Building Business Value - An Overview
- Mar 16, 2022
Business owners planning to transition out of their business someday often ask about a recommended first step. Regardless of whether you want to pass the business down to the next generation of family members or sell to an inside or outside buyer, we recommend the same activity: Develop your own company prospectus.
Traditionally considered the tool of the start-up or a sales tool for business brokers, the prospectus remains a tried and true method for getting business owners to pause and carefully consider the value of their business. Even a business with several years of proven performance and an owner who is thinking about transition will benefit by taking time to think carefully about:
- What do I want from the business at this stage of my life?
- What value does the business hold for me?
- What value could it hold for potential investors – whether they be external or family members?
The bottom line remains: “Why should anyone part with his or her cold, hard cash for this business?” Even if your succession plan does not include a cash transaction, anyone who takes over the business will be taking a financial and personal risk. Is it worth the risk?
What are key themes the Prospectus will consider?
For what may be the first time in a very long time (or ever), taking time to really consider what your company is worth to you and to others will set the business up for its journey toward transition. The Prospectus gives voice to the potential for on-going success. To describe that potential you can begin by thinking about these key themes and asking yourself a few key questions.
- What makes my business special—how are we different from our competitors?
- As a buyer: “why should I invest in your business—part with my cash? What kind of return on my investment am I likely to see in three years, five years, or more?”
- How easy is it to run your business? As a buyer, do I need you to run it or can someone like me make it hum?
- What is so great about the community where this business is located? Why should I keep it there? What is so great about this building or the street where we do business?
- What am I most proud of and why do I love this business?
- And finally, why am I choosing to leave?
What drives business value and what will be of interest to others?
Value drivers are those elements in a business that enhance, improve and support the long-term strength of a business. Strong value means future investors will have less risk in a business transition. Describing the current state of each of these value drivers will result in a clear snapshot of overall business health and potential — Exactly what a prospectus is meant to accomplish.
As you start thinking about your transition, the Prospectus gives you the opportunity to step back and consider that high level, 60,000 ft. view of value. Writing your Prospectus is a great way to discover where your business value lies and where it can be improved. In truth, you may not even have all the answers right now. That’s okay. Begin with what you know about these kinds of areas that contribute to the value of a business.
- Owner’s Vantage Point
Nobody knows this business better than you. And, you are the only one who will ultimately define what they want and need in order to transition successfully. Take some time to consider the business from that vantage point.
- What does this business give you as the owner? Not just the dollars, but what are you most proud of? What feeds your sense of accomplishment? What more do you want for the future of the business – even if you’re no longer there?
- What do you need from the business? How will it support plans for your next stage of life?
- Company Culture
Transition isn’t change just for you. It impacts the entire company and its employees. How well prepared are they to move through?
- What are the stated mission, vision and values of the business and how can you demonstrate that they are real and tangible in the company culture.
- What does your business do to make sure culture remains positive?
- Financial Health
How the finances of the business have progressed is the evidence of all the work you’ve done. Writing your prospectus is a great time to really capture and understand financial health. This is also a great time to draw on resources of financial advisors so they can help you understand how you measure up.
- What about profits, gross margin, and financial performance year-over-year?
- If you’ve had a big spike or slump in recent years, do you know why? How will it impact a future business owner?
- What is your banking relationship like?
The depth of the skills a company draws from is a key indicator of overall strength. How well your business can do without you is a key indicator of transition readiness.
- Who, besides you, holds a leadership position in the business? What are their skills and abilities? What are their plans for skill development and for remaining with the business?
- If you are still a “one man band,” what are you doing to bring on talent and how will you train them to take over? How long will that take?
- Who is your workforce? Where do employees come from and how long do they stay? How do they add to the company’s value? Do you have several key employees that will leave or retire soon?
You’ve managed to gather a share of a particular market in order to keep your business alive. What does that market hold for the future of the business?
- What market do you serve? How strong/mature is it?
- How prepared is the business to meet changing market demands?
- Customers and Competitors
The products and services your business provides are bound by your performance against both ends of the spectrum – customer on one end and competitors on the other. The awareness of customer needs and competitor challenges helps define the business value. Carefully consider both.
- Who are your customers? What are your customer concentrations? What are you doing about those levels?
- What changing customer demands are you hearing? Is the business currently poised to meet them?
- Who are your competitors? Where are they stronger/weaker than you? What are you doing to remain competitive?
- Business System
The systems that hold business operations together make it stronger, repeatable and reliable.
- Do you have systems in place that make the business easier to run? What about personnel, finance, and accounting procedures?
- What systems are in place that support the production and delivery of your products and services?
With Prospectus in hand, now what?
It will come as no surprise that there will be some areas where the business performs better than in others. Balancing the variety of elements that influence business value is the on-going challenge of ownership. Yet, your work on the Prospectus will help you to identify where the business has momentum and where it might need some shoring up. In some cases it will demonstrate where you need to focus intense effort if you hope to successfully make your transition dreams come true.
Creating your Prospectus and understanding more about the value of your business means you are prepared to act as if your business is for sale – even if it’s not right now. The Prospectus helps uncover next steps which might include contacting key legal and accounting advisors to understand legal and financial implications and requirements for a health sale/transition. Use the Prospectus to help create a strategic plan or identify those “nose to the grindstone” tasks that have been left incomplete.
Where can you get more information?
If you would like more in-depth information or would like help in any other aspect of running a family-owned or closely held business, please contact us.
If you have any questions, we'd like to hear from you.
Explore More Insights
Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.