Lupberger: Business Stewardship Now For a Post-Business Future
authors David Lupberger | May 3, 2021
Many of you reading this blog have spent a good part of your life building your business. It may well be your biggest asset and it’s an activity where you invest somewhere between 40 to 60 hours of your work week managing that business. It is not just your business, it’s your life!
This investment is worth building and holding onto. During your business life, you have developed a client list of satisfied customers, built-up a stable of reputable subcontractors and suppliers, and I hope you have key employees that feel the same way about your business as you do. Due to the commitment that these key employees demonstrate to you, you have an equal and commensurate commitment to them and their financial futures.
Knowing that you can’t work forever, how do you create a business that is transferable, meaning it can continue to work as profitably without you as it does with you. It should be your goal to not only preserve your financial investment and legacy, but to build a company that can continue to serve your community while meeting the financial needs of your good employees.
Here is some interesting research from the Exit Planning Institute from a study they did in 2019:
- 250,000 US Companies projected to exit by 2030
- 50,000 will be deemed “market ready (only 20 percent)
- Only 30,000 of those companies will actually sell (12 percent)
- 16,000 will sell with concessions (at a discount – 6.4 percent)
- 14,000 will sell at the desired price (no discount – 5.6 percent)
Think about those numbers for just a minute. By 2030, only 20 percent of companies will be market-ready to sell. That means that over 80 percent of those businesses will just close their doors, and only 12 percent of the companies that go to market will sell, with only 5.6 percent selling at the stated and desired sales price.
This is not because the businesses are not good businesses. It means that the owner has not prepared their company to sell. In the research above, 88 percent of businesses will just close their doors leaving behind past client goodwill, established relationships, and loyal employees to find their own way moving forward. In short, being a good steward of your business requires extensive long-range planning.
- How do you get your good company to that 5.6 percent that will sell (or transfer to employees) at your desired price?
- Why is this important?
Extracting Company Equity
For most business owners, 80 percent of their wealth is tied-up in their business. Getting your company into that small 5.6 percent group will allow you to sell or transfer your biggest asset. That is the key to your financial independence. That allows you to implement a plan for life after business and to enjoy “the fruits of your labor.” This is a process that you can create. The goal is to create a plan to extract that company equity.
If this goal is appealing to you, you should arise every morning with a simple mantra – “what can I do today to remove myself from day-to-day operations?”
In the Seven Habits of Highly Successful People, bestselling author Stephen Covey says that Habit No. 2 is to “Begin with the End in Mind.” Can you approach your business with the same mindset? The end goal is simple – can you create your business so that runs as profitably without you as it does with you?
As you might imagine, this takes time! Here are the key points to this process.
Company Value Drivers
To build company value and sale ability, review the list of business value drivers below:
- Stable and increasing cash-flow
- A stable, motivated management team
- Business systems that improve the sustainability of cash flows
- A solid and diversified customer base
- Effective financial controls
This is not rocket science. These are the core principles of any successful business. Let’s take a shallow dive into each value driver above:
Ultimately, all value drivers contribute to stable and predictable cash flow. It is the cash flow that determines what a buyer will offer to pay. Buyers buy cash flow, and they pay top dollar for cash flow that they expect to increase after they buy the company. Thus, you should always be thinking like a buyer throughout any sales process.
A Stable, Motivated Management Team
One of the most important value drivers in any business is its management team. This team is comprised of people who are responsible for setting company objectives, monitoring the company’s activities, and motivating the company’s workers. In many small companies, this “team” consists of one person, generally the owner. However, to build an organization that can transfer for top dollar, the management team should include people with a variety of skills. Surrounding yourself with quality people whose skills are different from yours is a cornerstone of a successful business.
In addition to building a solid management team, owners must build reliable operating systems that can continue to sustain the growth of the business. Thus, another key value driver is the development and documentation of business systems that generate recurring revenue from an established and growing customer base. If you leave shortly after the sale of your company, what remains? If your answers are “capable management” and “highly efficient business systems,” you will be able to leave your business in style!
Established and Diversified Customer Base
Begin to diversify your customer base by adding additional services such as a “client for life” maintenance service for past customers, and by adding new products and product lines. Bind your customers to your company so that they would not even think of working with anyone else.
Effective Financial Controls
Another value driver is the existence of reliable financial controls that are used to manage the business. Financial controls are a critical element of business management that also safeguards a company’s assets. Most importantly, effective financial controls support the claim that the company is consistently profitable.
A successful company exit, or transition plan has 3 legs:
- Maximizes transferable business value
- Ensures that an owner is financially-prepared
- Ensures that there is also a plan for “what’s next?”
Implementing a plan like this takes time and vision. It takes time to review each of the value-drivers. It takes time to prioritize the value drivers and then a commitment to implement the value-drivers in a systematic fashion. I want to emphasize that commitment. Less than 6 percent of business owners did this successfully. You can be one of them!
If you would like to check your own company readiness, I invite you to take a free “exit-readiness” assessment that will help you understand your current level of preparedness. It takes about 15 minutes, and it ranks your preparedness and provides a breakdown by category:
If you are interested in knowing more, please click on the following link. QR