Previously, we discussed how to grow your business and the key value drivers. Today, we continue that discussion. We take an in-depth look at how other value drivers can improve the growth of your business. These elements either reduce a buyer’s risk in purchasing your company or increase the probability that it will enjoy future growth.
Visit our last post to learn about the first three value drivers we mentioned:
- A solid, motivated management team
- Business operating systems that create, support and sustain cash flow
- A loyal and diverse customer base
Continue reading to learn more about these elements:
- Recurring revenue
- A realistic, yet robust, growth strategy
- Effective financial controls
- Healthy and growing cash flow
- Facility whose appearance is consistent with eventual asking price
To this point, we’ve really been talking about revenue: the people, the systems and the customers who produce it. Now let’s talk about recurring revenue, that Holy Grail of company owners and buyers. Predictable revenue is great, but revenue that recurs because it arises from a contractual agreement (subscription) or payment schedule? That’s music to a buyer’s ears.
Look around. Look at meal-preparation (e.g. Blue Apron), personal products (e.g. Birchbox or Harry’s) jewelry rental (e.g. Rocksbox), movies (e.g. Netflix) television (e.g. Hulu) or healthy snacks (e.g. Graze). While subscription products and services aren’t new (Harry & David’s Fruit of the Month Club has been around since 1936), they’re expanded into every area of our lives.
Recurring revenue turns your company into a money machine.
A Realistic Growth Strategy
Having a written document that describes how your company will grow is important to buyers because they’ll refer to it as they calculate (using a discounted cash flow analysis) the future value of your company. Buyers use their estimates of future value to make their purchase offers.
You want your growth strategy to make a strong argument for all of the ways your company will grow. Don’t assume that buyers will understand all the growth opportunities for your company. Your written growth strategy (using pro forma statements) is your opportunity to show off the potential of your business.
Effective Financial Controls
Management teams rely on strong operating systems, but they also rely on accurate financial data to measure the success or failure of company performance. Financial controls contribute to the accuracy of the data that appears on budgets, income statements, P&Ls and cash flow statements.
If you are going to claim that your company is consistently profitable, your financial statements will either support or undermine your claim. During due diligence, buyers will review, no dissect, all of your company’s financial data. If something is “not quite right,” a buyer may stick around and reduce its offer, or more likely, head for the hills.
Think about it. If you tell a prospective buyer that because your company made $2.5 million last year, $2 million the year before and $1.8 million the year before that, you expect it to grow at the same pace for the next three years, don’t be surprised to hear, “That’s great! Prove it.”
If you then pull out financial statements that your Uncle Lenny prepared using varying standards, were sloppy and riddled with unsupportable numbers, would you blame the buyer for taking off?
Giving buyers confidence in your financial controls and statements is not difficult: ask your CPA firm to verify them or subject them to a full, certified audit.
Healthy and Growing Cash Flow
Those buyers who hate risk? They look for cash flow–stable, predictable cash flow–and love earnings that are on the upswing. As we mentioned earlier, buyers use cash flow to determine how much to pay for a company. Great and increasing cash flow helps buyers sleep better at night and open their wallets a bit wider during the day.
If you are thinking about leaving your company in the next three years or so and your company’s cash flow isn’t growing and growing quickly, we have a number of ideas about how you can increase it.
With the management team, financial controls and operating systems that your company has in place, could it increase its profit margins if it increased its revenues? That’s the question a buyer will ask: Can we take what’s here—the systems and the people—and do it on a bigger, more profitable scale?
Facility whose appearance is consistent with eventual asking price
Take a walk around your facility, both inside and outside. What do you see? Is the place clean and comfortable? Does the equipment tell a prospective buyer that you’ve invested in keeping current or are creating a museum?
Prospective buyers will see your facility. If it looks as if Bob Cratchit works there, yet your asking price conjures up his employer, Mr. E. Scrooge, the disconnect will not go unnoticed. It isn’t unreasonable for buyers to want the businesses they buy to look or reflect their sale prices.
Join us next time as we discuss why you NEED a continuity plan in-place NOW.