Category: Business Valuation

What is Business Growth and how does it work?

Posted on by ashleydtilson

What is business growth, and how does it work?

Growth in a business in and of itself may or may not be a good thing…

Generally, a business’s ability to grow is regarded as a good thing.

It’s usually indicative of:

  • having attracted and satisfied more and/or larger orders,
  • purchased and built inventory,
  • hired and trained staff,
  • and developed processes and systems to fulfill more orders.

Capacity has been developed to meet the demands of an increasingly demanding customer. Not to mention, the holy grail of achieving customer satisfaction has been demonstrably achieved.

However, a rapid growth rate can sometimes be a bad thing.

Growth requires funding with additional working capital. This could be bad if facility increases are not planned to keep up with the financing needs of the business. Customer satisfaction could take a dive if delivery time or service quality suffers.

Human resource motivation could be significantly impaired if systems and processes are weak or broken. This can cause substantial effort on the part of employees to coordinate fulfilment orders and completion of delivery.

So when professional investors or stakeholders see a growing company, they are initially impressed. However, their predisposition is to look under the covers and to ask questions to establish the quality of that growth. They do this to better understand the business valuation of a company. This valuation can vary greatly depending on the type of sales and the capacity for growth that the company has established.

Let’s first consider the nature of the sales… If the new sales orders are one-off in nature, an investor will give the business credit. This will increase its appraisal of value.

However, the growth will only be appraised at a stepped-up multiple if the new business is contractual.

Furthermore, it must be recurring into the future.

In other words not all growth is evaluated equally. Business Owners beware as this will be established during due diligence. Demonstrating the dollar value of growth is only one component if you are looking to maximize the value of your business.

Let’s consider how the company has been built. Is it seen by an Investor to have capacity suitable for the size of its business base? Are its competencies operating in a balanced way? Imbalances and lack of capacity cause unintended consequences.

For most companies, a stable platform of growth is achieved when it can demonstrate that it has:

  • Delegated responsibilities to a competent leadership team that is managing its affairs;
  • Margins that are set at levels equal to or better than the competition and can fund future growth through reinvestment;
  • Financial and operating systems that can support the information requirements of growth;
  • Human resources that can attract and fulfil the growth;
  • Sales processes and systems that can be replicated and controlled to deliver planned growth;
  • Operations with planned capacity that is sufficient to fulfil the promises made by sales in a timely manner without sacrificing quality;
  • Customer satisfaction that brings them back and is sufficient for them to recommend the product or service to friends or colleagues.
  • Contracts that provide legal formality over relationships and transactions.

This is crucial the bigger a company gets. Players can stretch what was intended in a handshake. Money in greater amounts can expose integrity; so better to get everything agreed to in writing to avoid misunderstanding. Good businesspeople have no problem with that.

Many companies fail to set a firm foundation for growth. As a result, they fail in numerous, unintended ways to achieve growth and breakthrough to the next level.

Instead of growing, these companies plateau.

Absence of any of the above competencies, or balance in these disciplines are definable reasons for their lack of success. There are exceptions, but this is true in the vast majority of cases.

Fundamentally, value can be demonstrated if a company is growing in a sustainable and predictable manner. Such growth should result in the company becoming a net generator of cash. Sustainability is illustrated by growing the contractual base of business with customers who order consecutively giving the business recurring income. Such recurring income should be demonstrated via strong processes through the sales funnel that creates predictability for plans and forecasts.

Rapidly growing companies often exhibit weaknesses in operations, and this area is a constant challenge for management. The trick here is to create business plans and forecasts that are achievable.

This enables the company to marshal adequate resources in a timely fashion to fulfill its commitments. All cogs in the business engine must then run smoothly together in a controlled fashion. However this is where the greatest dynamism occurs for most businesses.

In summary, businesses that achieve good quality growth have each of the cogs of the engine working in harmony together. They have set the conditions necessary to grow in a manner that will likely achieve customer satisfaction, repurchase and onward recommendation.

 

 

Rizolve Partners understands what needs to be done to achieve sustainable, high-quality growth.
To learn more, check out our process expertise tips sheets here.

How Do I Calculate A Growth Rate Of A Company?

Posted on by ashleydtilson

Learn how to calculate the growth rate of your company, and how to use this information to make informed decisions on its future.

How Do I Calculate A Growth Rate Of A Company?

As a business owner, it is important to have a very clear understanding of your company’s growth rate.

Calculating your growth rate can help you make more informed decisions on allocating resources and planning for the future.

In this blog post, we will explain the steps involved in calculating your company’s growth rate.

We’ll also explain the important considerations and decisions you can make for future growth once you know what your “growth rate” is.

 

Step 1: Determine Your Baseline

The first step in calculating your company’s growth rate is to determine your baseline.

This could be your company’s revenue, profit, or any other metric that you want to measure.

In the example we’re going to use, we will calculate the growth rate of a company’s revenue over the past year.

Step 2: Determine Your Current Period

Next, you need to determine the period of time that you want to measure.

In the example we’re using, we’ll measure the revenue growth over the past year.

Therefore, our current period is the last 12 months.

Step 3: Determine Your Previous Period

Once you have determined your current period, you need to determine your previous period.

In this example, our previous period would be the 12 months immediately preceding our current period.

Step 4: Calculate the Percentage Change

Now that we have our baseline, current period, and previous period, we can calculate the percentage change in revenue. To do this, we use the following formula:

Percentage Change = ((Current Period – Previous Period) / Previous Period) x 100

For example, let’s say the company’s revenue for the past year was $1,000,000, and the previous year’s revenue was $800,000. Using the formula above, we can calculate the percentage change in revenue as follows:

Percentage Change = (($1,000,000 – $800,000) / $800,000) x 100

Percentage Change = (0.25) x 100

Percentage Change = 25%

Therefore, the company’s revenue grew by 25% over the past year.

Step 5: Interpret the Results

Once you have calculated your company’s growth rate, interpret the results. With this calculation done already, it’s pretty straight forward to understand your growth rate… A positive growth rate indicates that your company is growing, while a negative growth rate indicates that your company is shrinking.

It’s important to understand what is driving your company’s growth (or lack thereof). This information can be used to make informed decisions about the future of your business.

It is also important to compare your company’s growth rate to industry benchmarks and competitors. This will help you understand how your company is performing compared to others in your industry. This comparison can help you identify areas where you may need to improve.

Takeaways and Conclusions

Comparing your growth rate to industry benchmarks will give you insight into how your company is performing compared to your competitors. Through this comparison, you can identify areas where your business may need to make changes or improvements. These changes can help you remain competitive in your industry.

Knowing how your company is performing in comparison to others can also help you spot emerging trends. This gives you a “heads-up” on initiatives that you can capitalize on before your competition does.

We like the following “checklist” of why it’s important to do this calculation and analysis:

1. It is essential to comprehend the reasons behind the development of your company.

2. It is also essential to comprehend the reasons behind the absence of growth of your company.

3. This understanding is necessary in order to make wise decisions about the future of your business.

It starts with simple numbers, but seeking to understand the factors contributing to your company’s growth or decline can help you. It can help you develop a more effective strategy for continuing to drive growth in the future.

Analyzing the data can provide insight into your financial performance. Recognizing the market trends that have an influence on your business can help you identify areas that need improvement. This alone can give you ideas on what to focus on for future growth!

 

Rizolve Partners understands the importance of company growth and, even more importantly, overall value acceleration. To learn more, check out our process expertise tips sheets here.

Will your business be more valuable this time next year?

Posted on by donna

For many, January is a time of rebirth and resolutions. It’s a time to reflect on last year’s achievements and to set goals for the year ahead.

Some people will set personal goals like losing weight or quitting a habit, and most company owners will set business goals that focus on hitting certain revenue or profit milestones. But if your goal is to own a more valuable business next year, you may want to make one or more of the following New Year’s resolutions.

Tips to build a more valuable business:

  • Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.
  • Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow. Resolve to document one system a month and by the end of the year you’ll own a more sellable company.
  • Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.
  • Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.
  • Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.
  • Find your lease (and any other key contracts). When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord. Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company.
  • Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.
  • Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.
  • Get your current Value Score. All goals start with a benchmark of where your Company value is today. By understanding it and what it is composed of, you can pinpoint how you’re doing now and which areas of your business make-up are dragging down it’s value.

A lot of company owners will set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

Rizolve Partners is a trusted strategic advisory firm dedicated to helping business owners achieve peak value. If you’d like to learn more, let’s have a conversation. Are you curious about how transferrable your company is and what you would need to adjust to transition it successfully when you’re ready? Then perhaps it’s time to for us to connect so we can discuss your company’s current value and how to make your business (and your life) more attractive! You can reach us in any number of ways here.

The Smartest Business Owners Never Leave Money on the Table

Posted on by RizAdmin

Have you heard about the “age wave” that could affect the value you realize for your business when you decide to monetize the wealth you’ve created? Two thirds of private business owners are baby boomers, and their average age is 65, representing over 700,000 Canadian businesses. According to BDC, 49% expect to exit their business within 5 years. That could be good news if you’re looking to buy a business, but the market is about to get much more challenging for owners looking to exit.

Unlocking the wealth in a business is no trivial affair given that 80%-90% of most owners’ financial assets are tied up in their business. Owners are banking on their ability to monetize this wealth to ensure their financial security and lifestyle once they exit.

However, historical transition rates suggest looming issues for the unprepared: statistics show that only 20%-30% of private business transitions are successful. Poor transaction success, high levels of owner dissatisfaction, and low levels of survival for family-owned transfers all threaten retirement plans.

Despite that backdrop, nearly 80% of owners have no written transition plan, and nearly half have done no planning at all. Not having a considered exit plan will close doors to value maximizing opportunities and available tax saving strategies.

Here are five thoughts business owners should keep in mind when trying to optimize value on what they have created.

Know your exit strategy

A successful exit strategy ensures a business owner is financially prepared, maximizes transferable business value and provides a plan to answer the question, “What next?”

There are several factors that come into play.

First, an owner must understand their business and their personal objectives.

Your personal objectives and needs are key inputs to correctly setting your personal expectations and financial plans. Understanding your wealth plan and what must be achieved out of the business sale to enjoy it, represents your bottom line for negotiations.

Understanding that there are different phases in the getting-to-cash process is important, too. The planning phase to maximize value can take up to three years, while preparing and executing the final transaction can take up to a further year. Even after the transaction is completed there may be contract terms that need to be fulfilled.

Having a written plan covering these stages, as well as identifying goals for pre-sale value acceleration, will help chart a course for the owner and give other stakeholders something they can buy-in to.

Focus on value

To optimize value in the sale of a business, an owner needs to look at his or her company through a value lens. This is likely to involve “reframing” their approach from a perspective of purely maximizing profit to one of maximizing value.

To do this an owner needs to understand the value of the business today and what drives that value. The quicker one gets comfortable with the fact that this is not just about sales and growth in profit, the greater the likelihood of having a successful sale.

The more time one allows for “value acceleration” work to be executed, the better the prospect for maximization and creating a return on investment.

What gets measured, gets done

It is important to understand that more than 80 percent of the value of a company lies in intangible assets and goodwill (often off-balance sheet). An advisor team can help an owner identify and measure the components of such assets.

In order to track progress in accelerating value pre-sale, it is important to institute a measurement framework where the unit of measure is enterprise value. Having the value scores for the components of these assets allows an owner to create a targeted plan of improvement around the key drivers of value.

There are various measurement tools, ranging in sophistication, that enable owners to identify winning strategies and transform them into genuine results (e.g. Value Builder and Value Opportunity Profile). Measuring the positive results from improvement actions will help deliver desired outcomes.

Remember the maxim: “What gets measured, gets done!”

Know the end game

There is a defined sales process that occurs when selling a business.

The sales agent (broker or investment banker) invites a group of prospective buyers from a wide variety of sources to engage in the sales process. The agent stages the interaction to funnel down to the buyers who have demonstrable interest and qualifies their ability to execute the transaction. The goal is to orchestrate competition and create “deal tension” to optimize bids with attractive terms.

Some key sales documents, which the market expects to be available when engaging, will be employed in the process. An owner will need to have significant input in their preparation and justification. Having these documents available, with supporting information, is critical for deal momentum and navigating due diligence.

A lawyer skilled in M&A will also draft and provide negotiation support for various legal documents critical in arriving at negotiated price and terms.

Appoint an aligned advisor team

There are a number of key roles that form the backbone of an aligned exit-planning team.

First, there’s a quarterback (the “Exit Planner”) who can help an owner build, orchestrate and implement a plan. Critically, this position will take the business through a process of value acceleration and ensure that the business is transferable and ready for sale.

A personal financial advisor helps compute the minimum number that an owner needs to achieve from the sale of a business in order to fulfill his or her lifestyle wants. This provides a bottom line.

A business tax and legal advisor helps structure business assets so that what is sold is separated from assets not being sold and will organize to minimize tax on net proceeds.

Finally, a transaction advisor will help the owner organize and orchestrate the sale process, which requires independence and skill.

For a business owner, early planning, informed navigation, and careful execution of the exit process can mean the difference between maximizing the value of the business or settling for something less than they have dreamed about for their retirement.