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The Importance of Business Planning

Learn how Business Planning can impact the value of your business.

Brett Dearing Bio
Brett E. Dearing, CEPA

In speaking with business owners their is one key insight I share. Incorporating business planning as a daily part of running the business. What do I mean by business planning? Focusing not only on the day to day operations of the business but also building a plan around maximizing the Enterprise Value of the business. It’s an area of focus that all owners should focus on regardless if they are thinking of selling the business or not. The one thing that has been consistent  is that as an owner you never know when someone is going to knock on your door and ask if your business is for sale. I will say that when I speak to an owner that is emphatic about not selling the company, it is always interesting to see how that owner responds when a real potential buyer knocks. Being prepared for that scenario and others that may force the sale of your business is important. As an owner you may not have plans to sell your business but you should always have the business ready for a sale. So, how do you go about preparing your business?

Business Planning

Business Planning focuses on 11 Key Business Factors that can impact the the value of your business. The definition of value for this conversation is the Enterprise Value.

11 Business Factors:

Business Planning
Business Planning Review
  1. Years of Operation
  2. Management Strength
  3. Customer Loyalty
  4. Branding
  5. Customer Database
  6. IP & Technology
  7. Staff Contracts
  8. Location
  9. Owner Reliance
  10. Longevity
  11. Business Systems

 

The above graph shows an actual Business Plan Review conducted on an actual business owner with annual revenues north of $20 million. If the Enterprise Value of this business was maximized the Gantt Chart would be covered in light blue demonstrating a 90 -100% Score in each area. The four areas that are detracting from the value of this business are:

  • Management Strength
  • Staff Contracts
  • Owner Reliance
  • Business Systems

The Business Factors are only one third of the process. I also look at Forecast Factors for the business: Profits, Recurring Revenue, Revenue Streams and Revenue Potential. It is important to also look at the Market Factors as well: Economic Picture, Place within the market, Competitive Advantages, and the overall Market.

Key Factors Behind Business Planning
Three Key Factors Around Understanding Your Business is Ready For Sale

Based on feedback and insights from the business owner after several meetings I was able to create a customized action plan that addressed the four key detractors of his business.  Below is the case study sharing how business planning worked for the owner and increased the purchase multiple for the business ” Getting Another Turn”!

CASE STUDY- Exit Planning_ Gaining Another Turn_BD

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Customizing A 90 Day Action Plan In Preparation For Sale

Click on the link to listen to a brief WebEx on transition planning: Preparing The Business For Transition

The next article will be on personal planning. Are you as a business owner ready for the sale of your business and what it means to you after the sale? 80% of business owners that sale their business have buyers remorse within a year after the sale. We will cover the reasons behind their remorse and share how you can assist owners and prepare them for life after the transaction.

Sellers Remorse: Are You Emotionally Prepared For The Sale ?

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Brett Dearing BioAs a business owner, do you ever catch yourself asking the question “What am I going to do after I sell the business”? Finding the answer to that question is something that should be done sooner than later. To be specific, as the owner you should have a Personal Exit Plan at least 2 years before you actually begin to research the process of selling your business. When I share this with owners their response is “this sounds good but why should I take the time and resources to formulate a Personal Exit Plan”? In short my response is, “For peace of mind and the ability to move on after the sale of the business. 73% of business owners have “Sellers Remorse” within twelve months of selling the business which means they have not emotionally moved on from the sale of their business.

In speaking with and interviewing owners who went through the sales process many said they felt some type of remorse. Some of the reasons offered were:

  • Overwhelmed by lack of preparation for after the sale
  • Felt like they did not get the value for the business they were looking for
  • Employees were thought of as family
  • Was not personally ready for life after the transaction

In fact, some owners went on to say candidly “I was not prepared”. “I was so focused on the actual transaction that I did not spend any time trying to understand, deal with, or plan for how the sale of my business was going to personally impact me”.  And when probing a bit deeper; owners shared they were not emotionally prepared for life after the transaction. Several business owners even went as far as to share that they did not go through with the transaction due to the fear of letting go of the business and fearing life after the transaction.

Selling your business is arguably one of the most:

  • Emotional
  • Stressful
  • Time consuming situations

you will go through and it is equally important to be emotionally prepared for the sale.

HOW CAN THE TRANSACTION EFFECT YOU EMOTIONALLY

When working with business owners, financial buyers and investment bankers the first question I will ask the business owner is “Are you emotionally prepared to sell your business? As you can imagine it is a question that owners aren’t use to fielding. After about 2-3 seconds of the owner looking back at me with a confused look they say “I think so” or “I’m not sure”.

So, I will walk them through some of the specific areas around the transaction that can cause an owner to be emotionally overwhelmed, unprepared and negatively impact the negotiations. Let’s look at some of the emotions you as a business owner could face when selling your business. To do that we need to look at specific areas around the transaction that will impact you and your emotional preparedness. Those areas are:

  1. Exit Readiness
  2. Legacy
  3. Personal Goals
  4. Relationship With Staff
  5. Motivation & Passion
  6. Fears
  7. Reasoning For Selling the Business

Exit Readiness: Are you and business prepared for the transaction? If not, you can understand how this may cause HESITATION.

Legacy: Have you mapped out what you want you and your family’s legacy to be? Not having a legacy plan could create a feeling of LACK OF PURPOSE.

Personal Goals: What is your bulleted “Road Map” look like for you after the sale? Have you created a twelve month personal plan highlighting goals and activities you want to achieve the day after the sale for the next year. SUCCESSFUL PEOPLE NEED TO FEEL SUCCESSFUL.

Relationship with Staff: What is your plan for continuing relationships with certain employees of your business? For those that been with the company from the beginning you want to make sure they are taken care of. SENSE OF BELONGING

Motivation & Passion: As a successful business owner your passion is a key part of your success. Not having an endeavor that you can be as passionate about could create a LACK OF MOTIVATION.

Fears: What are your fears or reservations in regards to selling your business? Do you have a  post transaction plan to help deal with those fears? Do you have emotional support to help you through those difficult moments and keep you focused on the task at hand? Fear can have real consequences to a selling owner. I have had owners tell me they walked away from a transactions for fear of what some owners call THE GREAT UNKNOWN.

Reasoning: This is a big one! If you don’t come to terms with why you are selling the business it can be the main reason for “Sellers Remorse” and can cause REGRET.

EMOTIONAL PLANNING

It is important to assess your personal preparedness. Having a sound emotional foundation to get through the sale will only benefit you and make your business more valuable. When sellers see a sound, rational buyer that exudes confidence and the ability to temper the emotions of the negotiation process they begin to extrapolate how that emotional fabric has been woven into the business hence, making it a more manageable business to run and more valuable to the buyer. I have seen when buyers look at businesses with a rational, emotionally sound owner verses the owner that is quick to judgement, knows everything and snips at every comment during the due-diligence period. Yes, the buyer is there to negotiate to buy your business but if they had two equal businesses that would provide the same growth in value, diversification of product, customers, etc. buyers will naturally gravitate towards the business withe the owner that is emotionally sound.

One of the personal benefits to Emotional Planning is increasing your emotional intelligence which can lead to:

  • Increased Leadership Ability
  • Improved Decision Making
  • Improved Negotiation Skills
  • Overall Increased Personal Well-Being

So how do you know you’re emotionally prepared for the next phase in your business? Click on the link below and take a quick 8 question quiz.

Survey: The-EXIT: Emotional Readiness Survey

Email me at Brett@The-ExitPC.com for a free personal evaluation. This process is confidential and will help you discover what you need to work on in preparation of the sale while reducing the emotional impact.

Value Drivers: What are they and how do they impact the value of your business?

The Exit PodcastWhen running the day to day operations of your business it can be difficult to find time to contemplate the value of your business. The value of your business is called “Enterprise Value” and yes, you can increase that value with proper planning. Many business owners I have interviewed after the sale of their business did not understand the value of their business before the sale or the key components effecting the business value. The owners lack of understanding in these areas negatively impacted the value of their business at sale despite how well the owner thought they managed and ran the business. As you get closer to that day when you start thinking about selling your business it is important to understand how these components can impact your business. You should also have a strategic plan focused on improving these components hence maximizing the “Enterprise Value” of your business.

Value Drivers and Exit Channels

The key components that make up the “Enterprise Value” of your business are called Value Drivers. These Value Drivers are broken into two segments; Internal and External Value Drivers. Combined, these drivers determine the Enterprise Value of your business and the the Exit Window. The question then becomes, who is going to buy my business? There are three types of buyers:

Exit Channels:

  1. Strategic Buyer– Highest Value- Synergy Market Value
  2. Financial Buyer– Second Highest Value- Financial Market Value
  3. Related Buyer– Lowest of the Three Values- Asset Market Value

Transition Options

As shown each channel has a different transfer value and that value could be higher or lower than the Enterprise Value of your business. That it is why it is always good to know as an owner the type of buyer that is interested in your business.

Internal Value Drivers

There are nine Internal Value Drivers that impact the Enterprise Value of your Business. Each Value Driver may have more importance to a buyer meaning more value. The drivers shadowed in green are the ones extremely important to the success of your sale. One driver in particular can make your business unsaleable.

Internal Value Drivers

  1. Size of Company– Where does your company size up in its industry? Will it be acquired to roll into a larger company or will it be a platform to roll up smaller companies into?
  2. Locations– What markets is your business in and can it act as a demographic diversifyer or footprint into a new market for a buyer?
  3. R&D– Does you company have a healthy pipeline of new innovative products that can compliment an existing product line of a buyer or act as a cross selling opportunity?
  4. Management– Do you have a management team that runs the day to day and can continue to run the business after you sell?
  5. Sales Force– Do you have a competent sales team with business plans and sales goals that are tied directly to driving revenue?
  6. Growth Rate– Is your business growing or has it been flat for the past two years or more?
  7. Employee Mix– Do you have a trained, talented and self motivated team that can continue to lift the business after you sell?
  8. Operating Systems– This is a large investment for most buyers especially if they intend to roll your company into a larger company or if they plan to tuck in smaller companies into your business. If the operating system is not in place that talks to all aspects of your business with a dashboard and key KPI’s it can impact the value of your business.
  9. Margins- Is your business effectively and efficiently ran? Do you have good margins verses other companies in your industry?

External Value Drivers

External Value Drivers help to determine where you are in the Private Market Cycle and how that can impact the price a buyer is willing to pay for your business. It is important to mention that the timing of the sale of your business is based on your needs and specific situation. With that said you should be aware of where you are in the cycle and how that can impact your Exit Window.

Is it A Good Time To Sell?

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There are six External Value Drivers that help to define your Timing Window. The drivers shadowed in green show as favorable in the current Private Market Cycle.

External Value Drivers

  1. Economy- Where is the economy and are we in a growth period, a recession or a flat market? Is there geo-political strife that can throw the country into a recession?
  2. Market Demand– What is the current demand for your type of business and is there a strong demand from buyers?
  3. Industry– Is your business industry demonstrating strong growth of revenues and interest from buyers? Is there disruption that is causing buyers to want to be in your industry?
  4. Interest Rates– Are interest rates low enough where financing the debt in the deal still makes the purchase Accretive (Meaning does the purchase add value to the platform company)?
  5. Timing– Where is the current Private Market Cycle? Look at the chart above and ask would you want sell your business in the Prime Selling Time or during the Deal Recession part of the cycle?
  6. Competition– Is your company a company buyers want to own verses others in your industry? Is it a smarter purchase to buy your company verses your competitor?

As you can see there are a lot of factors that need to be thought out and prepared before you begin the process of selling your business. Working with a Certified Exit Planner can assist you with setting up a process and Action Plan focused on maximizing the Enterprise Value of your business while you manage the day to day operations of your business. A good Exit Plan can add another turn to the value of your business.

Here are a few questions to think about when evaluating your business and where you are in managing Internal Value Drivers.

1.Am I doing everything I can to maximize the value of my business today and into the future?

2.Is my business ready to sell?

3.How will waiting  or the Private Market Cycle effect the value of your business?

Please contact me if you have any questions about the article or specific to your business.

Brett.Dearing@BNYMellon.com