Editor’s Note - Ken Sanginario is the founder of Corporate Value Metrics, and developer of the Value Opportunity Profile, a nationally renowned process for maximizing business value. He spoke recently to the AIM CEO Connection.
Is the company you have worked so hard to build worth nothing?
There are currently 350,000 companies in the U.S. with annual revenue between $5 million and $100 million. Seventy percent of them, or about 250,000, are owned by baby-boomers who are expected to try to transfer ownership by the year 2030.
Given the existing demographic trends, there will be many more sellers than buyers during the next 15 years. At a minimum, therefore, valuations will suffer. More likely, only the best companies will sell at any price. The rest may simply cease to exist, bringing little or no value to their owners.
In fact, historical statistics predict that about 220,000 of the 250,000 companies will not be able to transact and, of the 30,000 that “succeed,” more than half will only be able to transact by granting some type of seller concession … a lower price, an earnout, seller financing, or the like. The outlook for the unprepared business owner is not attractive.
So, how can you make sure that your enterprise is among the long-term successful companies that can transact at maximum value? Or, even better, how can you prepare your company to be an acquirer in the “buyer’s market” that will soon arrive? The answer is to begin preparing your company years in advance through the process of Business Road-Mapping.
A company’s value is determined by a combination of the future cash flows it is predicted to generate, and the relative riskiness/sustainability of such cash flows. The more reliable and less risky the cash-flow stream, the more valuable the business. Public companies, for example, are typically valued at several times the level of a “comparable” private company, in large part because they are better developed across the entire enterprise and, therefore, less risky than their private-company counterparts.
The good news is that business risk is largely a controllable factor. In fact, most private companies have an opportunity to double their business value over a three to five-year period, by following a disciplined, methodical approach to improving overall enterprise quality and reducing risk.
A Road-Mapping process begins with an enterprise-wide assessment of the strengths and weaknesses/risks of a company, followed by a mapping of prioritized initiatives that should be implemented over a three- to five-year period. By reducing business risk to a level closer to that of a public company, a private company can maximize its ability to generate long-term, sustainable, growth in cash flows, and maximize value.
Here are some specific suggestions:
- Develop a comprehensive written strategic plan, with full participation from your management team, and use it to create focus and discipline within the organization;
- Embark to understand the relative balance (or imbalance) among the eight primary categories within your organization of: planning; leadership; sales; marketing; people; operations; finance; and legal, and strengthen the weakest areas first. A chain is only as strong as its weakest link, so the pressures of growth will constrain the company at its weakest points;
- Create a culture of alignment, collaboration, and shared success among the entire employee base and reinforce it through your recruiting, training, evaluation, and incentive programs.
Contact Brian Gilmore at 617.262.1180 for more information about the AIM CEO Connection.