So you’ve acquired a new business…now what? It is really tempting to keep the company you’ve bought. Business is such an emotional thing, and as an entrepreneur, you have to develop a keen emotional maturity about it. It is easy to keep everything and to love them like your children. Trust me, those businesses don’t love you back.
When asked when the right time is to sell a good business, Warren Buffett says, “Never…” Well, man of the businesses I’ve been discussing are not good businesses, and the only thing worse than a bad business is ten bad businesses. These are small companies, which may be good in their tiny niche, but are fragile, delicate, and require constant attention. When you have one, you should build shareholder value, and you should sell. Create a capital event, learn something valuable, and move on to the next one.
Adding Shareholder Value and the Exit
I firmly believe that your best customer is the person who buys your business. It’s true. When you think about being customer-focused, you have to consider the things you can do that will either increase the value of the business (i.e., adding shareholder value) or decrease the time it will take to sell the business (your exit).
Now, as entrepreneurs, we love to solve problems, and those problems usually revolve around staff and customers. We want to create a team and a culture that is high performance as well as fun and exciting. We want to create products and services that disrupt and amaze. The happy side effect of having a great company culture, excellent teamwork, and exceptional products is value creation.
I want to try turning that belief upside down and focus on the value creation first: identifying the drivers of shareholder value and then doing those things. Quite often, they can be counter-intuitive—like selling less, for example—but more on that in a moment.
When you embark on a traditional business turnaround program—let’s call it a “value-creation” program (because the business might not need to be turned around, but all businesses could benefit from the creation of more value)—many of the things you’d probably think to do might not actually realize any more value in the short- to medium-term.
For example, with new sales and marketing campaigns, the cost of acquiring a new customer is sometimes far greater than the money you make from that customer in the first twelve months. So sometimes, counterintuitively, it’s better to stop doing expensive sales and marketing campaigns and focus on your current customers. Focus on profitability because that’s going to drive the overall value of the business.
Cash Is King!
So, how do you create shareholder value when you first take over a company? The first area to focus on would be cash because cash is king. Businesses don’t fail from a lack of profit—they fail from a lack of cash, so having a keen focus on cash and cash generation is a number one priority:
- Stop all expenditures that don’t help your cash flow and focus on collecting money in a timely fashion.
- Don’t provide credit terms to risky customers.
- Prioritize payments on a business-critical basis.
Too many businesses get stuck in the “squeaky wheel gets the grease” syndrome, whereby they’re paying the people who call and complain the most. You may find businesses that haven’t paid their staff, but they’ve paid less important suppliers. Get the right focus.
You can do this by making a list of all the people you owe money to and then breaking it down into the order you’re going to pay them. Effectively no one in the middle third of the list gets paid until all the creditors in the top third are paid, and no one in the bottom third gets paid until all those in the middle third are paid. This is an excellent business discipline. It sounds ridiculously simple, and implementing this system can help cash management enormously.
It’s also really worth doing a daily or weekly cash flow for the business. Keep it simple, a money in/money out spreadsheet with a running bank balance along the bottom. By laying things out in a simple form directly in front of you and seeing what impact it has on your bank balance, you can get plenty of ideas and clues as to how to make your cash flow work better. Perhaps you could settle half an invoice now and half in a couple of weeks? It might annoy the person at the suppliers a little bit, but at least, if you’ve made an offer to pay them in full and it’s in a relatively short space of time, they’re probably not going to take any legal action against you.
Pick the Low-Hanging Fruit
Every business has low-hanging fruit. Here are a few you can pick right off the bat.
Could you increase the prices? In most businesses that I’ve come across, the pricing policies seem to be related to the owner’s age. The older the owner is, the less often they’ve raised their prices, or they still haven’t properly factored in inflation. In most companies, any increase in pricing goes straight to the bottom line because it’s 100% additional profit. For an average company, a 5% increase in prices is a 40% increase in profit, and a 40% increase in profit is multiplied up when you sell the company. This has a massive impact on shareholder value. Many studies of customer attrition and price increases have shown that a single-digit percentage increase every three years has little effect on customer attrition. Any effect that it does have is mitigated by the additional profit that’s generated.
Are there things that can be outsourced? In many small businesses, most of the tasks and functions within the business are an odd size. It’s easy to have a finance department or a marketing department in a large company, whereas, in a small company, you might need 75% of a finance person, 50% of a bookkeeper, and 25% of a marketing person. In these situations, sometimes using an outsourced provider can be a more efficient way of handling some of the functions within the business.
Get rid of all the little expenses that accumulate over the years. For example: software licenses, the bubbling water cooler in the corner, the stamp machine (even though you don’t send out letters anymore), expensive photocopying contracts (even though you only use the machine as a scanner). These things mount up and accumulate within businesses but can be easily be done away with.
When you look at all these expenses, you have to mentally multiply them up for the impact they’re having on the business’s overall sale price. Keep a keen eye on the various things that are going on in the business and where the money is being spent.
There is a story that when Philip Green (a British billionaire businessman) first bought BHS (a once large retail chain in the UK), the first thing he did was save $1 million a week on coat hangers. These things can be done!
Once you’ve gone through the figures and done the cash flow and profit management tasks, the next thing is to get the business ready for sale. But…that’s for next week’s blog. In the meantime, in case you missed it in last week’s blog, my latest book, Go Do Deals, is set to release on December 9, 2020. If you’ve been getting value from my blogs, then the book is definitely for you.
And, when you pre-order the book, you will receive two free gifts. First, you’ll receive my eBook, Merger and Acquisition Strategies for SMEs, an exceptional starting point for those serious about entering the world of mergers and acquisitions. You’ll also receive my new 21-Day M&A Strategy Email Course. This eight-module course expands on concepts introduced in the M&A eBook, as well as introduces entirely new concepts and terms.
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