Growth vs. Value: not all revenue is created equally

August 25, 2014January 4, 2015 Frank Mancieri, Chief Growth Advisor

When you look ahead to the next year, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

Take a look at the research coming from a recent analysis of owners who completed The Sellability Score questionnaire. They looked at 5,364 businesses and found that the average company that had received an overture from an acquirer was offered 3.5 times their pre-tax profit. When they isolated just the businesses that had a historical growth rate of 20 percent or greater, the multiple offered improved to 4.3 times pre-tax profit, or about 20 percent more than their slower growth counterparts.

However, the real bump in multiple came when they isolated just those companies that claim to have a unique product or service for which they have a virtual monopoly. The niche companies enjoyed average offers of 5.4 times pre-tax profit, or roughly 50 percent more than the average companies, and fully 20 percent more than the fastest growth companies.

Nurture your niche

Chasing “bad” revenue by offering a wide array of products and services is common among growth companies. The easiest way to grow is to sell more things to your existing customers, so you just keep adding adjacent product and service lines. But when a strategic acquirer buys your business, they are buying something they cannot easily replicate on their own.

A large company will place less value on the revenue derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.

Focusing on your niche is one of many areas where the long-term value of your business is at odds with short-term profit. For example, if you wanted to maximize your short-term profit, you might avoid investing in new technology or hiring a head of sales, arguing that both investments would hinder short-term profit. The truly valuable company finds a way to deliver profit in the short term while simultaneously focusing their strategy on what drives up the value of the business.

You can get your own Sellability Score, and see how you compare on the eight key drivers of sellability, by taking our 13-minute survey. https://www.sellabilityscore.com/b2b-cfo-1/frank-mancieri

Your Business Value vs. Market Correlation

August 4, 2014 Frank Mancieri, Chief Growth Advisor

It is a fact that a privately-held business will, in most cases, represent the largest financial asset in a business owner’s personal portfolio. This newsletter is written to have business owners consider a simple question – ‘how correlated is your business value to the overall economy?’ The reason that this question is so important to ask is because most business owners put the majority of their financial wealth at risk when they fail to view their business as an asset; in particular, as an asset that fluctuates in value. Therefore, this newsletter is designed to get you, the owner, thinking about protecting your overall wealth by thinking through a potential future date when you will transition your business – perhaps before the next economic downturn.

Investing 101: Diversify Your Assets

It has been said that there is such a thing as a ‘free lunch’ when it comes to investing – that ‘free lunch’ is the diversification of your assets. The reason that diversification is called a ‘free lunch’ is because in a liquid portfolio of investments (i.e. stocks and bonds), diversification costs almost nothing beyond some transaction costs. However, the low / no cost of diversification provides a substantial amount of benefit to the investor because the investor is not solely invested, or ‘concentrated’ in a single investment or perhaps in only a few investments.

In fact, in a well diversified portfolio, different types of assets / investments rise in value in certain markets while others will fall. Overall, the investor is provided protection of their wealth by spreading it out.

However, when a business owner’s largest asset is their illiquid privately-held business, how can they apply the same diversification mentality?

The first way that an owner can begin to address this ‘concentration of risk’ in their privately-held business is to understand how their company’s value is correlated to the overall marketplace.

Your Business Risk Relative to the Market

Let’s begin with a simple question:

When the overall economy is on an upturn, does your business become more profitable?

For the majority of business owners, the answer to this seemingly simplistic question is an obvious ‘yes’. Most owners rely upon favorable economic conditions to increase the value of their businesses.

If this is true for your business, i.e. the profitability and value rises with overall economic conditions, then, of course, the same is true when the economy falters and the value of your business will fall when the economy slows down.

“Correlation” vs. Market Returns

If the statements above apply to your privately-held business, then it can safely be said that your business value has a ‘high correlation’ to economic conditions. As such, you are likely hopeful that the economy will improve so that your business value can increase. However, having been through a number of recessions, you also know that you cannot control the overall economy. What you can control, however, is how well prepared you are to protect and/or harvest the value of your business despite the timing of the next economic downturn.

Shifting the Riskiness of Your Business

Can the value of your business somehow be immune to the next economic downturn? Probably not – at least not 100% of the value. However, one of the concepts that you might embrace in your thinking is that of ‘shifting the risk’ to another investor. This could include taking on a partner in your business.

The average business owner enjoys the freedom and financial advantages of running and owning their own business, so they don’t want to sell it. However, they also realize that having the value of their largest financial asset tied to the overall economy is also something that makes them very uncomfortable.

Taking Chips Off the Table

If you were to think of your business the way that you think of your liquid investments, you might sell off some of them (or technically ‘raise cash’ in order to reduce the fluctuations that can occur when a downturn in the economy sets in). Private equity groups invest in privately-held businesses but also partner with the existing owner and work on growing the business together with you. This is a way that you can stay actively involved in the business without needing to keep 100% of your business value at risk.

An Abundance of Capital vs. Continued Control

Today’s capital markets are flooded with ‘dry powder’ or investment capital that is waiting to be deployed into profitable businesses. If you have a profitable business today (i.e. more than $1 million in annual profits) then you might be attractive to an investment partner such as a private equity group.

While capital alone is not a reason to transact, you may also take into consideration that with so much capital looking to be put to work, you are actually in a relatively good position to choose the form of the partner or capital that you attract to your business and, perhaps, work with these capital providers to continue controlling parts of the operations of the business while working to increase its overall value. In short, the diversification of your personal wealth might also serve as the catalyst for growth at your company.

Concluding Thoughts

We hope that this newsletter has accomplished the objective of having you understand that while the economy is a large indicator of the value of your business, there are planning techniques available to reduce the overall risk to your total wealth. Paying attention to not only the economy but also to the sources of capital for your business, may lead you in the direction of reducing the overall riskiness of your business while protecting your wealth.

Frank Mancieri, Chief Growth Advisor, GT Growth & Transition Strategies, LLC, 401-651-1585, frank@gtGrowth.com

The hidden goal of the smartest business owners

August 1, 2014 Frank Mancieri, Chief Growth Advisor

What are your business goals for the year? If you’re like most owners, you have a profit goal you want to hit. You may also have a top line revenue number that’s important to you. While those goals are important, there is another objective that may have an even bigger payoff: building a sellable business.

But what if you don’t want to sell? That’s irrelevant. Here are five reasons why building a sellable business should be your most important goal, regardless of when you plan to push the eject button:

1. Sellability means freedom

One of the fundamental tenants of sellability is how well your company would perform if you were unable to work for a while. As long as your business is dependent on you personally, there’s not much to sell. Making your company less dependent on you by building a management team and creating just-add-water systems for employees to follow means you have the ability to spend time away from your business. Think of the world of possibilities that would open up if you could choose not to go into the office tomorrow….

2. Sellable businesses are more fun

Running a business would be fun if you were able to spend your days on strategic thinking and big picture ideas. Instead, most business owners spend the majority of their day on the minutia: the government forms, the employee performance reviews, bank reconciliations, customer issues, auditing expenses. The boring details of company ownership suck the enjoyment out of owning a business—and it is exactly these tasks you need to get into someone else’s job description if you’re ever going to sell.

3. Sellability is financial freedom

Each month you open your brokerage statement to see how your portfolio is doing. Not because you want to sell your portfolio, but because you want to know where you stand on the journey to financial freedom. Creating a sellable business also allows you peace of mind, knowing that you’re building something that—just like your stock portfolio—has value you could choose to make liquid one day.

4. Sellability is a gift

Imagine that your first-born graduates from college and as a gift you give him your prized 1967 Shelby Ford Mustang. Your heavily indebted child takes it on the road, but after a few miles, the engine starts smoking. The mechanic takes one look under the hood and declares that the engine needs a rebuild.

You thought you were giving your child an incredible asset, but instead it’s an expensive liability he can’t afford to keep, and nor can he sell it without feeling guilty.

You may be planning to pass your business on to your kids or let your young managers buy into your company over time. These are both admirable exit options, but if your business is too dependent on you, and it hasn’t been tuned up to run without you, you may be passing along a jalopy.

5. Change takes time and planning.

There are some things in life that take time, no matter how much you want to rush them. Making your business sellable often requires significant changes; and a prospective buyer is going to want to see how your business has performed for the three years after you have made the changes required to make your business sellable. Therefore, if you want to sell in five years, you need to start making your business sellable now so the changes have time to gestate.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Sellability Score. The questionnaire takes about thirteen minutes and your responses are kept confidential. You can complete the questionnaire by clicking on this link: https://gtgrowth.com/the-sellability-score/.

Frank Mancieri, Chief Growth Advisor, GT Growth & Transition Strategies, LLC, 401-651-1585, frank@gtGrowth.com

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