Which Quadrant is Your Business In?

When analyzing a business for growth & exit planning purposes, I like to use the quadrant model outlined above to assess what category the company falls into so we can best determine what the prescribed action plan is moving forward to create a more valuable and transferable business. The real question is when I am assessing a company is whether this business is an above average, average, or below average company, all things being considered. Knowing this, what impact does this have on prospective multiples for the company? And, what kind of action plan should owners undertake to improve their odds of a valuable exit price?

We can assess companies in a number of ways. The financial performance of the Company throughout its history is a solid indicator of whether it is currently above or below average. However, even if a company is successful, we’d still have to assess how sustainable its financial performance is. A company can be successful in the short term, but without effective systems and processes, that success can wane as the company begins to experience growing pains. This requires us to assess companies in a holistic manner through examining their key value drivers and what infrastructure is in place to support future growth. This is really what differentiates a best-in-class company from a company with potential, or a company with serious warts.

The figure above explains that best-in-class companies are likely to receive top billing when it comes time to be sold through receiving the highest multiples. For all others, there is some transferability risk (meaning the business may not sell at all) or, assuming the business is sold, achieving a disappointing multiple. The prescription to become more transferable depends on what quadrant your company falls into.

?Characteristics

Below, I have outlined the characteristics of companies that fall into each of Quadrants 2, 3, and 4. Note that these are general characteristics only, so companies may show signs of some of these characteristics, while not others.

Quadrant 2—Needs Refinement

Characteristics:

·????????Above average profitability and revenue growth

·????????Diversified customer base

·????????Likely has at least one layer of management

·????????Probably a weakness in at least one key value driver

·????????May lack infrastructure

·????????May lack ability to track & forecast

·????????“Soft” issues such as culture, values, leadership may be crux of current problems

Quadrant 3—Needs Improvement

Characteristics:

·????????Inconsistent or limited growth prospects

·????????Below average key performance indicators.

·????????May lack adequate management team

·????????Usually weaknesses in multiple functional areas (sales, marketing, finance, operations)

·????????No written strategy or business plan (or plan is not revisited on a regular basis)

·????????Inconsistent business strategies

·????????Limited or ineffective infrastructure

·????????May have transferability issues or if transferable, will be for lower multiples

Quadrant 4—Needs Triage

Characteristics:

·????????Owner centricity issues (i.e., owner wears many hats, lack of delegation)

·????????May have customer diversification issues

·????????May have no management team

·????????No written strategy or business plan

·????????Little to no recurring revenue

·????????Maybe have a one strength in one functional area but weaknesses elsewhere (for example, great on execution but weak at sales, marketing and finance).

·????????May be a lifestyle business

The action plan for companies in each of the categories are going to be different. In the bottom quartile, major triage is needed to make the business transferable. Business value has little meaning in a non-transferable company.?Note that a lifestyle business can be very successful financially and still non-transferable. There will be a lot of time, effort, and money to get that business into a transferability state. ?This requires planning, not crossing your fingers and hoping for the best.

In general, businesses in Quadrant 3 need improvement in one or more areas but usually have a solid base from which to improve on. While transferability is not certain, if owners leave themselves at least three years, its possible to shift the business into Quadrant 2. Because there are a number of areas requiring improvement, prioritization of tasks is critical. Issues such as owner centricity, customer concentration, and poor formal business planning are the key areas of concern here.

In Quadrant 2, the company has good prospects for transferability, but has a few weak spots on which to concentrate. Normally, in this stage, filling out the executive and support teams is one of the bigger issues. Companies also need to start defining key performance indicators and developing a strong finance function that can help owners make better business decisions. Additionally, it is important to start documenting systems and processes to facilitate transferability. The focus in this stage is very focused since the weak spots of the Company should have previously been identified through the planning process.

Finally, Quadrant 1 companies have the highest chance for a successful transfer to a third party. Depending on the owner’s time frame, exit could be imminent if the owner so chooses, or off in the horizon if the owner wants to focus more on growing the business. The primary tasks here are going to be strategic in nature. For example, how is growth going to be achieved? Will it be organic or through M&A? Even Quadrant 1 companies need to be mindful of continuous improvement in the areas that made them a Quadrant 1 company in the first place: people, processes, values, competitive advantage, and many other areas.

What Does This Mean?

If you are owner looking to exit in the next five years:

·????????Have your company assessed for exit readiness and business attractiveness.

·????????Use this assessment to figure out what quadrant you are in.

·????????You can then determine what type of action plan is required and how to prioritize your action steps.

Work with an exit advisor to develop and implement a realistic growth & exit