believes business is bad will probably not see it getting any better. Of course, there are always the real-life factors — banks that won’t lend, customers who stop buying, services that become obsolete. However, if these problems didn’t exist, there would be something else to keep the negative thinkers occupied.

How to project a positive attitude? Begin with the easiest. Sprucing up the place of business with fresh paint, newly-cleaned carpeting, well-stocked shelves, for example, will say a lot for the health of a company. Less visible, but highly important, is a positive outlook on the future of the business. Business owners should be prepared to spend what it takes to generate new business, and should take the time to explore new possibilities for long-range success. If the company currently has no mission statement or business plan, creating one will speak volumes abut owner’s enthusiasm for the future of the operation.

Healthy Managerial Style

In the modern workplace, where you can hardly see the business through the forest of “managers,” it’s good to get back to basics. Too often, owners get bogged down in busy work, or in “managing the managers.” They should occasionally take time off to work the floor, drive the delivery truck, sell the product. Owners who put themselves in the trenches are in touch with the business — and this first-hand understanding will be evident to anyone taking stock of the company’s worth.

An equally healthy approach to managing is preparing for contingencies. The owner’s style should include appropriate delegation of duties and a backup managerial plan in case of unforeseen calamity.

And finally, owners should project a general sense of well-being and energy. This may be easier said than done, but it’s important to note. Anyone taking stock of a business will draw a quick, and key, first impression from the very posture and tone of voice the owner presents.

Customer relations say a lot about the “heart” of a business. The business owner’s approach to handling customers sets the standard for everyone down the ladder. A healthy business avoids treating the customer like a number — or maybe worse, like a stranger. For example, successful big-time operations who deal with customers by telephone make it a point to ask for the proper pronunciation of a name, or request permission to use the customer’s first name. Added to basic courtesies is the sense that salespeople are happy to take the time necessary to answer questions and/or deal with problems.

Whether products and services are sold by phone or on the floor, employees should be well-versed experts on whatever they’re selling. Again, large outfits have established high standards to emulate; for instance, the outdoor equipment chain with salespeople who can not only fit hiking boots to a T (or a toe), but also know how to clean, weatherproof and care for the leather, vibram, or nylon of which the boots are made. Every hour spent training salespeople in the product pays huge dividends for the company’s long-term success.

Conspicuous Image

To foster the image of an on-going, healthy business concern, business owners need to keep their image prominent before the public. Advertising can build image at the same time it attracts business. Anything from a display ad within the yellow pages listings, to a monthly “home-baked” newsletter, to the offering of free seminars, can portray the business as more than just the sum of its products. An example of image-making at its best comes from the owner of a natural foods store in a metrowest Boston town. She not only produces her own monthly newsletter (with product information and coupons, plus general health articles), but she also sponsors evening lectures on subjects such as acupuncture, aromatherapy, women’s health, and children’s nutrition. What’s more, she offers free tours of her in-house cookie “factory” to local schools. The samples the kids take home are the best cost-per-inch ad value imaginable!

For the less adventurous, there are plenty of conservative ways to make ads pay. Every Saturday for years, the sports section of a Los Angeles newspaper carried a one-inch ad for the “Best Hamburger in Town.” No catchy phrases, no dazzling graphics, but the ad was there — and there — and there again. The consistency sold the restaurant’s product and its image and eventually, the eatery became a 10 plus chain.

Community Involvement

To further promote the business — and its owner — as a rock-solid and permanent part of the local scene, there are opportunities just waiting to be tapped. Taking an active role in the Chamber of Commerce, trade or service associations, or sponsoring worthy local events all lead to great public relations. In addition to the more traditional public donations — providing kids’ sports team uniforms, taking out ads in yearbooks — the business can band together to join walkathons, or volunteer to man the phones for public TV or radio fundraisers. Doing “good” makes the business owner and the employees feel good about themselves.

“Feeling good” is a good point at which to conclude our journey to the heart of a business. Dollars and cents will always be important in establishing value, but it’s a kind of people-sense that will give the truest reading.

Experienced buyers of large businesses have tended to spurn the smaller business, citing traditional “negatives” involved in this type of transaction. Now big-time buyers are throwing away the don’t-buy-small book; or at least, they are beginning to read between the lines. The so-called shortcomings of the small business acquisition can actually be opportunities in disguise.

Let’s take a look at these small-business negatives and see the possibilities or (improvements) inherent in each:

A Good Small Business Is Hard To Find

Experienced buyers often complain about the difficulty of locating a viable smaller business. Furthermore, when a business of possible interest is found, the owner/seller is often trying to manage the transaction single handedly, foregoing the advice of professionals. This negative issue can be resolved instantly by the use of a business broker. For the seller, the business broker will offer the support and expertise needed to launch and consummate the sale. For the buyer, the business broker will pinpoint appropriate businesses for sale, using a knowledge of the marketplace and extensive databases to shortcut the search process.

Business brokers will also be able to present the buyer with small businesses that are not “shopworn,” as can be the case when a business sale has floundered–again and again–in the inexpert hands of the seller. The bigger-time buyers will especially appreciate this, since they are always on the lookout for the unusual and first-time seller.

One Person Is Key

When the owner is also the key employee, what happens after the business is sold? How can the new owners/investors hope to replace the one person who has essentially been the business? This traditional concern paints a far too gloomy–and, in fact, inaccurate–picture. Too many small business owners only think that they are irreplaceable. In most cases, they are not. In fact, new management can bring with it the fresh enthusiasm and energy essential for significant growth. For example, viewed from the outside, the quaint gift shop that is an extension of the personality of its owners might have become just that–too quaint, a clutter of Aunt Susie’s jams, somebody else’s painted beach rocks, aged potpourri. The new management clears out a space to serve gourmet coffees, stocks gift items from an endangered rainforest made by third-world peoples, and the business takes on a whole new life.

Casual Company Structure

Lines of responsibility often blur in the small-business management structure. This problem is compounded when, as in many cases with the small to mid-sized business, the owner is also the manager. Daily concerns override long-term planning, and decisions tend to be driven by instinct rather than by in-depth analysis. The typical informality of small business management is not an insoluble problem by any means. The use of expert, highly specialized consultants and the instituting of an enthusiastic board of directors are two possible initial steps to take. Both groups–consultants and board members–will be invaluable resources to support the existing management and to help formalize the company’s structure. With the burden of managing the business more clearly defined and more equably distributed, a small business will have better opportunities for rapid change and growth.

An additional tip for those owner-managers considering selling their business: Experienced buyers will be more impressed with your business, no matter what the size, if you prepare an operating manual that details the current operation scheme and charts the responsibilities of each employee.

The Owner Keeps the Books

With many small businesses, the owner keeps track of operations and financial reporting procedures–off the cuff or in the head. Even when careful records are kept on paper or computer, the systems may not have kept up with the business and the times. (The operating manual mentioned above will help owners as they plan to sell their business.) The good news for buyers is that the changes needed to update most small business systems will not call for major overhauls. Simple systems improvements can effect dramatic results.

Goodwill Is What’s (Mostly) for Sale

A small business is not typically rich in assets. The investment in capital equipment is minor, and, in the case of S corporations, the majority of earnings go to the owner or owners. What is left to attract the experienced buyer? Mostly goodwill–just what most buyers don’t want to hear. There are, however, two positive sides to the low-assets “negative.” First, it is possible for the new owner to increase assets by the purchase of equipment and by frugal management decisions. Second, the business with a small asset base might receive a lower valuation, which will naturally appeal to any buyer; the experienced buyer will see the further benefit of using the resulting higher cash flow as a means to grow the business.

Leaving the issue of assets aside, most small businesses, in general, are going to sell for much lower multiples than the larger business. A buyer must “buy into” an exit strategy wherein the business will be re-sold on the basis of a higher multiple of earnings as well as simply higher earnings. This strategy has appeal for those buyers who want to buy small businesses at reasonable valuations.

Small Customer/Supplier Base

It is not atypical for a small business to rely on just one customer for 50 percent of its trade, or on a handful of customers for as much as 90 percent. Businesses with such small customer bases (and similarly small supplier bases) survive by cultivating strong relationships and loyalties. This one-on-one way of doing business poses a potential problem for buyers who are doubtful about maintaining these customer-supplier ties.

The seller can alleviate the buyer’s concerns by agreeing to stay on board, as needed, to help maintain key relationships with customers and suppliers. The smaller the customer base–with a few major customers forming the bulk–the more important the seller’s ongoing participation will be. In addition, sellers can use paperwork to their advantage, creating detailed listings of current customers and suppliers, as well as leads to those used in the past or with future potential.

The Uncertain Seller

Is the business really for sale? This is a vital question that any buyer wants answered. In the case of a small business, the decision to sell will involve many emotional factors, including the reluctance on the part of the seller to part with what has been such a large chunk of his life. If the need to sell is caused by family difficulties or by personal burnout, these are fluctuating issues that may leave the seller running hot and cold.

When the seller’s decision-making powers have become skewed, it is wise to enlist the help of a professional. The business broker can assess the seriousness of the seller–as well as that of the buyer. Once it has been determined that both parties are serious, the business broker will keep an eye on the chemistry of each player, fostering patience on the part of the buyer and guiding the seller on a steady path toward a successful sale.