Businesses are purchased because they are attractive to a potential buyer who can see the Value in them which is consistant with the price being asked. The Value of a business can be enhanced by the process of Value Acceleration. Read on and you will gain an understanding of the process and how important it is.
In Christopher Snider's book Walking To Destiny: 11 Actions an Owner MUST Take to Rapidly Grow Value & Unlock Wealth Snider states that 'there are five stages to creating a more valuable business: Identify, Protect, Build, Harvest, and Manage'. The first step, Identify Value should always be undertaken.
Stage 1 - Identify Value
This step is the starting point and should never be missed. It sets the baseline of the range of value for everything going forward and is completed in Gate 1 of the Value Acceleration Methodology™. This is important:
1. In so many cases 80 to 90% of the net worth of small business owners is tied up in their business.
2. It allows the change in paradigm from profit to value and allows You and your team to focus on maximising value.
3. It increases Your ability to unlock that value at some point in the future.
Stage 2 – Protect Value Once the baseline value has been established the next priority is to protect that value by mitigating the risks to that value. How much value are you prepared to risk given the 50% probability that one of the 5 D’s Death, Disability, Divorce, Distress and Disagreement will impact that value?
Stage 3 – Build Value
Building value happens because of increases in Your cash flow (EBITDA) and improvements to Your multiple through the actions of the Value Acceleration Methodology™. It also can be increased through intangible assets or the 4 “knowledge capitals” referred to as the 4 C’s of Human, Structural, Customer relationships, and Social capital.
Stage 4 – Harvest Value
At some point in the future You are going to want to harvest or cash in the value of Your business. This is the stage where the many options to harvest that value, like selling to a Partner, or to Family, or a Management Buy Out, or attracting a Private Equity Firm or attracting a Strategic buyer can be explored.
Stage 5 – Manage Value
This is an on going process involving identifying, protecting, building, and harvesting value from a personal, financial, and business standpoint. It is linked to the timing of your exit and happens in conjunction with the question asked after each 90-day action plan – Exit or Grow?
You will remember from the section on How Are Businesses Valued that we focus on Capitalisation of Future Maintainable Earnings (recast EBITDA multiplied by a Multiple) (CFME) as it is the simplest method to understand and is the most common method used for valuing small businesses. The two components are:
1) Recast EBITDA and
2) the Multiple.The multiple used to value businesses is normally in a range say from 2 times to 5 times and the Indentify action from Stage 1 allows for the business to be benchmarked against that range and sets the baseline for future stages.
Where you sit in that range is based on three factors:
By establishing these benchmarks we are able to take action to address what we refer to as the "three legs of the stool":
1) Maximise the value of the business
2) Ensure the owner is financially and personally prepared
3) Ensure the owner has prepared for the third act of their life - retirement.
The "three legs of the stool" constitute the basis of the Master Plan. The Master Plan guides the "three legs of the stool" into alighnment with the aide of the management and life planning system - Value Acceleration™.
This is where the MAUS ExitMax© Program comes in to play with it's Attractiveness quiz and report and the Personal and Business Readiness quizes and reports.
The Value Acceleration process requires the engagement of a CEPA. To engage a CEPA will require an investment by you. All business owners require a return on investment (ROI) and that is where Value Gap Analysis can highlight the exceptional ROI that the Value Acceleration process can deliver. The Value Gap is the quantified dollar value of the difference between your present value and the value of similar best-in-class or 'A' grade businesses in your industry. The Value Gap analysis is not a formal valuation as we don't do those. It is a Value assessment. For more on the Value Gap CLICK HERE.
The Attractiveness Index, Personal Readiness, and Business Readiness reports will highlight the strengths and weaknesses of your personal, financial, and business factors; and how your scores impact where you land in the ranges of value; and you will know your value gap is. Before proceeding through Gate 1 you need to sort through all the actions identified to accelerate your value and prioritise them into an initial 90 day Prioritised Action Plan to get you and your staff working on value growth. This process can be greatly improved by having a detailed plan assisted by a Vision (1-3 Years), Themes (1year), Projects (90 days), Tasks (< 90 days), Milestones (30days) and Deliverables.
The Prepare Gate is about execution. Think of the Prepare Gate as a series of 90 day sprints toward accomplishing 10 prioritised actions. This is where the detailed plan is invaluable. Have a vision of where the business needs to move toward but act in your present business.These 90 day sprints repeat themselves with 10 new prioritised actions each cycle so over the course of a year you will have completed 40 prioritised actions towards improving the value of your business.
The Decide Gate conincides with the Harvest Stage of Value Maturity. Exit when mentioned here represents the context or any inside or outside exit choice. By now you should have considered all pros and cons of the exit options and considered the risks and committments necessary to strategically accelerate growth in value and can therefore make an informed choice. Take your time in this gate and re-visit at the end of each 90 day sprint.
Register your details by clicking the button below and you will receive an electronic copy of WALKING TO DESTINY: 11 Actions an Owner MUST Take to Rapidly Grow Value & Unlock Wealth written by Christopher M. Snider the creator of the Value Acceleration Methodology™ and CEO/President of the Exit Planning Institute.
This is a MUST read book For Business Owners by a Business Owner. Walking to Destiny is not only your essential resource to understand what makes your business attractive and ready for transition; it is a business owner’s handbook to know HOW TO rapidly grow value and ultimately unlock the personal wealth trapped in your most significant financial asset: Your Business.