Valuing and Selling Your Business: A Quick Guide to Cashing In (2014)
Chapter 6. Time for Action
Plans for Cashing Out
The purpose of this book is to provide you, the business owner, with insights in an easy-to-read-in-less-than-four-hours format on how to “cash out” on your most important and valuable asset. I trust you now know how a business is valued, can articulate specific ways to grow that value, and fully understand how a business is sold.
I close this book with some practical tools and concepts to help you start increasing the value of your business and preparing to sell your business at the right time and to the right buyer. But I warn you that there is no Procrustean solution to this process of making your company more valuable and then cashing out.
In Greek mythology, Procrustes was a deceitful character. He enticed weary travelers to stay at his house with a pleasant meal and a night’s rest. He would extol his “magical bed” that would be a perfect fit for travelers no matter how tall or short they were. He was right about the bed being a perfect fit. However, the travelers were sorry that they slept on his magical bed. If they were too long for the bed, he chopped their feet off. And if they were too short for the bed, he would stretch the guests until they were the same length as the bed. It was truly a one-size-fits-all bed.
A Procrustean solution is the practice of tailoring complex issues into a one-size-fits-all plan. There are consultants, advisors, and books that will either sell you on their preconceived notion of what your exit strategy should be or use a one-size-fits-all packaged solution. But Procrustean solutions for increasing the value of your business and selling your business are doomed to fail, because they will do violence to the organic reality of your particular business and your particular needs.
In the absence of an out-of-the-box solution, you may feel a little overwhelmed at this point about how to start the process of improving your business value and selecting the right buyer. I am going to close this book with some tips to prime the pump and get you started.
Critical Items to Your Plan’s Success
Too many strategic and growth plans are sitting in the top drawer of the business owner’s desk collecting dust. Many of these plans have a lot of nice-looking color graphs and slick photos that would impress anyone. The owner spent significant time and money developing the plan. But it is completely worthless while it is gathering dust. How do you make sure all of your hard work and money spent on the planning process will be worth the effort? I believe that there are three critical concepts that you need to embrace in order to make your plan a success.
The first concept is setting the right tone from the top. You need to communicate that the execution of the plan is very important to you and that you are allocating a significant amount of time and resources to accomplish the plan. Your employees will see that you are serious about this and know that they will be held accountable for their contribution to the plan. If it is not known to be important to you, it will not be important to others.
The second concept is selecting the right people for your team. It can be a very lonely position being a business owner, and some owners slip into silo-thinking and are not open to outside ideas. We all have blind spots and self-serving biases that lead us down the wrong path. It is important that you have members of your team (advisors and employees) who can provide you with candor and are not afraid to challenge you. You want team members who can push and exhort each other to obtain the best result.
The third concept is making sure that your plan is achievable and tailored to your situation and culture. The reason why so many plans collect dust is because they are either too ambitious or too theoretical. I remember seeing a plan that had over 100 goals and action items with some impressive words that I did not understand. The plan did not accomplish much. The employees knew from Day One that those goals and action items could not be accomplished. Make sure that all those involved understand what is being asked of them and that they believe that they can perform their assigned tasks in the time frame requested.
Plans to Grow Your Value
There is not much published about how to develop a specific plan to grow the value of your business investment. You may be able to look at one of the many strategic planning books to assist you in creating a plan to grow the value of your business. You need to tailor that advice to focus on growing your business value and try not to get too bogged down by the process or the terminology that is used in these books. Many authors make the strategic planning process too complex. In my opinion, a simple straightforward plan works the best.
The following are the steps that I suggest you take in developing and executing a plan to grow the value of your business:
1. Know the current value of your business.
2. Set a growth goal for your business value.
3. Identify ways you can increase the value of your business from the following valuation drivers:
· Increasing your sustainable future cash flow
· Lowering your business risks
· Increasing your growth prospects
4. Select goals that are attainable and measurable and then develop strategies and action plans to achieve those goals.
5. Assign responsibilities and hold people accountable.
6. Have quarterly meetings to monitor the progress.
7. Reassess when necessary.
This book has discussed at length the importance of having a business valuation and how it is not possible to start your growth plan without a realistic view of what your business is worth. Once you have determined the value, it is important to set a growth goal. You may set an annual percentage increase-in-value goal or an amount that you want your business to be worth at the end of a certain time period. Whatever method you choose, it is important to have a target set for your future business value.
Once you know the value of your business and set a target for its future value, the next step is to identify ways to increase the value of your business. The approach that I like best is to spend a day with the business owner and key employees away from their facility and discuss the critical areas that are impacting the value of the business. I rank the items in the order of biggest impact on value, and I have the management team rank the items in the order of those they feel they can influence the most. This exercise results in a consensus on what items the team should focus on during the next months and years to increase the value of the business.
The next step is to select two to four specific goals that the management team will concentrate on to make the business more valuable. I like to make sure that there is a consensus on the selected goals and that these goals can be achieved and progress measured. Having a plan and stated goals is great, but it is actually the easy part. It is like reading a book about fitness, buying the gym membership, and hiring the personal trainer. Without showing up and working out, you will not reach your physical goals. The same goes for your plan to grow the value of your business. The right execution plan is critical.
For each goal, select a champion who will be responsible for the achievement of that goal. This person’s job is to develop the right strategies and actions to accomplish the goal. You need to have in place the right people who have the time and resources to get the job done. To help ensure the plan continues on course, hold quarterly meetings that focus only on the progress being made in increasing the value of the business. These meetings offer an opportunity to remind everyone what the plan entails and how each person contributes to the success of the plan.
There will be a time when it becomes evident that a particular goal or champion for that goal needs to be changed. Reassess and step back. Also, look at your value growth plan on an annual basis or when a major event takes place. Your plan is a living, fluid document, and reassessing it provides you with the opportunity to change the goal, tactics, or personnel if the situation warrants.
Tip Have your quarterly meetings to discuss the progress of your plan at an offsite location. Don’t allow your team to be distracted by the day-to-day issues when discussing the plan to grow the value of your business.
Plans for Cashing Out
Maybe the timing of the sale of your business and who the ultimate buyer will be is clear to you. If so, have you prepared an analysis of what your after-tax proceeds will be from your current strategy? Does this amount, along with your other assets, provide you with the retirement you desire? This analysis will provide you with a litmus test of how close you are to achieving your financial goals under your current strategy. After seeing how your plans play out on paper, you may choose a different strategy or become more focused on increasing the value of your business.
What if you don’t know who the ultimate buyer will be and when you will sell your business? How can you make a decision in this important area? What can you do today to start the process that allows you to exit your business on your terms?
Don’t look around for a one-size-fits-all Procrustean solution that will dictate your best strategy. It will take time and hard work to make sure you have the right plan. If you take the following steps during the next 12 to 18 months, you will be closer to having a well-defined strategy for “cashing out” of your business:
· Study the various types of buyers (see Chapter 5) and understand the advantages and disadvantages of each buyer as they apply to your situation.
· Estimate the net after-tax proceeds that will you will obtain from each type of buyer. Each type of buyer will provide you with a different outcome.
· Spend time reflecting on how your decision will impact the future of your family and the employees of your company.
· Think about the future and whether your company will become more or less valuable? Are you better off “cashing out” sooner or later?
· Develop plans on how you will spend your time once you leave your business. Are they attractive to you?
You have spent a lot of blood, sweat, and tears in starting and operating your business. It is not an easy process of turning over the keys of your baby to someone else.
Discuss your thoughts about the timing of the sale of your business and the type of buyer you would like to pursue with your spouse, kids, and trusted advisors. Each buyer type requires a different strategy and focus. It is never too early to work on your selling strategy and making your company more attractive to the ultimate buyer.
Your business will not become more attractive and more valuable to the ultimate buyer without significant planning and focused attention on accomplishing your plan. The business owner has to be very proactive in growing the value of the business, and it is important to have specific goals and action plans. Don’t be afraid to change your goals and strategies as your plan progresses and you obtain more visibility. By setting a course of action, you will achieve greater riches than by not putting a plan into place.