If you have ever been to a Texas Rodeo, chances are you’ve seen the cowboy breaking in the wild horse. At first the horse is jumping all over the place until eventually broken in. In time, the horse becomes familiar with the rider and learns to perform well. Business advisers are very similar to the cowboy breaking in the horse.

You see, many businesses tend to take off – and like the unbroken horse may run every which way unless it straightens itself out.

Here are a few examples of the important role a business adviser can play, especially for owners contemplating an exit within a few years.

A Business in Chaos

Scenario: A business takes off without a clear and concise plan hoping to catch up with itself but implodes because a long-term plan was never really considered or implemented.

Good business advisers are able to look at the big picture potential and then lay out the road map for the necessary steps or corrections the business needs to take to be successful. In many cases phenomenally successful.

Not Knowing the Current Valuation

Scenario: A business owner starts thinking (dreaming) about a selling price for the company before a current valuation is done.

Knowing the gap between what it is currently worth verses its desired worth is essential. Establishing this provides a goal post to help ensure the business’s maximum value at the point of succession is realized. In the meantime, a valuation may be beneficial for attracting suitable investors necessary for future growth.

Good business advisers will suggest that a business look at what it is currently worth first, and then build the strategy necessary – to increase its value to the maximum possible amount. Included in the analysis will be current and anticipated economic consumer trends, competition and other critical factors.

Neglecting the Necessities

Scenario: A business owner decides to sell, but offers are not forthcoming once buyers look more closely at the the company’s operations and books.

As so much as the rider wants the horse to grow up healthy, smart companies want the same. No owner who loves his or her horse is going to feed it junk. Instead the animal will be fed a steady diet of quality oats and other nutrients necessary for long-term health and sustainability.

Good business advisers wants the company to be healthy as well. The adviser will ensure that the following business necessities are in place performing well.

  • Strong marketing which is specifically designed to reach the intended customer and increase revenue
  • Great employees who embrace the mission and brand the business represents because they genuinely understand and appreciate the big picture and vison by which the company they work with stands.
  • Systems and policies that promote continuity.
  • Financial projections that give real clues and expected trends for better cash flow management and increased lending capabilities.
  • Other categories intended to keep the arteries of the business running smoothly may include customer surveys, mystery shopping and even going undercover as an employee.

Rodeos, Cowboys and Business Advisers

Just as the horse which is broken in can become the race horse leading the pack, a business should do the same and bring in an expert to correctly break them in or address deficiencies.


John Russell has served as Principal Adviser for companies in Austin, San Francisco and Central Europe since 1995. www.therussellconsultinggroup.com

 

Every business owner wants to maximize the value of their company and receive higher valuation from prospective buyers when strategically working on an exit plan. Whenever I see flat or declining sales from year-to-year and especially in the last three years, I know that business is going to be more difficult to sell.

Higher Valuation from Sustainable Revenue Growth

Creating sustainable growth is very important to achieving higher valuation. There is usually a direct correlation between increased company revenue and profitability as long as the company is maintaining profit margins and not selling cheap products or services just to be selling.  The following numbers are taken from a small manufacturing business in three consecutive years that illustrate what having a solid repeatable revenue engine did for the company profitability and thereby created a higher valuation:

  • YEAR
  • REVENUE
  • COGS
  • GROSS PROFIT
  • OP. EXP.
  • EBITDA
  • 2015
  • $1,800,513
  • 1,400,233
  • 400,280
  • 351,426
  • 48,854
  • 2016
  • $2,386,006
  • 1,713,471
  • 672,535
  • 356,079
  • 316,456
  • 2017
  • $3,007,631
  • 2,066,109
  • 941,522
  • 412,139
  • 529,383

The 3-year weighted average EBITDA was $378,319 = (3 x 529,383) + (2 x 316,456) + (1 x 48,854) / 6

Higher Valuation Metrics

Because of a solid, repeatable revenue engine that was increasing both revenue and profit year-by-year, our firm and the seller were able to convince the buyer to use the 2017 EBITDA in determining the price in the buyer’s  formula of paying 4.6 x EBITDA. This resulted in a sale of approximately $2.4 million.

Without a solid, repeatable revenue engine, the buyer probably would have used the three-year weighted average in determining price, and the maximum that the company would have sold for is approximately $1.7 million. One could also assume that the EBITDA would have been far less without the strong revenue growth, so a higher probability is that the same company would have sold for less than $1.7 million. The higher valuation was a direct result of the increased revenue and profit.

Every company is different with a lot of factors determining value, and different industries command different multiples of EBITDA as well as the size of the company’s revenue in determining multiples. Higher valuation is driven by higher revenue. A profitable $25 million dollar revenue company is going to command a higher multiple than a profitable $2.5 million dollar revenue company.


By John Fincher, CBI, BCB – http://www.corpinvest.com/fincher.htm