In our previous article, we encouraged entrepreneurs to “begin with the end in mind” when they start their business. Your plan needs to be focused on the kind of business you plan to create over time.
Then you will pay attention to the road signs along the way to ensure you get there. We call those road signs “value drivers” and they are the milestones that get you to your final destination.
As you begin paying attention to your value drivers, first notice where they are now. Then start calculating the course corrections you need to make so they can lead you where you want to go. Here are some key value drivers:
An effective management team. To build a business you can leave in style, work your way out of being indispensable! Begin the process of building a key management team. Grow your business with a view to your ultimate customer … that’s the person to whom you are going to transfer your business.
Effective financial controls. Based on a thoughtfully designed system of internal controls, an accounting system should provide meaningful, timely and accurate feedback to management. This system provides direction that can be altered, like controls on an airplane, when a course correction is needed. Responding early to variances from budget, and improving what is not working, makes yours a growing and profitable business.
Stable and improving cash flow. Cash flow means collections from sales less payment of all expenses and liabilities. This results in money available for owner distributions or to reinvest into growing the business. Buyers place a premium on a business with consistently growing cash flow. Building sales, especially growing cash flow, is the easiest way to make money twice. First, you’ll have more cash in your pocket, and second, your business value grows 2-6 times the amount of the growth in cash flow.
A written, realistic business plan. You need a documented growth strategy, with budgets and assumptions, going forward at least five years. Success is derived from envisioning and coordinating your team in following your plan. The budget gives a path from which key managers and the new owner can see how they can justify the price and create more than what is there now. This thoughtful, rigorous document will increase your success potential by 80 percent.
Operational measurements. Establish your business’ Key Performance Indicators, tied to operating systems, and provide a “dashboard” to show how the business is performing. They’re invaluable when you put them into an easy-to-read scorecard that quickly gives you your bearings. KPIs are critical because they keep your eye on what’s most important in your business. They give you feedback on how management decisions are affecting profit and cash flow. It’s well worth focusing on KPIs since they point the way to ongoing progress that build business value — and cash flow!
Attractive premises. When they look great they exemplify higher value for your business. This is what your ultimate customer, your buyer, sees and figures into his offer. Without this frosting on the cake, your value will suffer.
Time. The more time you have to install the value drivers before you take your business to market, the better. Executing a written, prioritized exit plan will hasten the process. The more time, the more value you can build, and the more cash you’ll realize, after tax, from your transition. As we began this article, remember: “begin with the end in mind.” This puts you, the owner, in charge of creating a valuable business, so you can leave it in style.
This value-building process is best done in bite-sized pieces, consistently over time, aimed at achieving your vision and goals.
Do you plan to keep your business until the day you die? Or do you plan for it to outlive you? Either way, the more value and cash flow you can create with value drives, the better.
Loni Woodley, partner at Auer Woodley Hilderbrand & Sanders LLP (AWHS), wrote this piece in cooperation with Dennis Smith, CPA, CExP (Certified Exit Planner). AWHS is a full-service accounting and consulting company, specializing in helping business owners accomplish their goals. Contact Woodley at 634-2815.