There is a 100% chance you will exit your business, so shouldn’t that be planned rather than left to chance? As discussed in my last blog post, company value shows the company’s progress over time. It should be part of the owner’s business plan and measurement metrics for how the business is progressing. Goals should be set and value measured.
To understand how a CFO can help increase company value, it is important to understand both the extrinsic and intrinsic value drivers of a business. This blog is the second of the series and will cover intrinsic value drivers.
What are intrinsic value drivers of a business and why are they important?
In the last blog I discussed the extrinsic value driver of earnings and cash flow as the starting point of valuation. Generally a business’ worth is tied to some multiple of that number. So I pose the question, why would two companies in the same industry and same earnings have a different multiple applied to earnings and ultimately a different valuation?
The key here is the risk return tradeoff. That is the higher the risk, the lower the multiple. It is the intrinsic value drivers that mitigate risk and increase the company value: some of these items are:
1) Business plan & associated financial projections;
- Business Plan-Overview of history and future
- Market Analysis and strategy
- Strategic position
2) Policy & Procedures manuals;
- Human Resources
- Desk manuals
3) Accurate and Timely monthly financial reports;
- Closing process & calendar
- Trained personnel
4) Succession plans;
- Emergency plans
- Business Continuity Planning
5) Effective Management team;
6) Ownership files in order:
- Annual company meetings and minutes
- Buy/Sell Agreements in place
- Shareholders agreements
7) Metrics to measure operations, sales etc.;
8) Historical data supporting trends;
9) Intellectual Property;
Business plans support the valuation of the business. Not only where the company is currently, but where the company will be in the future as well as how it will get there. Know the current internal strengths and weaknesses and the external opportunities and threats help the current and future business owner understand the company’s position in the market place and a view of the road ahead.
Procedure manuals document how the company operates. This is one less thing an acquirer will need to worry about. One company I work with will document every position in the company including the CEO! Ever think how one would fill your shoes if you suddenly became ill or worse yet, died? Did you know a company with monthly financial closings is worth more than a company with quarterly reporting?
Which leads to the next point, do you have a management team in place and a succession plan if they leave or retire? Does this include you and your replacement? Do you have emergency and contingencies plans, and business continuity plans?
Are the ownership files in order, key man disability and life insurance in place, and a dash board monitoring key metrics in order?
What about intellectual property. Do you own the trademarks, patents and copyrights? Also don’t forget about other property that may be outside the operating company, like an office and/or warehouse in a separate partnership or trust.
I recommend a company go through a prediligence exercise. View your company like you are the buyer and organize and prepare the documents and other information you would want to see. This may include items like contracts, customer lists, concentrations, dependencies, litigation, software licenses, etc. this may also highlight those areas that need to be addressed to increase value drivers both extrinsic and intrinsic. Just like you were selling a home, you want to make sure your business has “curb appeal”.
Does this seem overwhelming or take too much of your time? That is where a B2B CFO® comes in to help. As your CFO we know how to help business owners Find the exit®. We understand how to increase company value by improved profitability and cash flow as well as putting the above intrinsic value drivers in place to help reduce the risk of a third party purchasing your business and thus increase the multiple they may be willing to pay.
B2B CFO® because:
Every business, regardless of size, needs a Chief Financial Officer®