Business Succession - Increase Your Enterprise Value

Business succession planning is most likely not one of the top “to dos” on your list of priorities. But as a business owner working hard every day to run a successful enterprise, it should be. Whether you’re considering an exit strategy today or further down the road, it’s critical to properly position yourself and your business to maximize the opportunity. Waiting until you’re ready or forced to sell is not a strategy–and creates the potential for leaving cash on the table. Poor planning and preparation could also mean working longer than you want or having a transaction fall through altogether.

In a recent SEViX Meeting, it became clear that just thinking about selling your business is not a strategy. There are some vital steps, strategies, and business metrics you can use to help ensure a positive and profitable transaction.

Running a Business is Hard. Selling a Business is even Harder.

According to the German Chamber of Commerce and Industry, just 20% of companies put up for sale are sold—meaning 4 out of 5 owners walk away empty handed. An estimated 65-75% of the companies could be sellers but never even make it to market. And while these facts are sobering enough, only 1 of 10 owners received anywhere close to the value they expected with the sale of their business. The bottom line however is that business owners have to struggle by creating a business that is attractive to a buyer.

The Levers for Driving Up the Value of Your Business

The Formula

EBITDA (performance/cash) x MULTIPLE (risk)

Baseline Company Valuation:

€ 10 M = EBITDA (performance/cash)

         3 = MULTIPLE (risk)

          = € 30 M valuation

Szenario # 1: Increase Performance

€ 20 M = EBITDA (performance/cash)

         3 = MULTIPLE (risk)

          = € 60 M valuation

Szenario # 2: Minimize Risk

€ 10 M = EBITDA (performance/cash)

         5 = MULTIPLE (risk)

          = € 50 M valuation

Szenario # 3: Increase Performance AND Minimize Risk

€ 20 M = EBITDA (performance/cash)

         5 = MULTIPLE (risk)

          = € 100 M valuation

Rainer Ulrich states that financial buyers (the most common type) are actually buying the predictability of your future stream of profit. Business owners have two “levers” to increase the value of their company:

• Amount of cash your company will generate in the future (PERFORMANCE/CASH)
• Reliability of cash flow estimates (RISK)

As the business leaders focus on the performance of the enterprise while minimizing risk for the potential buyer, it’s easy to see how a valuation changes with the following formula: EBITDA (cash) x MULTIPLE (risk) = VALUATION. Increase performance and the valuation rises. Minimize risk and the multiple goes up. Increase performance AND minimize risk? Now you’ve positioned your business to be sold for its highest value.

Don’t Ignore Your Barriers to Growth

SEViX identifies 4 barriers to scaling up values: leadership, marketing, scalable infrastructure, and cash.

• Leadership: Companies are challenged with growing leaders who have the capability to delegate and predict.
• Marketing: As the company grows, leaders tend to lose focus on their marketplace and lose their competitive advantage (differentiators).
• Scalable infrastructure: Companies resist against the compelling need and importance of growing and changing systems. Processes and structures require handling complexities in communication and decision-making.
• Cash: Companies focus on profits rather than on cash. 10 x growths sucks 10x cash and unfortunately debt is used to address the problem.

Focus Your Efforts to Scale Your Business

In addition to the 4 Barriers to Growth, SEViX also identifies 4 areas you need to address in order to scale up your business. He states that scaling a business is about asking and answering major questions. These questions and answers are:

• In Leading People. Have a handful of rules (core values) that you are committed to and and which you honor. These values guide all your relationships, decisions, and systems in company.
• In Setting Strategy. Ask yourself the following questions:

1. Does what you do / offer really sufficiently concern your customers?
2. Does what you do / offer differentiate yourself from competitors?

• In Driving Execution. Implement these essential habits:

1. Set a handful of priorities.
2. Gather quantitative and qualitative data.
3. Establish daily, weekly, monthly, quarterly, and annual meeting rhythms to drive effective communication.

• In Managing Cash. Do not run out of it! Pay as much attention to cash as you do to the P&L and balance sheet.

Preparing Your Business for Sale

Emerging trends in M&A indicate the current framework conditions are highly driven by competition , by easy financing, by a glut of private equity groups, and by cash-rich strategies. Valuation multiples are close to historic peaks for businesses that have explosive growth, proprietary products and services, or niche positions in key industries.

 Supporting you preparing for the process of becoming involved in a very complex and competitive M&A environment, SEViX is providing you some insights to make you successful while selling your business.

First Steps:

• Determine when and why you may be interested in a sale of your business—timeline is critical to preparation.
•  Obtain advice from financial advisors regarding minimum after-tax proceeds necessary to achieve family’s desired financial future.
• Discuss estate planning and tax minimization strategies with an attorney well-versed in M&A.
•  Establish M&A advisory team: investment banker, accountant and attorney.

Financial Preparation

• Long Term

1. Make efforts to boost or at least defend gross margins.
2. Reduce non-essential SG&A expenses.
3. Consider reviewed or audited financial statements.

• Short Term

1. Create rolling 12-month forecast backed up with data
2. Begin assessing potential EBITDA addbacks and adjustments
3. Clean up balance sheet—inventory, A/R, A/P, etc.

Operational Preparation

• Long Term

1. Increase sales and marketing efforts.
2. Take steps to modernize ERP, CRM and accounting systems.

• Short Term

1. Upgrade website and other marketing materials.
2. Identify growth opportunities that new owner could capitalize on.
3. Develop “story” around reasons for the sale and why it is the right time.

Management and Organization

• Long Term

1. Determine any obvious holes in the organizational chart.
2. Ensure sales team is fully staffed.
3. Develop second-level management.

• Short Term

1. Owner-driven businesses should begin delegating increased responsibilities to management team.
2. Create technical and organizational knowledge.
3. Consider retention or transaction bonuses for key management.
4. Include trusted management in M&A planning process.

Due Diligence Preparation

• Systematize and document your business operations.
• Assemble all customer and vendor contracts—ensure all are current.
• Compile copies of all HR files, employee benefit plans, insurance policies.
• Actively track key metrics relevant to your business and industry.

Start Your Planning Now

It’s never too early to start planning for your own future, as well as the future of your business. With many short and long term considerations, today is better than tomorrow to get your proverbial “house in order.” Of course when things are running well, it is fun to go to the office everyday—and it’s difficult to think about selling the business. But remember, that’s when your business is the most valuable as well.

 As soon as you start taking some early steps to increase you enterprise value, you’ll be happy that you did so down the road. Companies that demonstrate steady, consistent growth dramatically outperform organizations that run through wild swings in revenue and profit. The company with a predictable, steady pace that is driven by a market dominating strategy, scalable systems, and effective processes attracts the top talents—and creates products and services that meet their customers’ expectations . And these are the companies that generate significant wealth.

Contact Data:

SEViX GmbH

- Rainer Ulrich-

Salzstra?e 3a

83313 Siegsdorf

E-Mail: [email protected] 

Mobile: +49 175 999 2092

Web: https://sevix-group.com