Value Control

The Iron Law of the Market

I think it is an apt reminder that there are things in the world we control, and things we do not. Wisdom is knowing the difference.

One of the reasons Succession Plus works with business owners is because of their unique ability and desire to control their world for the better.

If you are anything like the typical business owner, your business represents well over half your overall net worth. You would likely agree that its value is something worth actively controlling.

You can control it. As with anything, the trick is knowing how.

Control your profits

In my experience, it is best to think of Value Control as a multi-year endeavour, and profit is almost uniformly one of the most important measures in measuring and controlling business value.

Often, buyers will need 3 to 4 years of recent trading history to look at when formulating an opinion about a price to offer.

Control your reinvestment

There is an oft-used phrase in the owner community that “the business is my pension”. This is reflective of the optimistic mindset entrepreneurs typically have. What it translates to, is that instead of accumulating savings in a pension and other non-business assets, owners will often redirect those resources straight back into the business (reinvestment). Some reinvestment is appropriate, but there is such a thing as excess.

When combined with excessive owner dependence, or sudden absence around retirement age due to illness, for example, the result can be the business value evaporating altogether.

Where accountants and financial planners, in particular, can help is in proactively assisting the owner to gradually build non-business assets over time.

Control your Balance Sheet

It never ceases to amaze how advisers routinely neglect the Balance Sheet when talking about business value.

Your business may be worth £1m based on its profit, and so may the next business. But if yours is in a deep debt position and the other is sitting on a pile of cash, it’s unlikely you will receive the same net proceeds in your wallet.

Many other factors need attention on the Balance Sheet, that all too often only become apparent by the time a buyer is negotiating and they are deep into Due Diligence.

Due Diligence damage control

It often proves worthwhile to conduct a serious dry run at Due Diligence nice and early. That is, simulating the circumstances under which a large liquidity event would happen.

How would your business measure up if it were placed under the microscope by a party with a vested interest in knocking you down on price?

• Can you prove profit forecasting and back it up with results?
• Are your stock levels properly documented (not tax-driven)?
• Are your employment records squeaky clean?
• Does your business contain legacy issues like opaque share classes or preference shares?
• Can you evidence management meetings going back several years?

These are precisely the sorts of “skeletons in the closet” advisers talk about. Controlling them is the same thing as controlling the likelihood of a sale and the circumstances under which it happens.

Controlling the big picture

Far too many businesses don’t search out quality advice early. They may eventually sell, but not without a bout of ‘Wishes Syndrome’.

• “I wish I knew if I’d restructured early enough, I could have saved tax when I sold.”
• I wish I’d had a proper conversation about the value of my business years earlier.”
• “I wish I had started preparing earlier.”
• “I wish I knew I could get some chips off the table via an Employee Share Ownership Plan before I went to market.”

It’s a false economy to skimp on quality advice.

The best advisers can see and quantify the consequences of not just action, but also in-action, far in advance. They can help you avoid unintended consequences.

Accessing the right kind of help is something that will do wonders for your value control.