Do you know the value of your business?

What color of car would you rather buy? Based on your personal preference, the answer to this question will affect how much you are willing to pay for a vehicle that is identical in all aspects other than color. You might ask what does this have to do with the Market Value of your business? Simply put, traditional valuation techniques generally ignore one important factor in their calculation, the buyer.

A traditional valuation certainly has its uses, particularly for IRS and litigation cases, such as determining value for a divorce settlement. However, they usually all assume a willing buyer exists and that this buyer doesn’t have any personal preferences outside of the normal industry standards.

Let’s go back to the car example, assuming a dealer has two used cars that are the same make, model, year, etc., but one is blue and the other is silver. They will almost certainly be priced exactly the same. However, if your preference is for a blue car, you would no doubt buy the blue car. In fact, the dealer would have to discount the silver car for you to consider that as an option. Therefore, your preference has effectively determined a higher value for the blue car over the silver one, despite the market suggesting that they are both worth the same.

So how do you apply this logic to the value of your business? If you’re thinking about selling your business sometime in the future, you probably have no idea of who will buy it and what their preferences are, so what can you do now to position your company to maximize value from an exit, and where do you start?

In terms of business acquisitions, there are generally two main buyer groups, each with very different views of what is important to them. These groups consist of financial and strategic buyers. Financial buyers generally consist of individuals or groups of individuals looking to invest in a business, whereas a strategic buyer is normally a company looking to add to its existing operations.

As an example, assume that after some initial research, you determine that the most logical and likely buyer type is a strategic buyer. You determine, based on other acquisitions in your industry, that the primary focus of most buyers is the quality of the customer base being acquired, rather than say the management team, who will most likely be surplus to requirements after the deal. Therefore, if the last five years have been spent investing and training a good management team these efforts could be ignored by the buyer who will discount this aspect of the business. However, if those efforts had been channeled into increasing and maintaining quality customers over the same time frame, the buyer would most likely pay a higher price for the business.

The above example highlights the impact of focusing attention on the right aspects, which we call Value Drivers, of the business to make it the most attractive to likely buyers when it comes time to sell in the future. Value Drivers can include, among other things:

• Customer Base
• Management Team
• Products & Services
• Competitive Advantages
• Location
• Quality of Financial Reports
• Financial Performance

While you can control and manage most of the value drivers of your business, other aspects specific to a buyer will also determine the potential value that they can justify paying, including:

• Risk Tolerance
• Required Rate of Return on Investment
• Ratio of Equity and Debt used to purchase the business
• Cost of Debt

The impact of these factors is not possible to plan for but is buyer specific and will result in different values being placed on exactly the same business by different buyers. They should be considered when negotiating an actual sale with actual buyers.

In order to position your business to maximize value when the time is right, we recommend going through the following exercises:

1. Undertake a market analysis of who is buying similar businesses to determine the most likely buyer type for your business.
2. Review recent transactions to determine what values are being achieved.
3. If possible, contact ‘typical’ buyers anonymously to understand the value drivers they are primarily looking for in an acquisition target.
4. Understand the level and source of debt that could reasonably be secured to finance an acquisition of your business so that you can estimate the likely ratio of debt and equity.
5. Perform a strategic planning session for your business to ensure the long term goals of the Company are focused on growing the right value drivers based on your analysis above.
6. Create Key Performance Indicators in order to track specific value drivers on a monthly basis and include as part of your monthly financial package to ensure efforts are maintained over time.
7. Review the process on an annual basis to ensure any changes in buyer types and value drivers are known and addressed in a timely manner.

If you have questions about knowing the value of your business, please contact Austin Buckett.

Benchmarking – Can It Help Your Business?

Many business owners think benchmarking is for big or troubled companies. But no company, regardless of size and performance, can afford to ignore it. In today’s changing business environment and economy, it’s hard to keep up with your competitors, and benchmarking allows companies to compare their productivity and efficiency to other businesses.

Two Types of Benchmarking

The first step in a benchmarking program is to understand what benchmarking is. Most of us know that it is the process of comparing your own company to others to identify areas in which you can improve your performance. However, there are at least two principal types of benchmarking: overall benchmarking and process benchmarking. Overall benchmarking looks at business performance in general, such as total return on capital.

It’s important to do both types of benchmarking. Overall benchmarking may tell you that you need to improve, but without process benchmarking you may not know how or where to improve. Overall improvements cannot be made without improving key processes.

Choosing Models

The second step in the benchmarking process is to choose the company or companies you want to benchmark. Many companies assume that they should benchmark within their own industries. Often, this assumption is correct. If you are below average, it’s a good idea to learn how to meet your industry average, and to do that you need to benchmark other companies in your industry. But if you want to excel, to become superior to your peers, you should look outside your industry for ideas. Motorola, for example, benchmarked L.L. Bean when it wanted to improve its order shipping process.

Where can you find benchmarking data? Most experts agree that within the industry, you should contact key executives such as vendors, trade associations, competitors, former employees and customers for suggestions. You should also obtain analyst reports, proxy and financial statements and 10Ks from industry competitors. Outside the industry, it would be best to obtain annual reports from publicly traded companies and investigate private firms in publications such as Ward’s Business Directory or Dun & Bradstreet.

Setting Benchmarks

The third step in the process is to identify benchmarks. What do you want to compare? This is the most complex stage of the benchmarking process.

It’s critical that the benchmarks you choose reinforce the company’s strategy. If you want to offer the best price, you must set benchmarks that are different from a company that focuses on total customer satisfaction. For example, Nordstrom benchmarks would be very different from K-Mart’s benchmarks.

To choose proper benchmarks, keep in mind the stakeholder categories of any business: customers, employees, vendors and shareholders. Determine which of these relationships you are trying to improve upon with your primary goal, but keep in mind that they’re all related. For example, if you try to improve customer satisfaction, you should also ensure you maintain sufficient returns for your shareholders. A complex set of relationships needs to be balanced.

Comparing Data

After you have determined who and what you want to benchmark, you can begin the benchmarking process. Although the process involves the close scrutiny of another company’s methods, taking a tour of another company’s plant to learn how it works isn’t enough. You’ll also need to scrutinize the other company’s business goals, operations and finances.

Your accounting firm can help in these areas. Some companies prefer that their accounting firm focuses only on financial benchmarking, but this often provides inadequate information. Many companies work with their CPA firms to design a “Balanced Scorecard”. A Balanced Scorecard brings both financial and nonfinancial measures clearly into view. It measures traditional financial data like total return, inventory turnover and margin. It also measures nonfinancial data, like market share, relative quality and employee satisfaction.

Take Action

The final and critical step is to make changes based on the benchmarking process. All too often, companies go through the benchmarking exercise but don’t take the actions needed to improve or give up when improvement is not seen fast enough. Benchmarking, however, is not the only analysis companies should make; it’s simply one element of a comprehensive improvement program.

If you have questions about how your company could benefit from benchmarking, please contact Austin Buckett.

Need help with your business loan?

Recently the Colorado Springs Business Journal published an article entitled “Delinquent loans hurting local banks”, giving a good perspective of what businesses and banks are facing alike when it comes to financing in this economy.

If your business is facing any of these issues:

• You can’t renew your line of credit.
• Your loan has a balloon payment, but the bank won’t extend.
• You have an opportunity to expand your business, but you can’t get the financing.
• What are you to do to keep your business afloat?

BiggsKofford has developed solutions:

• We can help you develop, plan and present your financial story for lenders and capital sources.
• We have successfully placed clients with new lenders, when others have turned them down.
• We have identified alternative capital sources – when traditional lenders won’t do the deal.

For more information on how BiggsKofford can help, contact Chris Blees or Austin Buckett. You can also find more information on capital sources here.

Need Capital? | BiggsKofford’s Entrepreneurial Series

BiggsKofford’s Entrepreneurial Corner for March 18, 2010 covered the topic of raising capital and how to handle your bank calling your loan or line of credit.

Presented by:
Chris Blees, CPA, CM&AA, CEO of BiggsKofford
Austin Buckett, ACA, CM&AA, Manager at BiggsKofford

A copy of the presentation can be found here:
BiggsKofford, P.C. Entrepreneurial Series March 18, 2010

If you are interested in attending or sponsoring a future Entrepreneurial Corner, please contact Stephanie Johnson at 719-579-9090.