Planning Is the First Step to a Higher Valuation
Updated: Oct 7, 2020
Business planning is one of the most profitable actions you can take to grow and accelerate the value of your business. Defining the target market, determining the barriers to entry, analyzing the competition are just a few of the areas considered. This Article summarizes the primary areas and benefits for consideration.
This is the second in a series of nine articles that follow a business owner, John. He is taking action to increase the value of his company before transitioning or selling it and moving into retirement. In the last article, he learned that Tom—who owns a similar business—had sold it for a much higher price than John was told his company was worth.
John decided to follow Tom’s lead. He hired an advisor to develop a comprehensive written strategy to capitalize on the growth and value enhancement opportunities already inside his company. Here’s what John started to learn about “value drivers” from his advisor.
Business Value Enhancement 101
Every company has value drivers. They affect either the earnings or the worth of the operation. While each business has its own unique characteristics, the main value drivers are similar between companies—even in different industries.
Owners need to understand what drives the transferable value of their companies. Being in business is not about survival: it’s about making a profit and creating sustainable value. Value isn’t always about the numbers. Environmental and qualitative value drivers have a dramatic effect on a company and its ability to grow. Knowing which elements can create value—and which can destroy it—helps owners and managers make better day-to-day decisions. It also allows them to build increasing value into the culture and DNA of a company.
The place to begin is a detailed discussion about the quality of the organization. This should include the owner, management team and advisor. At Birkdale, we use the results in our Deep Discovery and Enterprise Value Assessment. This initial conversation broadly examines the eight main value drivers:
John decided to take an in-depth look at each of these areas, starting with planning.
Planning: One of the Most Profitable Actions You Can Take
There are a number of parts to planning: 1) defining the target market, 2) determining the barriers of entry into a company’s market, 3) analyzing the competition, and 4) reviewing the plan for product and market development. The results of all of these are included in the business plan, which also features a discussion of the eight value drivers.
Having a business plan alone can have a major positive impact on value. A recent study by Cranfield University indicates companies with a business plan increase their growth potential by 30%! This happens because a plan forms the foundation upon which other improvement initiatives can build. The management team must be integrally involved in the process. Their knowledge of the business will drive the plan, and they will ultimately be responsible for implementing it.
Much debate has surrounded what to put into a business plan. There are two ends of the continuum: 1) a very concise, rigid plan where the future is predicted, or 2) watching the direction of a business and making changes as you go. The best plans are agile and tend to use both. This combination is easier with an existing business. You already have done your research and can predict the future with greater reliability. Then you can adapt the plan and include ways to tap the target market opportunity you have identified.
Plans without a direct correlation between revenues and costs indicate that management really doesn’t understand the financial ramifications of the business. Financial projections must reflect not only the wording in the business plan, but the specific assumptions that support the plan and the projections.
Successful ventures are extremely agile and let their strategy evolve. They will go in one direction and then, suddenly, discover there is a new market demand or a variation of the market that will produce the results they seek. Consequently, you don’t want to deplete all your resources on the first iteration of the plan—hold some back for the unexpected.
You also want to phase in your business plan as you analyze the opportunities and remove some of the risks to growth in the company. Most business plans contain five-year projections. It’s very hard to project the fifth year. However, this is an important exercise. By reducing risk and being agile, you can make year five estimates more reliable.
A Clear View of Customers
Well-defined targets—the customers or users of your products or services—determine the marketing strategy that allows you to reach and penetrate a market. These are distinguished by their locale, demographics, values, lifestyles, product/service preferences, and behavior, among other qualities. The business plan must contain a discussion about your target markets and how they affect value.
Knowing the Barriers to Entry
This has a very significant effect on value. Here’s the key: knowing what the company does that makes it very difficult for a competitor to enter the market and compete. This may include governmental regulations, economics, availability of capital, legal considerations or marketing. Every business goes through a period when its products or services become a commodity. When this happens—or before then—a company must think about what differentiates it from the rest of the field. To create real value, this difference must be unique and meaningful enough to create a barrier that makes others less competitive.
John realized how important the business planning process was to the success of his company—now and for any future transition. He and his management team could use it to establish the foundation and road map for profitable growth and sustainable value. This made him eager to look at the next value driver: leadership.
By Barry Goodman, CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners, LLC
Copyright: Cannot be reused without Author’s Permission.
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning and/or not recognizing what needs to be added, corrected or modified before then.
Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and at the conclusion of an engagement.
For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or contact us.
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