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Why a business valuation analysis is important to your company's value

07.24.18

All business owners need to consider a business valuation, ideally updated annually. A current business valuation is important for your company’s financial health as it can:

  • Give you an accurate picture of what your company is really worth — and how transferable that value can be — this provides a realistic picture of your company’s value should you decide to sell. It also provides a window into your ability to grow the business and how much money a bank would be willing to lend to support that growth.
  • Help you to plan for a faster sale — proper planning delivers more lucrative and successful sales of small businesses, as it gives a business owner time to increase the company’s worth before the sale, and to sell quickly.
  • Protect your family if something happens to you. John Warrillow, founder of The Value Builder System, writes that illness is the number one event that forces business owners to sell. A business valuation analysis can identify ways to create a more transferrable business in the event of illness or death.

Overall, a business valuation professional can provide you with an exact value of your company and help you develop a long-term plan to increase its value. Valuation strategies can help you increase profitability by helping you:

  • Identify prospective opportunities for sales growth
  • Implement cost-cutting strategies that maximize profits
  • Increase employee retention and save money on hiring and training
  • Develop systems and processes to increase the odds of a successful transition to the new owners, whoever they may be

If you or your client is interested in increasing a company’s value, please contact Seth Webber 

Topics: manufacturing

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Do you want to receive top dollar for your business? Do you want to make your business irresistible to a potential buyer? Looking for a stress-free retirement? If you find yourself answering “yes” to these questions, it’s time to take steps to create a transferable business.

The first step? Get a business valuation and find out what your business is worth. More often than not, business owners are surprised their businesses are worth less than they thought. A business valuation expert can give you an accurate picture of your company’s worth, and help you see how its performance compares to other companies in the same or similar industries. Here are five things you can do now to make it more easily transferable later:

  1. Reduce the risk of high owner dependence. The overall value of the company decreases if owner dependence is high. One way to avoid this is to transfer the owner’s knowledge of the company’s products to others in the business, enabling a more profitable and efficient transition.
  2. Attract, keep, and retain key employees. You can increase your company’s value if employees are committed to remaining with the company after a sale. Furthermore, skilled employees bring stability to a business, and save costs and time on retraining and hiring.
  3. Put recurring revenue agreements in place. This will increase the value of your company as it takes pressure off a new owner as they acclimate to the business as it provides a guaranteed revenue stream during new business pursuits.
  4. Identify cost-cutting strategies and streamline processes to improve efficiency and maximize profits.
  5. Monitor industry activity and trends within your industry and find opportunities to grow your business. This research can help you determine what potential buyers value in a company.

If you wish to identify ways to make your business more transferable, contact Katherine Whitehead.

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Five steps to maximize the transferability of your business

Although there is no legal requirement to have a formal shareholder agreement, it’s a good idea for any company with more than one shareholder to have one, as it reduces the potential for conflict between shareholders, helping the company run smoothly and profitably. It also outlines shareholders’ rights, privileges and obligations, and includes the foundation of how to set up, manage, and run the company. Here are four other key benefits a well-drafted shareholder agreement provides:

  1. A shareholder agreement outlines decision making considerations e.g., how you will manage the company and how you can appoint the board. By identifying and listing matters that need unanimous approval, minority shareholders will have a say on important issues.
  2. A shareholder agreement prevents shareholder disputes and addresses exit strategies if conflicts arise—and provides a road map for a resolution. A key element of a shareholder agreement is a buy-sell provision, aka a buyout agreement. It is a legally binding contract between shareholders that stipulates the right or obligation of one shareholder to buy the shares of another shareholder when certain events occur.
  3. A shareholder agreement provides the framework for restrictions on the transfer of shares by addressing all possible triggering events—the good, the bad, and the ugly—sale, retirement, death or disability, divorce, termination, or bankruptcy—so that everyone understands what happens in any given scenario. You need to tightly define value or consideration paid when various triggers are met. This provides stability, enabling the company to withstand uncertain times with confidence. Loose definitions or scenarios not covered by the agreement are the source of many shareholder disputes—wasting time, effort, and money.
  4. A shareholder agreement also deals with the financing of the company and addresses how to raise future monies while demonstrating business stability to potential investors and partners.

If you are a business owner with more than one shareholder, make the investment in a well-drafted shareholder agreement. As shareholders will always have disagreements and not always see eye-to-eye, by setting out shareholder expectations you can then focus on what’s important: the profitability of your business.

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Four reasons why a shareholder agreement is essential to your company's survival

Read this if you are a business owner or advisor to business owners.

With continued uncertainty in the business environment stemming from the COVID-19 pandemic, now may be a good time to utilize trust, gift, and estate strategies in the transfer of privately held business interests.

In simple terms, business valuation is a function of future cash flow and the risk in achieving those cash flows. As uncertainty in the ability to achieve future cash flow rises, risk rises at the same time. The value of a business is driven by risk. Holding all else equal, as risk continues to increase, the value of a business decreases. Similarly, if all else is equal, a continuing decline in anticipated cash flow results in decreased business values. An increase in risk, coupled with growing uncertainty and decline in cash flow may create a compounding effect of depressing business values. 

Cash flow challenges

Even if the cash flow of a privately held business has held up thus far, there is great uncertainty as to future cash flow. The duration of this uncertainty is a major concern for many business owners in the current environment. It was not long ago that many were anticipating the pandemic impact would be short-lived, resulting in a v-shaped recovery. Those expectations have given way as national unemployment numbers continue to climb. This continued uncertainty may lessen the value of privately held businesses. Depending on the company, its expectations, and impact from industry and economic factors, the effect on future cash flow may be significant.

With these elements in mind, the current and near-term may serve as an advantageous time to consider the transfer of interests in a privately held business. Increased risk and lowered future expectations will combine, resulting in lower values—particularly as compared to performance during the recent strong economy. 

Further opportunities exist if you are considering transferring a non-controlling interest in a company. Discounts applicable to minority or fractional interests typically include discounts for lack of control and lack of marketability, and in some cases discounts for lack of voting rights. These discounts may serve to further reduce the overall value transferred through a given strategy. 

What strategies can be used to capitalize in this environment?

From a federal perspective, gift and estate tax lifetime exemption amounts are at all-time highs; currently, $11.58 million per individual in 2020. With portability, a married couple can gift or transfer over $23 million in value without incurring a federal gift or estate tax.

Coupled with the ever-increasing annual gift tax exclusion amount of $15,000 per recipient in 2020, executing a succession plan could not come at a better time. Individuals should be aware of the scheduled sunset of the above referenced amounts in 2025 with reversion back to previous levels of $5.0 million (adjusted for inflation).

Building on future uncertainty, the 2020 presidential election is quickly approaching, as well as budget concerns from federal and state administrative agencies resulting from COVID-19. As it is unknown whether the current estate gift and estate tax exemptions will remain at these all-time highs, it may be an opportune time to leverage the current lifetime exemption or annual gift tax exclusion. 

Given the likely decline in value of closely held business interests or marketable securities combined with historically low interest rates currently, transferring assets now that will likely rebound in value later will provide transferors/donors with the most bang for their buck. 

Certain trust vehicles are often beneficial in a low-interest rate environments and provide varying forms of flexibility to the grantor or donor. When combined with the increase in the charitable deduction limits for taxpayers who itemize their deductions, this is an optimal time for transferring assets.  

One of the most important aspects of estate planning is to review and update your estate plan regularly for changes in your financial or family situation. Estate plans are not static and should be periodically reviewed to ensure they achieve your goals based upon your current situation.

Our mission at BerryDunn remains constant in helping each client create, grow, and protect value. If you have questions about your unique situation, or would like more information, please contact the team.

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2020 estate strategies in times of uncertainty for privately held business owners

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While recent articles within the exit planning community have noted a slowing of business transitions and exits, during times of uncertainty it may be even more important to focus on the opportunity at hand. Rather than waiting it out, we recommend that business owners try to be active, involved, and focus their efforts on improving their business.

The situation is similar to the ebb and flow of the tide. The current economy is the tide at an extreme low point. We know that the economy will recover, so what can be done in the meantime to take advantage of opportunities, and be ready to succeed when the tide rises?

Changing of tides

Suddenly, there has been a rapid and seismic shift in the landscape. Weaknesses and threats, rocks and hazards, may have emerged. How you choose to approach these perils will make a difference in the long term. Will you take the opportunity to discover, identify, assess, shore up, and mitigate these elements?

It is important to view this current state in the context of the larger, long-term perspective. Once the tide comes back, will you be able to set full sail ahead having built resiliency, redundancy, and strength into those areas while you had the opportunity? While the water is low, it presents a great opportunity for business owners to discover and understand: 

  • What broke first and why? 
  • How can you shore it up for better operations in the days ahead?
  • What weak spots you didn’t know about are now apparent?
  • How can you address those weaknesses?
  • How can you leverage existing resources differently to chart a path forward?

Models of priority

There are various stages or hierarchies of priority in thinking about the progress of a business. 

Each priority model features bases and pinnacles. The pinnacles of each model are realized in a long-term setting, after the remaining bases have been solidified. While continued development of a clear vision for your business is paramount, dynamic shifts in the landscape call for reassessment of the bases. In the long-term, self-fulfillment manifests from properly executed strategy, but in the near- and mid-term, these various frameworks force strategic planning back to assess and address the base components. 

The bases of each model should serve as safe havens for reversion. When facing uncertainty and failure, have you made your base strong enough to redirect your efforts in an actionable plan for the long-term?

Action Planning Pyramid and Value Maturity Index

Action Planning
Five Stages of Value Maturity

The Value Maturity Index, broken into five stages is a stepwise assessment of active exit and business strategy. Inherent in the value acceleration framework are the concepts of resiliency, redundancy, disaster recover, and actionable planning.

While we may have been fully entrenched in the build phase, setbacks due to dynamic changes in the landscape force us back to protect mode—the assessment and methodical shoring up of weaker points of the operation to protect against future downside risks.

Though this stepwise progression is linear in nature, keep in mind that flexibility and adaptability are paramount in changing course to address needs of your current state.

When we look at action planning, parallels can be drawn to the various models. Certainly, we are focused on continuing sales, marketing, and customer relationships, but it becomes a question of reversion to meeting the basic needs and serving client’s pain points rather than  beginning ground-breaking efforts. 

The current climate forces us to the base, with a focus on solidifying the exposed areas that may have been made apparent, and likely compounded, by the current realities. Concerns on management, metrics, core values, and priorities serve as the bases in need of coverage.

Maslow’s Hierarchy of Needs
 

Maslow's Hierarchy of Needs

Maslow’s Hierarchy of Needs1 is a well-known motivational theory in psychology that comprises a five-tiered model of human needs, whereby each successive tier must be fulfilled (beginning at the base) before rising to the next tier. It can be used to view similar information from a psychological perspective.

Value acceleration and creating successful outcomes are largely tied to a clear long-term vision. We typically reside in the Self-actualization level of the hierarchy of needs when undertaking the high-level view of the framework.

Based on the adaptability and call for sudden directional changes in today’s climate, we are not as concerned with these top levels. We have them in our back pocket for easy recall, but they are not the pressing issue staring us in the face.

If we think about shoring up bases (the Protect Stage), in considering this psychological model, our focus is on the “basic needs” level. That is, keeping people (self, family, and employees) safe and remaining connected for immediate continuity.

McKinsey & Company Event Horizons

McKinsey & Company Event Horizons

Many others in related fields are viewing the current situation in similar terms. In the McKinsey & Company Events Horizon view2:

  • Resolve addresses those immediate hurdles and challenges a business is currently facing.
  • Resilience focuses on near-term items to be addressed once the initial base is covered. 
  • Return views the mid-term horizon in understanding how to return to scale by focusing on understanding metrics and increasing the frequency of measurements for informed decision making. 
  • Reimagination and Reform typically go hand in hand, but without covering bases of needs, crafting a dynamic shift in operations to incorporate new environments may be counterproductive. 

However, once these bases have been clearly assessed and addressed, the path forward may appear dramatically different, in which case creative solutions to enhance opportunity should begin to form. Examples of this may include newly emerged revenue streams and opportunity areas, fully integrated systems and dashboards to capture timely decision making data points, or pivots in your business model adaptable and reactive to new environments.

One example that has been in the news recently involves CEOs being pleasantly surprised that productivity of employees has not dropped even though people are working from home. How sustainable is this productivity? What implications might this have for corporate real estate and office settings? The answers will vary widely, depending on your business and competitive environment.

Exposure, discover, and control

Back to our tides analogy for a moment. As the water receded, what new rocks were exposed or what existing challenges became more apparent? What is your plan to address these areas? Is this the time to make large investments in your company or the right investments? Now that the tide is out, it is time to shore up, move the rocks, and address elements of your business to prepare for long-term successes. Through our assessments, risk profiling, and benchmarking analyses, we help business owners discover the largest gaps across the company, prioritize the most impactful problem areas to address, and implement changes to enhance business value through continuous improvement. 

Taking stock of your company’s future through the incorporation of lessons learned will bolster value in the long-term by de-risking and developing new opportunities, methods, work, shifts in productivity, and shifts in mentality. That approach also brings lots of questions: If there are no early warning signs, why not? What should your indicators be? What metrics are crucial in identifying the pulse of your current situation? What is your business reliant on? How can you build information and indicators for rapid shifts in decision making? How strong are your current controls and how integrated are your management and information systems?

To answer these questions, you need to quantify and develop metrics that will aid in the early identification of future challenges, thus increasing your responsiveness with data-driven decision mechanisms. Having your fingers on the pulse of your company and understanding the impact of each input to your strategy will focus your attention on the information that matters most. This allows you to understand, position, and adapt to changes in your business and community environment in a proactive and agile manner. Measurements, forecasts, and dashboards should provide you with regular, valid, and relevant information you can use to take informed action in decision making.

Historical look backs during various points of time will allow you to key in on pivotal data indicators and inflection points. When looking at this from an operational view, industry and economic factors impacting your company can serve as corroborating pieces of evidence to further support data metrics analyzed.

As you perform look backs, it is also best practice to regularly study and update development, pipeline, and reliance metrics for feedback and information discovery with data integrated throughout your operations. This helps avoid lag time in reporting on stale information towards real-time actionable data points.  

Each metric is specific to your business and can be directly mapped back to increases in shareholder value. Understanding these drivers of business value will focus your attention and intention on improving in the right areas, while avoiding distracting and less impactful pain points.

Don’t fret over precision, rather build in flexibility and adaptability with scenario- and sensitivity-based criterion to understand changes, implications, and reliance of each input. Understanding these relationships in a broader scheme aid you in quick, impactful decision making guiding you towards enhanced value.

Resilience until the tides rise

This approach allows opportunity to fully assess the known and unknown problem areas, weaknesses, perils, and hazards your business may be facing. From that base you can begin to address these issues to scale effectively with lower overall risk when activity picks up.

Management metrics, core values, and priorities drive resilience for long-term continuity by shoring up the foundation to build for the future. Assembling evidence in troubled times provides opportunity to capitalize on and fulfill core values. Documenting these decisions and improvements memorialize your decision making, impact on value enhancement, and should serve as a playbook for future events.

What you make of the time you have now through identification, assessment, and addressing newly emerged risk areas provides the opportunity to increase success once the economy rebounds. We are here to help. If you have questions about your particular situation, or would like more information, please contact the business valuation consulting team

1Maslow’s Hierarchy of Needs, Saul McLeod, updated March 20, 2020. SimplyPsychology. www.simplypsychology.org/maslow.html.
2Beyond coronavirus: The path to the next normal, Kevin Sneader and Shubham Singhal, McKinsey & Company, March 23, 2020.  www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/beyond-coronavirus-the-path-to-the-next-normal. COVID-19: Briefing note, March 30, 2020, Our latest perspectives on the coronavirus pandemic. Matt Craven, Mihir Mysore, Shubham Singhal, Sven Smit, and Matt Wilson. McKinsey & Company. www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business.

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Value acceleration in times of uncertainty

Read this if you want more information about the Paycheck Protection Program (PPP).

Most likely you have heard of the PPP within the Coronavirus Aid Relief and Economic Security (CARES) Act that was passed into law March 27, 2020. Below, we’ve shared some of the questions we have heard from many of our clients. If you need more information or have questions regarding your specific question, please contact us

Question #1: What was the PPP designed for? 
Answer:
The PPP was designed with the goal of keeping American workers paid and employed. It aims to accomplish this by issuing loans to qualified businesses so that they can continue paying employees and other qualified expenses.

Question #2: Do you or your business qualify for this? 
Answer: There are several considerations when determining whether or not a business qualifies. For more information, see this recent blog post from Seth Webber, which address a number of these considerations. 

Question #3: What should the PPP loan be used to cover in your business?
Answer: The intent of allowable uses includes: (i) payroll costs, including (a) employee salaries, commissions, or similar compensations, (b) group health care benefits, (c) paid vacation, parental, sick, medical, or family leave, (d) allowances for dismissal or separation, (e) retirement benefits, and (f) state or local tax assessed on the compensation on employee;  (ii) payments of interest on any mortgage obligation, but not prepayment or payment of principal amounts; (ii) rent (including rent under a lease agreement); (iv) utilities; and (v) interest on any other debt obligations incurred before February 15, 2020. However, certain payroll costs are excluded, including salaries and wages which annualized amounts would result in compensation over $100,000 and sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.  

Additionally, you should consider the time period your allowable expenses are designated for. The Small Business Administration (SBA), in consultation with the Department of the Treasury (Treasury) issued a list of frequently asked questions (FAQs) and responses to these FAQs as of April 10, 2020, Paycheck Protection Program Loans FAQs. Within these FAQs, Question 20 asked, “The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?” The SBA and Treasury noted, “The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten (10) calendar days from the date of loan approval.” 

Question #4: What portion of the loan, if any, can be forgiven?
Answer:
The Treasury Department issued guidance on March 31, 2020 indicating that at least 75% of the forgiven amount should be used for qualified payroll costs. Although the covered period is specified as February 15, 2020 through June 30, 2020, forgiveness amounts of the loan are based on expenses (primarily payroll) during the eight-week period following the receipt of the loan. There are other aspects of the forgiveness provisions that impact the actual amount forgiven, including maintaining or quickly rehiring employees and maintaining salary levels, with the overall forgiveness amount being reduced if full-time headcount declines, or if salaries and wages decrease more than 25%.

Question #5: What about the portion of your loan that is not forgiven?
Answer:
For the portion of loan not forgiven, the life and terms of the residual loan appear favorable. Current guidance indicates a repayment period of two year loan at 1% interest. Included within this is a six-month deferral period on principal repayment. The loan does not require collateral or a personal guarantee.

Question #6: How should you keep track of the funding and allowable costs?
Answer
: Best practice would be to set up a separate banking account. This will allow you to bifurcate the funding source and offset that amount by costs tracked over the covered period directly. This allows you to use other cash reserves and funding sources to meet other expense needs during the covered period. The funds need to be brought over (into that separate banking account) within 10 days of the application being approved.

Question #7: What other resources are available if the PPP is not a good fit for you?
Answer:
There are additional programs available through the Small Business Administration (SBA) including the Economic Injury Disaster Loan (EIDL) program, which features an advance amount (EIDL Emergency Grant) of up to $10,000. Guidance remains outstanding on exact implications of the EIDL Emergency Grant amount with some SBA offices pointing to $1,000 per employee up to a total max of $10,000. This EIDL Emergency Grant does not have to be repaid, but if you subsequently receive funding through the PPP, your forgiveness amount will be reduced by the EIDL Emergency Grant amount. The EIDL program also features a max life of 30 year loan with interest rates of 3.75% and 2.75% for entities that are for-profit and non-profit, respectively. More information on this is detailed in Dave Erb’s recent blog post.

If you do not need to make use of the PPP and EIDL programs, but still face significant downturns in your revenue base, tax relief in the form of the Employee Retention Credit (ERC) may also be an option. The provisions of the ERC within the CARES Act specify eligibility as, an employer that does not participate in the PPP and: (i) a complete or partial shutdown in operations; or (ii) at least a 50% decline in gross receipts, based on quarterly comparison from 2020 to 2019. The ERC allows for a tax credit of 50% of qualified wages (max wages of $10,000 per employee and max credit of $5,000 per employee). For more information on the ERC provisions, see Bill Enck’s blog post.

As developments continue to unfold and changes in guidance continue to emerge, the BerryDunn Recovery Advisory Team can help you stay informed through the BerryDunn COVID-19 Resource Center.

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Paycheck Protection Program: FAQs

In a closely held business, ownership always means far more than business value. Valuing your business will put a dollar figure on your business (and with any luck, it might even be accurate!). However, ownership of a business is about much more than the “number.” To many of our clients, ownership is about identity, personal fulfillment, developing a legacy, funding their lifestyle, and much more. 

We explored the topic of what business ownership means on Wednesday, May 8th, in the final presentation of our value acceleration series, exploring how to increase business value and liquidity. In this final installment, we discussed the decision of whether to grow your business or exit, and which liquidity options are available for each path. 

While it may seem counterintuitive, we find that it is best to delay the decision to grow or exit until the very end of the value acceleration process. After identifying and implementing business improvement and de-risking projects in the discover stage and the prepare stage (see below), people may find themselves more open to the idea of keeping their business and using that business to build liquidity while they explore other options. 

Once people have completed the discover and prepare stages and are ready to decide whether to exit or grow their business, we frame the conversation around personal and business readiness. Many personal readiness factors relate to what ownership means to each client. In this process, clients ask themselves the following questions:

  • Am I ready to not be in charge?
  • Am I ready to not be identified as the business?
  • Do I have a plan for what comes next?
  • Do I have the resources to fund what’s next? 
  • Have I communicated my plan?

On the business end, readiness topics include the following:

  • Is the team in place to carry on without me?
  • Do all employees know their role?
  • Does the team know the strategic plan?
  • Have we minimized risk? 
  • Have I communicated my plan?

Whether you choose to grow your business or exit it, you have various liquidity options to choose from. Liquidity options if you keep your business include 401(k) profit sharing, distributions, bonuses, and dividend recapitalization. Alternatively, liquidity options if you choose to exit your business include selling to strategic buyers, ESOPs, private equity firms, management, or family. 

In our discussion about liquidity, we addressed several other topics that audience members were curious about. One of these topics was the use of earn-outs in the sale of a business. In an earn-out, a portion of the price of the business is suspended, contingent on business performance. The “short and sweet” on this topic is that we typically find them to be most effective over a two- to three-year time period. When selecting a metric to base the earn-out on (such as revenue, profit, or customer retention), consider what is in your control. Will the new owner change the capital structure or cost structure in a way that reduces income? Further, if the planned liquidity event involves merging your company into another company, specify how costs will be allocated for earn-out purposes. 

We also discussed rollover equity (receiving equity in the acquiring company as part of the deal structure) and the use of warrants/synthetic equity (incentives tied to increases in stock price). Here are some of the key points from this discussion:

  • Make sure you know how you will turn your rollover equity into cash.
  • Understand potential dilution of your rollover equity if the acquiring company continues to acquire other targets. 
  • Make sure the percentage of equity relative to total deal consideration is reasonable.
  • Seller financing typically has lower interest rates and favorable terms, so warrants are often attached to compensate the seller. 
  • Warrants are subject to capital gains tax while synthetic equity is typically ordinary income. As a result, warrants often have lower tax consequences.
  • Synthetic equity may work well for long-term incentive plans and for management buyouts. 

We enjoyed talking with business owners, management, and their advisors during this five-session series. We have found that through the value acceleration process, clients are able to increase business value and liquidity, giving them control over how they spend their time and resources.

If you are interested in learning more about value acceleration, please contact me. I would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Decide: Value acceleration series part five (of five)

So far in our value acceleration series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

This month, we focused on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

  • Customer diversification and contract implementation
  • Inventory management
  • Use of relevant metrics and dashboards
  • Financial history and projections
  • Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

  •  Family involvement in the business
  •  Needs vs. wants
  •  Development of an advisory team
  •  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.


The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

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Planning and execution: Value acceleration series part four (of five)

What are the top three areas of improvement right now for your business? I asked this question of 20 business leaders and advisors on Wednesday morning (March 13th) during the third session of our value acceleration series. In this discussion, we focused on how to increase business value by aligning values, decreasing risk, and improving what we call the “four C’s.”

To back up for a minute, value acceleration is the process of helping clients increase the value of their business and build liquidity into their lives. Previously, we looked at the Discover stage, in which business owners take inventory of their personal, financial, and business goals and assemble information into a prioritized action plan. On Wednesday, we focused on the Prepare stage of the value acceleration process.

Aligning values may sound like an abstract concept, but it has a real world impact on business performance and profitability. For example, if a business has multiple owners with different future plans, the company can be pulled in two competing directions. Another example of poor alignment would be if a shareholder’s business plans (such as expanding the asset base to drive revenue) compete with personal plans (such as pulling money out of the business to fund retirement). Friction creates problems. The first step in the prepare stage is therefore to reduce friction by aligning values.

Reducing risk

Personal risk creates business risk, and business risk creates personal risk. For example, if a business owner suddenly needs cash to fund unexpected medical bills, planned business expansion may be delayed to provide liquidity to the owner. If a key employee unexpectedly quits, the business owner may have to carve time away from their personal life to juggle new responsibilities. 

Business owners should therefore seek to reduce risk in their personal lives, (e.g., life insurance, use of wills, time management planning) and in their business, (e.g., employee contracts, customer contracts, supplier and customer diversification, etc.).

Intangible value and the four C's

Now more than ever, the value of a business is driven by intangible value rather than tangible asset value. One study found that intangible asset value made up 87% of S&P 500 market value in 2015 (up from 17% in 1975). We Therefore, we focused on how to increase business value by increasing intangible asset value. Specifically, we talked about the “four C’s” of intangible asset value: human capital, structural capital, social capital, and consumer capital. 

We highlighted a couple of strategies to increase intangible asset value. First of all, do a cost-benefit analysis before implementing any strategies to boost intangible asset value. Second, to avoid employee burnout, break planned improvements into 90-day increments with specific targets.

At BerryDunn, we often diagram company performance on the underlying drivers of the 4 C’s (below). We use this tool to identify and assess the areas for greatest potential improvements:

By aligning values, decreasing risk, and improving the four C’s, business owners can achieve a spike in cash flow and business value, and obtain liquidity to fund their plans outside of their business.

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The four C's: Value acceleration series part three (of five)

We are two for two when choosing value acceleration presentation dates that align with winter storms. It turns out we may be a more reliable indicator of winter weather than Punxsutawney Phil, who has a track record of 36 percent accuracy over the last 50 years.

After a last-minute rescheduling due to the weather, we held our second discussion in the value acceleration series on Friday, February 15th. Value acceleration is our process of helping clients increase the value of their business and build liquidity into their lives. In the first session, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In our conversation on Friday, we took a closer look at the first stage of the value acceleration process: the Discover stage, aka the “triggering event.”

In our first session, we walked through a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

© Exit Planning Institute

In the Discover stage, business owners take inventory of their personal, financial, and business goals, noting ways to increase alignment and reduce risk. The objective of the Discover stage is to gather data and assemble information into a prioritized action plan, using the following general framework.

 

Every client we have talked to so far has plans and priorities outside of their business. Accordingly, the first topic in the Discover stage is to explore your personal plans and how they may affect business goals and operations. What do you want to do next in your personal life? How will you get it done?

Another area to explore is your personal financial plan, and how this interacts with your personal goals and business plans. What do you currently have? How much do you need to fund your other goals?

The third leg of the value acceleration “three-legged stool” is business goals. How much can the business contribute to your other goals? How much do you need from your business? What are the strengths and weaknesses of your business? How do these compare to other businesses? How can business value be enhanced? A business valuation can help you to answer these questions.

A business valuation can clarify the standing of your business regarding the qualities buyers find attractive. Relevant business attractiveness factors include the following:

Market factors, such as barriers to entry, competitive advantages, market leadership, economic prosperity, and market growth
Forecast factors, such as potential profit and revenue growth, revenue stream predictability, and whether or not revenue comes from recurring sources
Business factors, such as years of operation, management strength, customer loyalty, branding, customer database, intellectual property/technology, staff contracts, location, business owner reliance, marketing systems, and business systems


Your company’s performance in these areas may lead to a gap between what your business is worth and what it could be worth. Armed with the information from this assessment, you can prepare a plan to address this “value gap” and look towards your plans for the future.

Next up in our value acceleration blog series is all about what we call the four C's of the value acceleration process. 

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The discover stage: Value acceleration series part two (of five)

We held our first discussion on value acceleration on January 9th as the first of a six-part series. If you were unable to attend (because the weather was not in your favor, or if you are outside of the Portland, Maine area), or are a business owner or executive interested in increasing the value of your business, read on to see what you missed.

One of the statistics that really caught participants’ attention was this one: 12 months after selling, three out of four business owners surveyed “profoundly regretted” their decision. Situations like these highlight the importance of the value acceleration process, which focuses on increasing value and aligning business, personal, and financial goals. Through this process, business owners will be better prepared for business transition, and therefore be significantly more satisfied with their decisions.

In our first session, we walked through a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

© Exit Planning Institute

The Discover stage is also called the “triggering event.” This is where business owners take inventory of their situation, focusing on risk reduction and alignment of their business, personal, and financial goals. The information gleaned in this stage is then compiled into a prioritized action plan utilized in future stages.

In the Prepare stage, business owners follow through on business improvement and personal/financial planning action items formed in the discover stage. Examples of action items include the following:

  • Addressing weakness identified in the Discover stage, in the business or in personal financial planning
  • Protecting value through planning documents and making sure appropriate insurance is in place
  • Analyzing and prioritizing projects to improve the value of the business, as identified in Discover stage
  • Developing strategies to increase liquidity and retirement savings

The last stage in the process is the Decide stage. At this point, business owners choose between continuing to drive additional value into the business or to sell it.

Through the value acceleration process, we help business owners build value into their businesses and liquidity into their lives.

Read more! In our next installment of the value acceleration blog series, we cover the discover stage.

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The process: Value acceleration series number one (of five)

Consider the implications of the following statistics:

Sixty-three percent of private businesses are owned by baby boomers.
Approximately 10,000 baby boomers are reaching retirement age each day. 
Seventy-eight percent of business owners expect to fund 80% or more of their retirement through the sale of their business.
Only 20% to 30% of the businesses that go to market actually sell.


While a massive number of people are retiring each year and counting on the value of their business as part of their retirement plan, many are unable to actually generate any liquidity beyond normal compensation. They may even have a very valuable business, but can’t convert any of that value into cash. What a terrible situation! They may feel like a sailor stranded on a desert island—surrounded by water, but dying of thirst.

Attaining liquidity from your business and increasing business value are two topics that go hand in hand. Factors that increase business value often also increase the ease of selling the business. Even if your plan is to never sell, increasing profitability and liquidity will make planning easier. In this blog post, we will identify five ways business owners can improve business value and increase the likelihood of selling the business at a desirable price.

Businesses are often valued by using an income metric (such as earnings before interest, taxes, depreciation, and amortization, or EBITDA) and a valuation pricing multiple.


To increase business value, business owners can increase the valuation pricing multiple, increase income, or both. Focusing on improving the multiple is often a more effective way to increase business value.

Business risk is the key driver of the multiple. Five effective ways to improve the multiple are:

1. Reduce reliance on the owner of the business
2. Incentivize key employees to sign long-term employment contracts
3. Diversify the customer base
4. Create sustainable recurring revenue 
5. Maintain immaculate financial statements


By planning ahead and implementing the above steps, business owners may be in a much better position for retirement.

P.S. We will be exploring these topics in our Value Acceleration presentation series, beginning on Wednesday, January 9th at 8:00 a.m. in our Portland office. If you would like to attend this session, please contact me. We would love to have you attend. We’re going to be focused on the process to increase the value of your business and build liquidity into your life.

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Value acceleration—The gas pedal for the value of your business

I leaned out of my expansive corner office (think: cubicle) and asked my coworker Andrew about an interesting topic I had been thinking about. “Hey Andrew, do you know what BATNA stands for?” I asked. Andrew, who knows most things worth knowing, indicated that he didn’t know. This felt good, as there are very few things that I know that Andrew doesn’t. 

BATNA, which stands for “best alternative to no agreement”, is very relevant to business owners who may at some point want to sell their business. It’s a relatively simple concept with significant implications in the context of negotiations, as the strength of your negotiating position depends on what happens if the deal falls through (i.e., if there is no agreement). Put another way, your negotiating position is dependent on your "next best alternative", but I’m pretty sure the acronym NBA is already being used.

If you have 100 potential buyers lined up, you have a strong negotiating position. If the first buyer backs out of the deal, you have 99 alternatives. But if you have only one potential buyer lined up, you have a weak negotiating position. Simple, right?

BATNA is applicable to many areas of our life: buying or selling a car, negotiating the price of a house, or even choosing which Netflix show to watch. Since I specialize in valuations, let’s talk about BATNA and valuations, and more specifically, fair market value versus investment value.

Fair Market Value

The International Glossary of Business Valuation Terms defines fair market value as “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

Think about fair market value as the price that I would pay for, for example, a Mexican restaurant. I have never owned a Mexican restaurant, but if the restaurant generates favorable returns (and favorable burritos), I may want to buy it. Fair market value is the price that a hypothetical buyer such as myself would pay for the restaurant. 

Investment Value

The International Glossary of Business Valuation Terms defines investment value as “the value to a particular investor based on individual investment requirements and expectations.”

Think about investment value as the price that the owner of a chain of Mexican restaurants would pay for a restaurant to add to their portfolio. This strategic buyer knows that because they already own a chain of restaurants, when they acquire this restaurant, they can reduce overhead, implement several successful marketing strategies, and benefit from other synergies. Because of these cost savings, the restaurant chain owner may be willing to pay more for the restaurant than fair market value (what I would be willing to pay). As this example illustrates, investment value is often higher than fair market value.

As a business owner you may conclude “Well, if investment value is higher than fair market value, I would like to sell my business for investment value.” I agree. I absolutely agree. Unfortunately, obtaining investment value is not a guaranteed thing because of… you guessed it! BATNA. 

Business owners may identify a potential strategic buyer and hope to obtain investment value in the sale. However, in reality, unless the business owner has identified a ready pool of potential strategic buyers (notice the use of the plural here), they may not be in a negotiating position to command investment value. A potential strategic buyer may realize if they are the only potential strategic buyer of a company, they aren’t competing against anybody offering more than fair market value for the business. If there isn’t any agreement, the business owner’s best alternative is to sell at fair market value. Realizing this, a strategic buyer will likely make an offer for less than investment value. 

If you are looking to sell your business, you need to put yourself in a negotiating position to command a premium above fair market value. You need to identify as many potential buyers as possible. With multiple potential strategic buyers identified, your BATNA is investment value. You will have successfully shifted the focus from a competition for your business to a competition among strategic buyers. Now, the strategic buyers will be concerned with their own BATNA, rather than yours. And that’s a good thing.

We frequently encounter clients surprised by the difficulty of commanding investment value for the sale of their business. BATNA helps explain why business owners are unable to attain investment value. 

At BerryDunn, we perform business valuations under both the investment value standard and the fair market value standard.

If you have any questions about the value of your business, please contact a professional on our business valuation team

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BATNA: What you need to know