As we get ready to close the door on 2016, many business and investment analysts believe that over the next 8-10 years, an excess of $10 trillion dollars of wealth could be transferred as the baby boomer crowd look to retire, sell off their companies, and exit the everyday working world. As a CFO consultant – one of my main duties is to be a true business partner to my clients throughout the life cycle of their business, and not only help my client’s companies grow, but help them think about the end game of their business. Because wishing for a good price when selling your business is NOT a good exit strategy!
Much like a baseball manager determines when use his pitchers throughout a game (does he bring in his middle relief pitcher in the 7th inning when the bases are loaded, or go to the ace closer early knowing he might not be available in the 9th?), or a football coach who must make a decision about a coin toss at the start of the game (which way is the wind going to be blowing in the 4th quarter if I need a field goal to win the game) – business owners should think early and often about what will happen to their company at the end of their working life. Years and decades can slip by quickly as you work to grow your business, and waiting until retirement age to think about the end game of your involvement in a company can impact its price, sustainability and legacy. Questions about the future should be asked not only for long term goals, but can often be used as a means of growing the business in the first place! And keep in mind your decisions impact not only you and your family, but your employees and their families too.
The question is then, what makes a good exit strategy, and how do you to create one? Oddly enough, what make a good game plan to grow your company, makes for a good strategy to exit your company. It’s a business decision after all. Nearly half of all company exits are not voluntary. Often called the 5 D’s, (death, disability, divorce, distress of the business, and disagreements among partners), these factors can arise suddenly, and lay waste to decades of hard work. So with that in mind – here a few things to keep in mind that will work to grow your business, while helping you prepare for a positive financial exit:
Build a business that is transferable – Focus on creating overall enterprise value, don’t just focus on the top line or income. Do you have recurring, repeatable income?
Understand your market – What is the marketplace look like from my company? Do you have a unique product or niche that no one else has?
Plan for your succession – If you run a family business, does my company stay in the family, and if so, who takes over? If you’re not a family business, Have you created a strong management team? Are there documented policies and procedures in place, and can the company carry on if you step back?
Demonstrate sustainable growth year over year – It’s been said that only 30% of all family businesses make it to the second generation. So, while it helps to have grown in leaps and bounds, slow and steady is just as good, especially if it’s a family business. You want to create a legacy!
It’s important to have clean financials – Are your books in order? Are you using your company to pay all your household bills? Can you tell the true value of your company? Have you filed your taxes? And can someone read and understand the story of your company from the numbers?
In summary, thinking about the endgame of your company is not something that can be solved with hope and a prayer, but rather a business strategy that should be developed, analyzed and evaluated throughout the life cycle of your business. Being prepared is more than just a motto the Boy Scout’s live by, it can help you prepare for your financial future!
As a typical small business owner, you are used to doing it all. But, because there are only so many hours in a day, most business owners simply settle for running a few standard accounting reports at the end of each month, because – well – that’s what you are “supposed to do”. So you run an Income Statement report to see if your business made (or lost) money in the last 30 days, as well as a Balance Sheet report to make sure there are funds still left in the bank account. And then with a quick glance at the top and bottom lines on the reports, it’s back into the saddle and time to gallop off to the next important task.
If this sounds familiar, you may be missing a big opportunity to understand and improve your business. Do your Financial Statements tell the story of your company…..or are they just keeping score?
The KIS rule – Keep It Simple!
First, keep it simple and easy to digest, so start with the design and layout of your financial presentation. It should be clean and easy to understand – never more than a one-page summary. I’ll never forget one of my first meetings with a new client. He owned a truck repair shop, but he wanted to run his company just like the Andy Garcia’s casino owner from the 2001 movie Ocean’s Eleven. Every morning, Garcia’s character was handed a single, one-page summary of the previous day’s financial activities, which he quickly reviewed, analyzed and approved or acted on. Now my client didn’t want to run a casino, but his point was on target – he wanted his financial reports to show his key metrics in a quick and concise manner.
- Breakout your Income Section by product or service line. That way you can quickly assess, on a monthly and annual basis, which streams of revenue are excelling, and highlight which lines of business are lagging.
- Define a Cost of Goods section. These could be materials, labor, or other costs that are directly associated with producing income.
- Finally, group all other expenses by operational functionality. What types of expenses are a major part of the fixed costs that you need to pay every month, regardless of whether money is coming in or not? For example – rent, utilities, office cleaning, computer supplies, and maintenance expenses (to name a few) should all be rolled up into Operating Expenses. You have to know how much it costs just to keep the lights on every month along with how much you are spending on sales and all of your marketing ideas.
Compare this year versus last year.
Sure, you think you are having a record year, but how would you know if you don’t have a monthly and year-to-date comparison to last year’s numbers? Perhaps the numbers were overinflated one month by an unusual market condition. Plus, year over year, as well as month to month comparisons, can help you spot trends as they develop, alerting you to a potential on-going problem that has been slowly, but steadily, getting worse.
Lastly, consider who else may see your numbers.
When it comes time to talk to your bank about expansion or obtaining that line of credit, clean and clear financials will be required. The same for when it’s time to think about bringing on a new partner. Good financials and the story they tell can often be the difference between making and breaking the deal. Remember to separate out any owner fringe benefits (like car payments or gym memberships) from ordinary and necessary business expenses so the true value of the company can easily be recognized.
In summary, don’t think of Financials Statements as a necessary, but tiresome, ritual repeated every thirty days, but rather as chance to review your company’s evolving story on a monthly basis. Structured properly, they will be a valuable tool that helps you make informed business decisions, understand problems early, monitor progress, and open the door to future growth and expansion.
Scott Brinser, owner of Brinser Consulting, an accounting professional with over 20-plus years of experience is your outsourced accounting solution. From bookkeeping duties to part-time CFO services, Scott provides relief to small and mid-sized companies that do not have the need for a full-time accountant. He works with your CPA accountant to keep the books clean all year long, while providing top level analysis that will help you fully understand the numbers, and allow you to concentrate on growing your business!