business growth

Building your saleable asset – what is your exit strategy?


Time to build a healthier profit line

and turn the business into a highly saleable asset

Before we begin, imagine its 12 months or two years from now. A potential buyer walks into your business and asks to see how things operate…. 

You happily walk her through your business pointing out how these days it runs without you, how you have systemized each and every process, how from anywhere in the world you have the ability to log in to the management reporting system and instantly have a snapshot of the key profit drivers. Then with the click of a mouse you demonstrate this; you can clearly show that the company is indeed one worth buying, profits are healthy, and the business is one which has consistent sales and proven processes to continue selling. You certainly have got her attention now; after looking at countless other businesses she was beginning to lose hope, that maybe buying a manufacturing company was not such a good idea. Now she feels like she has just found the Holy Grail! 

In this scenario, you are in the driver’s seat; whether you sell and for how much is your call. You have factual evidence that you do indeed have a healthy & profitable business. You can clearly demonstrate that it runs without you, you have processes in place to ensure that the business will continue to be profitable regardless of who owns it.

Wouldn’t that be nice? Is it realistic? Absolutely!

Now, you may think this doesn’t apply to you or your business as you have no intention of selling, however being investor ready is much more than that; by following the five steps outlined in this guide you will build a business that will run without you, giving you a very saleable (and valuable) asset and the freedom to choose what to do with it.

To begin with, you will have an exit strategy when/if you need to sell and at the very least you will have real equity in your business.

Did you know that the majority of businesses for sale are in fact “unsellable”?

Having previous experience as a business broker I can tell you most business owners that asked me to sell their business:

1)      Did not have anything more than a job with overheads and 2) They were in fact the business, if they didn’t turn up things didn’t happen.

According to research undertaken by Andrew Vincent of “Your Business Success” only 7% of business owners earn more than they could as an employee AND sell their business at a premium.

Also in the same article by Andrew Vincent it is stated that “according to the Australian Bureau of Statistics, over the four year period from 2003-2007, 777,106 businesses ‘exited’ (i.e. quit, went broke, some sold). That is an average 3,736 businesses per week”. That’s a lot of broken dreams….

But that’s ok, you’ve already decided that you are not going to be one of them and if you follow these 5 steps there is no reason why you won’t be one of those few who earn handsomely AND sell the business at a premium (if and when you want to).

A word of caution before we begin however: the steps outlined below are deceptively ‘simple’.

When you read them, you’ll probably say to yourself, ‘That’s pretty obvious’.

And of course, when they’re detailed like this, they ARE obvious. If they weren’t, you’d have to be concerned. 

But that’s actually not the point. The point is that just ‘knowing’ these five steps is very different from actually APPLYING them. How many times have you had the intention of working on strategies to grow the business, systemize it, improve efficiencies etc; only to get dragged into day-to-day issues? Then getting frustrated because this is what you pay your staff to do?

Sounds familiar? I see it all the time.

Actually, your employees are possibly just as frustrated as you are. To perform optimally, they need to know and be involved in the company’s strategic vision, helping to create the vision & the strategy so that they own it and believe in it. Without this vision, they don’t know where they are going and then you get upset because they haven’t arrived yet.

When I work with business owners this is one of the first things I help them to do; decide on the vision and the strategies required to achieve the vision. Then, through a series of workshops I help with their implementation. Obviously, whether you decide to utilize my expertise & experience to implement these 5 Critical Steps to being investor ready is totally up to you; they are actually broken down to their most basic form to allow you to follow them on your own.

The question is: will you have the discipline required to methodically follow each and every step, to focus on that potential buyer two years from now? Remember, if you fail to plan, you plan to fail. 

As we work our way through this guide you will see some examples of how I have successfully implemented the five steps over the years; the reason for this is twofold: to clearly demonstrate that I can actually help if you feel that your business would benefit, on the other-hand if you decide to go it alone, you will have real world examples in each step to help you “become investor ready”.

So let’s get started, what are these five steps? 

1. Strategic vision: Do you have a clear objective for your business? If not, think about what it is that you want to achieve both personally and in business, then begin to plan the route to get there. Maybe it’s more time to enjoy family or maybe you have aggressive expansion plans for the next five years before selling the business and retiring on the great price achieved.

The important thing is this; it must be what YOU want to do, then become passionate about it, make it your focus. Put the systems in place to help you achieve your vision, whilst focusing on the desired outcome.

  • What goals will your business achieve today, next week, next month, next year?
  • Do your employees know what these goals are?
  • How will they be achieved? Are they in fact achievable?
  • Do you have the resources; if not what do you need to do to obtain them?

It is imperative that first of all both you and your people have a clear vision of the goals to be achieved and what is expected of each team member. To do this you need to provide the map and what each team member is expected to do on the road to your destination. Communicate the vision and the strategies to achieve the vision. Set milestones and don’t forget to celebrate each one with your team.

Make the Strategic Vision S.M.A.R.T.

Specific – what exactly you are going to achieve e.g. $5 million in Sales, 40% increase in profit etc.

Measurable – To get results you must measure them, gauge where you are now versus where you want to get to.

  • Do you know how many enquiries you get weekly, monthly?
  • What is your conversion ratio?
  • How often do your customers buy from you?
  • What is the average sales value?

By focusing on these profit drivers alone you will greatly increase the value of your business.

Achievable – Make sure that your goal is achievable otherwise it will be unlikely to get employee buy in.

Relevant – the goals must be relevant to your business – its reason for being a goal must be valid.

Time-based – it is essential in order to achieve your goals that they have a timeline e.g. “We will implement a sales training program focussing on improving conversion ratios by 1 July 2014 for all sales staff” and not “We will do some sales training next year”.

Your Strategic Vision should be documented in detail – this is a live business plan, a road map with clear directions, a how-to manual, which should be reviewed quarterly and updated yearly.

A suggestion here: to ensure successful implementation, start this process with a full day (uninterrupted by phones/email etc) off-site meeting with your key people; ideally use a facilitator to keep the meeting on track and to give unbiased opinion. You could use your external accountant here or a business consultant.

Over the years, I have been involved in both world-class Strategy Workshops and run of the mill “doing it because everyone else is” or “my accountant said it’s tax deductible so we just treat it like a perk for senior management”. I’m guessing you know which company actually achieved their goals.

Begin the meeting with a PEST (Political, Economical, Social & Technological) which is focussed on external factors and is especially useful in determining the state of the marketplace. This should then be followed by a SWOT (Strengths, Weaknesses = internal factors) & (Opportunities & Threats = external factors).

Allow staff to be totally honest here without fear of retribution, take the feedback on board, avoid being negative. This insight is a critical success factor to achieving your Strategic Vision. Utilize it!

Then do the same thing in regards to your competition: PEST analysis followed by SWOT analysis. What do you do better than everyone else, why should customers buy from you?

Strive for Operational Effectiveness i.e. doing what you do better than the rest of your industry. Ideally your strategy meeting will be followed by several workshops to work on issues which become apparent, as well as take advantage of obvious opportunities. Treat each of these workshops as seriously as you did the strategy workshop, no shortcuts.

Exercise – Strategic Vision

  • What is your vision of the business in 3 years? Write a clear statement here, e.g.

“My business will generate $xx,xxx,xxx with a net profit of $x,xxx,xxx. I will work x days per month and this will consist of big picture strategic decisions and implementations. Thanks to exceptional business & people systems my business will generate these consistent returns without the need of my day-to-day involvement”. Is there an action plan in place to achieve this vision? Is it S.M.A.R.T.?

  • Define your plan here:

Do you have the buy-in of your key employees? This is a Critical Success Factor! To give your team a fair chance of arriving at their destination, they must know where they are going!

Exercise – Who does what Checklist

  • Who does what in your business?
  • Who generates the income?
  • Who is responsible for marketing, ordering stock, inventory levels, manufacturing, logistics, customer service, AR/AP, account reconciliation etc?

You                 Employee                    Outsourced

Sales/ Marketing
Manufacturing
Procurement/Inventory Control
Accounts Payable/Receivable
Payroll
Human Resources
Delivery/Logistics
IT & Communications

Do you own a business or a job with overheads?

To grow your business and turn it into a saleable asset, there must be clear direction on who does what and who is accountable! Develop systems, policies & procedures that ensure the business operates efficiently and profitably without you.

2. Marketing Your Vision: Ok, so you and your team now have a clear objective – its time to tell the world. If as part of your strategy meetings and workshops you didn’t work on your USP (Unique Selling Proposition); it’s time to do it now.

  • What is it that differentiates your product or service from your competition?
  • What makes it unique, better?
  • Is your product cheaper, is it faster, is it lighter or smaller etc.

Whatever it is, make this your point of difference and make sure your target market is aware of it.

Define in a clear concise statement what your USP is: Next, do a stock-take of your marketing collateral. Look at it with the eyes of a potential customer; would you be interested?

Exercise: Define your USP

  • Does your marketing use the AIDA principles of Attract, Interest, Desire, Action?
  • Do you have a presence on Internet?
  • Is your webpage outdated or is it a live, up to date interactive experience?
  • Does it have information to attract, get prospects interested, stimulate desire and importantly a call to Action?

For example you could offer a free “how to guide” about your industry, product reviews or a tutorial, available by entering your email address. This contact then becomes a potential lead and with the right systems in place will be followed up, e.g. by the use of a squeeze page capturing the prospects contact details and entering them directly into the CRM as a lead!

  • Follow up is critical, how often do your sales team follow up on a lead or enquiry?
  • How do you know?

A great tool which is essential to you being able to let go, to walk away knowing that KPIs will be met, is to implement a CRM,  ideally one that is internet based allowing you the owner to log-in from anywhere in the world (e.g. from the back of your yacht) and check sales activity, orders, profits etc. Do you know that by focusing on the following five profit drivers and measuring the results regularly in each you can transform your business?

  • Increase leads: create and send newsletters regularly to your existing database of customers & prospects, ask for referrals and testimonials, join industry associations and local business groups. Attend networking events.
  • Increase conversion ratio: develop scripts and follow-up processes.

Insist that your salespeople read this book: www.businessballs.com/freespecialresources/Consultative_Selling_ebook.pdf

  • Increase the number of times a customer buys from you: Treat them as a VIP buyer, give them discounts, celebrate milestones with them, ask for feedback and act on it
  • Increase the average sales value per customer: encourage your sales staff to up-sell, create a simple form that they tick off each of the options they have offered their customer
  • Increase your Gross Profit: through the systemization and continuous improvement of processes discussed later in this guide it is more than certain that you can increase your current GP by 10%

For example you have 100 leads and a 20% conversion ratio, now let’s apply the 10% increase:

Currently Increase% After
Leads 100 10% 110
X X X X
Conversion % 20% 10% 22%
= = = =
Customers 20 24
Frequency 5 10% 5.5
X X X X
Average Sales Value $25,000 10% $27,500
= = = =
Average Customer Value $125,000 Becomes $151,250
Customers 20 21% 24
X X X X
Average Customer Value $125,000 21% $151,250
= =
Total Sales $2,500,000 Becomes $3,660,250
Gross Profit % 20% 10% 22%
Total Sales Increase $2,500,000 46% $3,660,250
X X
Gross Profit % Increase 20% 10% 22%
= =
Profit $500,000 Becomes $805,255

By focusing on each of these key areas and achieving 10% increases in each, we have increased profit from $500k to $805k! Is this possible? Yes, I believe so, but even if you were to only achieve 5%, wouldn’t that still be worth the effort? Remember also, that what gets measured gets results. Focus on increasing the number of leads, the conversion ratio, the number of customers, their average sales value and the profit on each sale and you are guaranteed to get incredible results!

Exercise – Sales & Marketing

  • Leads/Enquiries per month:
  • Is every enquiry captured?
  • Closed sales/orders per month:
  • Average sales value?
  • No. of transactions per customer?
  • No. of customers per year (i.e. who actually bought):
  • Are your sales people active in networking groups, associations etc?
  • Is your webpage updated regularly?
  • Does it capture enquiry?
  • Is there a follow-up procedure? Explain:
  • What is the conversion ratio?
  • Is there a newsletter or similar to entice prospects to send you their contact details?
  • Do you monitor visits to your site with Google Analytics or similar?
  • Is the content of your webpage optimized for search engines.

3. Automate your business: Ok, so you know where you’re going, you’ve decided on how you’re going to market and you’ve got a CRM or similar to measure the results of your sales team. Now, you need to put systems in place so that you the owner are not a part of the business, so that it runs without you. To do this requires a thorough analysis of your business; who does what, when, why, where? Rather than just writing down verbatim what each person does, take the extra time to work out the right way, the most efficient way to do that task, then document it. Where are the gaps and what’s falling through them? What can be done better?

Before coming to Australia 11 years ago, I worked as an Industrial Engineer for a large engineering company supplying pipeline components for the oil & gas industry. I worked in what they called the Methods Department with 12 other people and it was our job to streamline processes, maximize efficiencies by whatever means be it technological, multi-tasking, tooling, training etc.

One particular project I worked on reduced the cycle of a particular process from 4 hours to just 13 minutes! Just by studying the process and comparing it to “best-in-world” technology, then implementing same.

Was there investment? Of course, but let’s look at the ROI; 4 hrs = 240 mins 240 / 13 = 18.46!!!

That’s 18 components completed in the same time as one previously!

What was the investment? Almost $100,000, but if we look at the gains:

Labour cost of $80 p/h X 240 mins = $320 for 1     = $320 Labour cost of $80 p/h X 13mins    = $320 for 18 = $17.77

This project paid for itself in 33 weeks. Since I implemented this change in their French branch in 1998, it has since been rolled out globally (this is a company with 66000 employees).

What do you think the real ROI is on this implementation? I would conservatively say, millions!

So as I said, don’t just describe each and every process. You’re going to have to study each process anyway, so you may as well look at possible ways of improving it.

That’s also a good reason to have a fresh pair of eyes involved; after all you don’t know what you don’t know.

I had a prospect recently who complained that he needed to move to bigger premises; later when the prospect became a client and I got the opportunity to explore further, the reality was very different. It turns out that this particular business owner (a pre-fabricated home manufacturer) thought he was doing the right thing manufacturing the roof first as for engineering calculations this is the first part of the house designed. It’s also the last part of the house required on site though, so his yard was full of product he couldn’t ship!

Obvious I know, but a serious dent to cash-flow!

While you are looking at the processes, it wouldn’t hurt to also consider the plant layout; can it also be improved? Is there an opportunity for cell manufacturing for example? As an industrial engineer I had the opportunity to consolidate my employer’s Scottish plant into their French plant; all 200 machines, lathes, mills & CNCs. I took advantage of the opportunity to also review current work practices. This resulted in several work centres being moved so that the operator could work on 2 processes simultaneously.

It also increased production output by 66%.

What would these sorts of increases do for your business?

How about procurement? Are there opportunities there for improvement e.g. terms of trade, consignment stock etc? Are you aware that by improving your inventory turnover you are also releasing hard cash that can be better used elsewhere?

Exercise – Stock Control

  • Do you know what your stock turnover is?
  • Do you do regular stocktakes?
  • Are you managing the procurement of stock efficiently?
  • What are your average days in Accounts Receivable & Payable?

Managing these areas of your business will dramatically improve cash-flow!

I always remember one particular case whereby the company always kept a minimum of 12 widgets in stock, the supplier also kept a minimum of 20 wdgets in stock and they were only five minutes away! At over $1000 each, that’s a lot of money tied up for no good reason, especially as the company was only using on average 6 widgets per month. A client in the balustrade business last year came to me complaining about being behind budget, yet having large order books & couldn’t understand what was wrong. After investigation it was a simple matter of “horses for courses”. This particular client was struggling to fulfil orders because his company was going over the top with the product supplied versus the product required. In effect they were having every single item outsourced to a stainless steel fabrication company who used TIG welding as the process to assemble. I quickly found a product of equal quality which simply clicked together and budgets were quickly surpassed.

So investigate just what you can and can’t do in the procurement area.

Create SOPs (Standard Operating Procedures) for each process, write scripts, take photos, and produce videos where applicable. From answering the phone to invoicing, manufacturing to dispute resolution – have the process documented.

Create an Organisation Chart: Make sure that it focuses on the roles required to achieve your Strategic Vision rather than the actual people who currently perform those roles. Include roles that will be required in the future even if you do not yet have people to fill them.

All this documentation may seem like an awful lot of work but the rewards are enormous! The time and effort put in at this stage will determine just how much of a saleable asset you have.

Shortly after arriving in Australia, I worked as the Manufacturing Manager in the number 1 engineering plastics supplier in Australia. They were number 1 precisely because they systemized everything. 18 weeks of the year every Wednesday at 8am all staff were required to attend compulsory training, each week was different and everything from customer service to product information was covered. And the result? The business sold for tens of millions.

Imagine again, two years from now as you walk that potential buyer through your business, how maybe now that the business runs without you, you’re not even sure you want to sell but it feels good to hear just how much your business is now worth.

Don’t take shortcuts here, many companies simply copy and paste these documents from the net and unfortunately it shows.

Again put yourself in the shoes of a customer, in this case the potential buyer of your business sometime in the future; are these generic documents or are they tailor-made policies and procedures for your company? Are they professional looking? Are they reviewed and updated periodically and not just done once and left on the shelf? Is everyone aware of and does everyone follow these procedures to the letter? Have all the staff been trained in the application of these procedures?

This doesn’t mean you shouldn’t use Internet; of course you should, it’s a fabulous research tool. There are some great resources, tools, templates and spreadsheets available and you would be silly to re-invent the wheel. However, it is imperative to customize the resources you download to your particular business. Please make sure also to give credit to the authors of material you download. A great starting point for your research would be www.businessballs.com Again, I have no association with the owners of this site, but it does have some great info on there!

Exercise – Systems

  • Is there a system in place?
  • By system we mean is there documentation in place for each process in the company?
  • Does everyone understand the workflow?
  • Is there a central database which can deliver an up to date snapshot of where the business is at?
  • Can you quickly & accurately find out the current status on a job, a debtor, the sales pipeline or aged debtors?

YES                                NO

Operations Manual
Policies & Procedures
CRM/MRP or similar central database
Skills Matrix & Training Program
HR Manual, Inductions, job descriptions & appraisals
  • Is staff turnover high by your industry standard?
  • What is staff morale like?
  • Do your people feel empowered to innovate?
  • What about career development?
  • Are employees encouraged to develop their skills

4. Which brings us to your people, their skills & their aspirations?

  • Are you getting the best out of your people?
  • Are they getting the best out of you?

I have met many owners who mistakenly believe that this is unimportant, that if staff aren’t happy that there are plenty more to take their place!

Wrong!

Remember the goal here is to make your business “investor ready”. Investors aren’t interested in buying a company with high staff turnover, low morale, quality issues and customer service issues. Investors are interested in buying a company, which is in fact run by employees who are supported by systems, have clear objectives and a product which fills a need.

Your people therefore, are important.

Start by re-interviewing them, yes, even if they have been with the company several years. You wouldn’t believe the number of times I have heard a business owner complain about a certain skills shortage, not realizing that they actually employ someone with that very skill-set. Only last week I seen it happen with a client in the construction industry, who desperately needed a designer, yet was unaware that a labourer on his factory floor had seven years experience designing homes!

So listen to the people you have in your organization, to their grievances, their aspirations, their ideas, their wants and needs.

It’s a guaranteed win/win!

Remember at the beginning of this 5 step process you created a road-map for your business, well now it’s time to create one for your employees. What do they aspire to? How can you help and how does it help you?

Create a skills matrix for all your employees, you will immediately see the weaknesses in your organisation – fill these first; e.g. if you only have one person who can do a particular process such as set up a machine in your production department make it a priority to up-skill at least two other employees to do this process.

A couple of years ago, just before going out on my own, I had the dilemma of basically trying to achieve 4 months work in 6 weeks. Guess what! With the privilege of a well-honed skills matrix and employee buy-in to the project we got it over the line.

Set a budget for training, encourage all employees to progress, organise regular internal training sessions, not only on manufacturing processes but also on customer service, negotiating, products, sales, time management etc.

Encourage professional and personal development outside of the company. Create job descriptions for each role, include responsibilities and KPIs. Implement performance appraisals and stick to them. Consider 360-degree performance appraisals where you seek feedback from the employee about their superiors and from external and internal customers and suppliers regarding your employees. To fully profit from this type of appraisal, the objective must be to improve your business as a whole rather than randomly pick on criticisms. Appreciate your people, involve them in decision making, encourage innovation, empower them to be creative, most importantly get their buy-in on where the company is going, do this by explaining the WIIFM (what’s in it for me).

On several occasions I have seen production practically double by simply involving those who know best, the very people who do the job every day, seek their advice. If it was their company what would they do differently? Explain for example that you need to ramp up production in order to get that important order, how can it be done? On one occasion, I had a client who was stressing that he needed more welders, better welders, more commitment etc. After a brief discussion with the welding team where I asked questions, then listened to what they could do to make it happen, we managed (with some investment) to get the number of unit produced daily from 8 to 14.

That’s a 75% increase in production.

What’s that worth to you? Let your employees’ offer the solutions and you can be sure that they will be committed to making it happen. Create an environment that encourages people to give their best, to grow along with the company. Again, remember the goal is to make your business investor ready.

5. Freedom to choose: Ok at this stage you have a business which runs without you, what next? You’ve done the hard yards; you must now optimize your achievements by putting in place continuous improvement programs to ensure that the business can go on running without you. I would suggest here that the strategy workshop you ran back in Step 1 be run twice a year, ideally a couple of months out from the beginning of the financial year and again at the half-way mark. Include budgets, capital expenditure and new product development. Speaking of which, where is your product in its lifecycle, should you be preparing for its replacement. Do you have a replacement? Make this part of your strategy. Now is not the time to take your eyes off the road! Sure, your business now runs without you, but make sure that you keep planning ahead; this is not a one-off exercise.

Well done! You now have a business that is “investor ready”. You have a saleable asset; whether you decide to ever sell it is entirely up to you. You have regained your freedom, you are comfortable in the knowledge that you have a profitable business and that you have reliable cash flow projections. Now you really get to enjoy working on the business, whether that’s networking at events, working on joint ventures, contemplating licensing or franchising – it’s totally up to you! Maybe you have always wanted to expand interstate or overseas?

Thanks to the first four steps, you are now in a position to be able to seriously consider this. With your strategy, marketing, systems & people all aligned, you now really can set up distributors, licensees or franchisees and/or become an international company.

The reality is; you now really do have the freedom to choose and have the tools available to know the implications of your decisions. This is the exciting part; you have now arrived in the top 7% of SMEs.

So there it is; the 5 critical steps to becoming investor ready. I hope this guide has been helpful, that it inspires you to act and that you achieve your goals.

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