I come from an M&A background. It was fun, exciting and challenging. I have participated from due diligence through Post Acquisition Integration in over 75 M&A transactions. I understand the emotions that are vested in it. I read recently that M&A activity had peaked, that it was declining. The new focus for CEO’s was not on M&A but on “organic growth driven by market expansion, increasing revenues, operational improvement, and innovation.” That change in focus may not be new for many small to midsized Business owners, but it does reflect a significant change in strategy for those hoping to sell their businesses to fund their retirement. Even when M&A was going well, the Exit Planning Institute was reporting that 80% of businesses that entered the market did not sell. With M&A activity declining, it is obvious that even more businesses will not sell.
So now what?
We have multiple issues here. These are:
- Inevitably the current Business Owners will not be able to continue to operate their business. Hopefully, all will leave their business financially secure, but that is not guaranteed. In that most small to mid-size business owners have as much as 80% to 90% of their wealth tied up in their business this presents retirement security issues.
- If you are an owner of a small to mid-size business, the odds are that your business is what is sometimes called a “Life Style” business. In other words, the business is there for an income with which you support yourself and family. The more income you have, the better your lifestyle.
- You may not be able to sell your business and gain the wealth you have built there
- If you can’t sell your business, and odds are you will not, how will you live once you can no longer work, choose to no longer work and equally important, how will your business provide for your family?
So what is the solution?
While rarely is there a one-size fits-all solution there is one thing you can do now that not only opens other options but also improves your personal financial picture.
It all starts with a plan. The first step of which is what is the current value of your business. Commonly this is calculated by multiplying your EBITDA (Earnings before interest, tax, depreciation, and amortization) by a multiplier that those who buy and sell businesses develop based on a variety of factors. Multipliers come from factors such as the size of your company, your industry, and other economic factors ranging from competition to trends within your industry in general. You can find a general idea of some of these multipliers here.
Most businesses focus strictly on what drives the revenue component of EBITDA. You have to focus on what occurs after revenue and as a result, this will help you have some influence on the multiplier used to determine your business value. To do this, you should:
Manage what drives your Cost of Goods Sold (COGS) such as:
- Labor (Direct)
- Shipping and Handling
Manage your non-COGS business expenses
- Expenses such as insurance
- Non COGS labor (Indirect)
The Owner must also transition themselves out of a revenue-producing role as much as possible. The reason for this was answered earlier when the Owner exits the business so does their value. That value must and should be replaced before the Owner leaves.
It Isn’t All About Revenue
Focusing on those areas that drive business performance is a key part of your efforts. These are:
- Operations/Process Improvement –
- Process Mapping
- Cost Analysis
- Workforce Engagement
- Materials (inventory)
- Cost of production
- Marketing and Sales
- Customer Service/Retention
- Waste/Error Reduction and Elimination
This all takes time and effort. You may not have the skills necessary to do this and relying solely on your Personal Financial or Wealth Planner, or your Accountant is not the best solution. Whether you find the appropriate resource to do this through a University, Local Business Consultant skilled in whole business consulting or you decide to use a certified and appropriately experienced Business Coach the solution must begin with you doing something today. The longer you wait the more difficult the challenge.
We’ll discuss next steps in a future article.