In this series of posts, we’re examining the elements (or value drivers) that build transferable value: the value of your company without you at the helm. Transferable value is the type buyers look and pay for . Today we consider the multi-faceted growth plan that your business may require if you are to one day sell or transfer it for the amount of cash you need and want for your post-business life.
If your business currently has sufficient value and cash flow to yield financial security when you sell or transfer it, your focus need not be on creating a growth strategy. For the vast majority of us, however, formulating and executing a growth plan is at the core of our Exit Plans.
In the context of Exit Planning, a growth plan is designed to achieve one goal: to provide the amount of cash you will need at your exit to attain both financial security and your other objectives. Whether you call it a “growth plan,” a “business plan” or a “budget,” the point is that if you want to leave your business on your terms—including departure date—you will need a road map that describes what needs to happen, by when, and who is going to be accountable for achieving each task.
Your timeframe to achieve the growth needed begins today and ends on your anticipated exit date.
I recently spoke with Tom Majcher of Majcher Group LLC, an investment banker and Exit Planner about the role of growth plans in an owner’s exit.. Tom related the following story.
“When I began working with ‘Yolanda,’ the owner of ‘Company ABC,’ to create her Exit Plan, we determined that she needed a company with $20 million in annual revenue to meet her exit goals. ABC had steadily improved revenue to $8 million, but profits were decreasing.”
Using $20 million in revenue as their target, Tom and Yolanda sat down to create a plan to grow revenue and profitability.
The elements of the growth plan for Company ABC included:
- A management restructure. Most growth plans for established companies include some level of restructuring at the management level. In the case of ABC, Yolanda was the only “manager” and she had reached the limit of her ability to grow business revenue and cash flow.
“Our first task,” recalls Majcher, “was to find, hire, and retain an entire management team, beginning with a well-experienced COO. Yolanda was hard-working and incredibly capable, but limited in the skills and financial resources necessary to grow the company. We created a plan to reward the new COO with significant ownership in the company provided it grew as we planned.”
- A formal, annual budget. Once the new COO was on board, Yolanda and Tom worked with him to create an annual budget that assigned responsibilities to the rest of the newly hired managers, set timelines, and projected revenue and cash flow over a seven-year time frame. In writing, the plan summarized what needed to be done, by whom and by what date using bullet points and attached pro formas.
- Additional financing. With its financial ducks in a row, Yolanda and her COO were prepared to obtain the additional financing necessary to fund the anticipated growth of her capital-intensive company.
As a result, Company ABC blossomed: its management team implemented state-of-the-art systems and achieved the goals Yolanda had set for it. Five years after meeting Tom, Yolanda sold a company that had reached its revenue and cash flow objectives for cash to a private equity fund.
Yolanda was integral to making growth of her company happen: she had built great customer and employee relationships as a foundation. But she also had the humility to know what she didn’t have (a plan!) and to bring in Tom, a knowledgeable advisor. Yolanda was also willing to change her role in the company for the sake of growth. Without that combination of Yolanda’s insight and Tom’s prompting and expertise, her company would have continued to drift along and it is unlikely that she would have exited as successfully as she did.
Combining next-level management (the mother of all value drivers) with a written growth plan is, in my experience, a powerful one-two punch. With your input, top management should create the plan for how your company will achieve the goals you set.
Evaluating Your Company’s Growth Strategy
If you have not yet created a written growth plan that describes how your company will go from where it is today to the value it must hold to a buyer on the day you sell it, take a hard look at whether you and your current management team have the ability to create and execute one.
Yolanda determined that neither she nor her quasi-management team had the experience or capability to create an effective plan. The changes she made to her role, which in turn fostered the hiring of an effective management team, led directly to the design and implementation of a plan that dramatically accelerated the growth of her company.
As I hope Tom’s case study illustrates, creating a growth plan is an area in which using a next-level, outside advisor along with your existing advisors (if they are forward-looking) can be essential to the success of your business exit.
This article was written by John Brown from Forbes and was legally licensed through the NewsCred publisher network.