The most successful business owners go through an annual strategic planning process and then create an annual budget or profit plan to set and drive sales, profitability, operational and other business goals. There are a number of ways to plan; the important thing is to set goals and then have detailed financial and operational plans and timelines to achieve them.
While many business owners set and follow a budget, very few think about the higher goal; the value of their company. Whether they are planning on staying with their business another 10-20 years, or transitioning out in the next 1-5, having a Value Plan Strategy is key to reaching higher financial goals.
I recommend that business owners follow this five step plan:
- Understand the current value of your company:
- Use a simple adjusted EBITDA and an earnings multiple suited to your company for a ballpark estimate. Often this is close enough, depending on your company and industry.
- A business appraiser can provide you with an estimate of value for a reasonable fee.
- Get a detailed appraisal if you want the most accurate value; these are fairly expensive.
- Understand what the primary Value Drivers of your business are in addition to net income. Many of these will affect the multiple of earnings used to value your company.
- Project a new estimated value five years out (or less if exiting prior to this):
- Using your strategic plans and vision as to where you can take the business, put together a financial projection with reasonable but stretch sales, by year. Build up the full income statement forecast, building in improvements to cost of goods sold and expenses that you believe are achievable and that you can develop actionable plans for.
- Identify improvements to other business value drivers and develop plans to achieve the improvements. These could include such things as:
- Reducing overall risk in the business.
- Improving the management team so the business can run well without the owner.
- Improving, then documenting policies and procedures.
- Reducing sales concentration. No customer should exceed 10-15% of sales.
- Having robust software systems and processes for managing operations and finance.
- Estimate what the value of the business could be at the end of the forecast based on the new sales and profitability, and the other value drivers using the methods above. While it will certainly be an estimate, it will give you a reasonable idea as to what you could achieve.
- Determine if the new value achieves your goal; will it provide you with what you need to retire, or the value you believe you deserve for all of your hard work? If not, go back to the drawing board and revisit your strategic planning to see if you can identify additional ways to improve the business.
- Put in the hard work to develop the detailed plans to achieve your new goal. Have your board or an outsider review the plan with you for a gut check on reasonableness.
- Put in the hard work to achieve your plans. Ensure you have the right team and assign key dates to complete your goals.
- Follow-up annually or more often to assess your progress in reaching your Value Goal.
This process is not simple but it will help you outline a path and create a plan to increase the value of your company. You will understand where you are now, and where you can be in future years. A lot of things can happen to change the factors that drive the value of your business but if you follow this process you will be in charge of your destiny by proactively managing the factors that you can control.
If you want to learn more, please contact me or one of my B2B CFO® partners; we excel at strategic planning, helping you to focus and helping drive profitability and company value. We can help you achieve your goals.