Plan Early to gain control over how you exit your business [Transcript]

 

[Exit Stage Left logo]
[Plan Your Future Today]

 

[Patrick Emmet, MBA Managing Director]
[Business Valuation, Inc. and Capital Heritage Group, Inc.]

 

Patrick Emmet:

Start with the end in mind.

 

What are the five areas in the beginning to focus on with the end in mind? Well, really there’s five areas, financial, operational, sales organization, and strategy. Let’s go into the financial side. First,

 

they want to see that there’s an experienced financial leader on board. That there’s a clear dashboard, that there are KPIs as they’re called key performance indicators tied to the performance of the company that are reviewed on a monthly basis.

 

Third, they want to see that there are budgets, monthly budgets, annual budgets, and that there’s a process that’s been gone through to clearly look at what next year or this year’s budgets are. They want to know that there are good relationships with whatever financing source that you have, whether it be a bank, a venture capital, private equity firm, but there are good relationships within those. Also that there are clear financial controls, starting off it’s the easiest thing to put in place, whether it’s a double signature for checks, whether it’s somebody that cuts the check, but somebody else signs the check, whether it’s somebody invoices and somebody pays. Again, all of those are financial controls that are very, very important to the transparency of an operation. Also documented processes and procedures. What if somebody that works in your department leaves the next day, are those processes documented that they were responsible for. Monthly reporting is another very important thing that you want to set up right off the bat and that ties in with your budgets. Monthly reporting is important so everybody knows exactly how everybody is doing.

 

Strong financial performance is key, obviously for selling the company and as you go forward, you always want to be showing that you are doing well from a financial standpoint. That’s not only from a revenue standpoint, but from a gross margin and from a net income standpoint. Are you also handling each of the transactions properly? Are you coding them properly? Again, all of that ties into good solid financial leadership. Then again, that ties into the very last point of transparency. You want everything to be transparent and all of the things that I’ve mentioned tie into transparency.

 

The next important part is operations. Again, it’s having an executable plan. Something that everybody can get their hands around and execute as one group. A solid management team do each of the players that are a part of that executive team or on that team have the experience necessary to do well in that company and to have the company do well. The operational controls, which go back to the financial controls. Do you have items that measure the performance? So, you know on a monthly and a daily basis, how well you are doing. Do you have a monthly plan tied to your annual plan? So on a monthly basis, when you have your monthly reporting from the financial side, you also have your monthly reporting from an operational side, and that should tie to your annual plan that you have done at the end of the previous year for this year is performance.

 

Again in operations, as in financial, you want to make sure all processes and procedures are documented. This is just good business practice. Good operational execution, again, people go by the saying of DIRFT do it right the first time. As John Wooden said, if you’re not going to do it right the first time, when are you going to find time to do it right the second time. A diverse vendor base ties into when you go to sell, you don’t want to be dependent on either any one customer or any one vendor. That is a weakness when you’re trying to sell a company and devalues that company. So if you are a McDonald’s, you don’t want one potato farmer that you get all your potatoes from, you’re going to want to diversify that and have 15 different vendors in case something happens to that one or one region of the company has bad weather.

 

Last but not least up to date technology. You want to make sure that you’re operating in today’s technology and not in yesterday’s technology so much today is done via the internet via EDI transactions that you have to have the latest technology, besides it just makes doing business a lot easier. For sales you want to make sure you have a sellable product or service, obviously, but you also want to have a solid sales team behind that product that’s capable of selling. Do they have the experience? Do they have the years of experience and the relationship building capability to sell that product. Also monthly targets tied to annual targets, again, with operations and with financial, you want to make sure that you have a plan that you are operating against.

 

From a sales side, just like you had on the operation side, you want to have a diverse customer base. One of the big things that hurts a company when they are trying to be sold is to have a small base or a customer that is worth too much to the company. If any customer is worth 50% of the revenue base or more, you’ve got to diversify that customer base. That goes along with the same thing of a diverse geographic coverage, you want to make sure that you’re not just locked into one area, but that you’re selling across multiple areas that might be in your town, that might be in your state or nationally, but you don’t want to be tied into one area of a city, one area of the state or one area of the country.

 

You want to have solid growth in units, revenue, and margin. All of which are important. Increased revenue is terrific, but if you’re not making money doing so, it has no value to the company and will certainly hurt the company when it goes to be sold, gets to be sold. Also an incentive program tied to profitable performance. You want to make sure right at the beginning that you set up a good incentive program that incents the right behavior and that incent profitability, not just revenue growth at different stages of a company, you may want to, insent different things, but you’re always going to be wanting to promote profitability. Again, as in everything else, you want to have transparency of everything that you’re doing. So anybody can take a look at it and you ha you’ll be able to answer any questions.

 

As far as the organization’s concerned, you want to have a good solid organization, a good solid management team in place. One that has the experience, that has the background in what you’re doing, and ones that can lead. The appropriate organizational structure and entity also, whether you want to set yourself up as a subchapter S as a partnership, as a priorship, all of that makes a big difference when you go to sell and very important on the front side to make sure you do properly.

 

You also want to have a board of directors or a board of advisors. You don’t want just, yes people around you. You want to be able to have an objective board that either once a month or once a quarter, you go to share the performance of the company and gain feedback back from them. Again, you also want to have incentive programs for the employees, not just for the sales team, but also for the rest of the company, whether that be a profit sharing program, this will help you in your recruiting new employees to your company and that ties right into the next one of recruiting discipline, not just to hire your family, not to just hire friends and not to just hire people when you need them, but you should be on a regular basis looking at such areas is LinkedIn or any other areas for recruiting all the positions that are involved in your company.

 

Last but not least is strategy. You want to have an executable plan starting from the beginning. That will start with your initial business plan. That will start with your mission statement and your vision statement, and your strategies. You want an executable plan that everybody has signed off on. You want a strong executive team, again, that can lead the company and have the necessary experience in their areas that they’re managing. You want to have budgets and annual goals tied to that strategy, so everything flows up. You want that board of directors and advisors, and you want the transparency. Everything should start from the bottom and be able to add to the next level, to the next level, to the next level. So if you’ve got your sales team, their goals need to be tied to their manager’s team, which needs to be tied to their divisions team, which ties to the overall company’s performance.

 

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