This was written by another Chartered Professional Accountant member and a good read.
David Prowse CPA, CA, December 15, 2020
I believe this article hits the mark and enjoy!
As 2020 winds down, it’s a great time to start planning ahead for 2021. In our earlier articles, we spoke about why value creation was a worthwhile goal for entrepreneurs. In short, a value creation mindset can i) increase an owner’s options when it comes to transitioning, ii) increase the value of the business by improving both cash flow and the multiple attached to your business, and iii) re-energize your entrepreneurial spirit as you adopt an outside-the-box strategic approach to growing your business. Whether exiting your business is on your radar, improving your company’s value through attacking the key value drivers of your business can get help you to achieve your business and financial goals. Below is a short list to consider as we head into a new year.
1) Are You and Your Business Separate?
The most import thing you can do to create value is to separate yourself from the business. No, I don’t mean you should walk away from your business and never come back, what I mean is that transferability is a major driver of value in a business. A business is a combination of its intellectual, physical, and human capital but if a business’s processes, systems, strategy, and any other “secret sauces” are tied up solely in the owner’s head, then the business minus its owner is a collection of assets and employees without a leader. The company is essentially only worth its assets at a liquidation value. Owners need to understand this point!
The first and most important thing you can do to increase the value of your business is to find a way to have your company run without you.
This means you either need a layer of management underneath you (or at least a general manager), or a business model that allows you to somewhat run it on auto-pilot.
Assuming you do have a layer of management, there are a couple of critical questions you need to ask yourself. Is anyone on the management team a candidate to take over the business in the next decade? If the answer is yes, is there grooming required to shape that person into the leader required? Do they have any interest in such a succession plan? Do they have the financial wherewithal to purchase their way into the business (even on a gradual scale)? Does the current layer of management consist of the right people in the right positions? Answer those questions honestly then assess what steps need to be taken in 2021.
2) Do You Have Insight and Foresight into Your Business?
Insight refers to the ability to understand what is happening now in your business. Foresight involves the ability to accurately predict what will happen based on certain decisions or events. A key part of value creation is to have both insight and foresight into your business. Insight requires an owner to understand what is truly happening within the business and how the company measures against peers within industry. Foresight requires an owner to be able to predict the impact of certain business decisions on metrics within the business (which could be either financial or non-financial key performance indicators). To have both insight and foresight requires the business to:
Assess what key metrics are most important to the business;
Assemble the necessary infrastructure and personnel to calculate these key metrics;
Forecast key metrics into the future based on existing insight;
Review the key metrics and forecasts on a timely and regular basis (including comparing these metrics to industry peers if possible); and
Make strategic decisions in response to the insight gathered.
3) Does Your Business Have a Strategic Direction?
Have you spent time thinking of the strategic direction of your company? What is the company’s purpose? On what basis are you competing against your competitors? Once you have made the decision to adopt a value creation mindset, consider that maybe some of your existing business is holding your company’s growth back or lowering its profits. Top-line revenue growth is important but new business that is unprofitable, risky, or outside of the core competency of the business may come at a large cost. A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is one strategic exercise you can perform in the upcoming year to work to accentuate the strengths of the business while limiting the impact of its weaknesses, all the while considering trends within the industry that may impact your business either in a positive or negative light.
4) Establish Your Goals
Goal setting is an important exercise in business, especially if you want to grow your business with an exit in mind. If your plan is to exit your business in the next ten years (or grow it X times what it is now), its important to establish a roadmap to get there. The first step is to set goals of what you wish to achieve. If exit is the ultimate goal, what is the final desired sales price? What are your post-exit goals on a personal basis? If growth is your main priority, How many customers do you wish to serve? What revenues are you targeting and by what time frame? Once you have established your long-term goals, work your way backwards to establish what you need to do in 2021 to move yourself towards those objectives. Then, think about quarterly and monthly objectives.
Prioritization of objectives is also important. Trying to solve 100 problems at once may also result in a lack of progress. Rather, it is better to address one or two key issues a quarter so over the course of 12-36 months, significant amount of progress can be seen within your organization. Even marginal progress can result in an increase in the company’s multiple when it comes time to value the business.
5) De-risk Your Business
Risk can impact a business in a number of ways ranging from economic risk, supply chains, organizational structure, competitive factors, employees, technology, and legal amongst many others. By making an assessment today on what your organizations greatest risks are heading into the next year, you can be proactive to take steps to de-risk your business and improve the value of the business through increasing its sustainability. For many SMEs, one of the greatest areas where they can make a large difference in de-risking is establishing an organizational structure that promotes strong top-down and bottom-ups communication so that strategic communication forms the top is effectively communicated to front-line employees and customer-facing employees can communicate what they are seeing to upper management so that issues can be dealt with on a timely basis. On top of that, consider the adequacy of contracts (legal risk), how your company gathers business data and key metrics (efficiency and productivity), and the IT infrastructure in place, and the systems and processes in place to generate sales, manage operations, monitor expenses, and manage risks. De-risking your business is just as important as increasing cash flow.
Hope these tips help you be prosperous and successful.
Have a Happy New Year and see you in 2021!
December 31, 2020
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