One of the toughest things you’ll confront in your planning is focusing on the goals that matter most. You might find that the things you want to do conflict with the things you must do. For instance, you may want to use your analytical skills to increase production—something you can do at any time—during the only time that candidates for a next-level management team are available for recruiting or development. The first project is more enjoyable, but the second is more important to your future. What can you do to overcome overwhelming decisions between doing what you want and doing what you must? Consider the situation of Sybil Marino and Ronda Rowe, co-owners of a manufacturing company.
Sybil and Ronda had co-owned M&R Manufacturing for 20 years. Though they rarely spoke outside the business, they had two things in common: They were still heavily involved in the business’ critical functions—from sales and delivery to operations and internal systems—and they wanted to sell the business within five years. Neither Sybil nor Ronda had any skill or interest in training their managers to take over for them. All of the company’s success flowed directly through their final decisions, and they preferred to keep it that way. They reasoned that they could create more value through their expertise than through searching for and training others, who would never be as good.
When they told their advisor Henri this, Henri stressed that they would need a management team to take over for them if they wanted to sell the business for the money they needed. Sybil asked, “Why should we have to do that? Shouldn’t the people that we sell to be responsible for that? What if we sell to a private equity group? Don’t they just bring their own managers?” Henri explained that most private equity groups pass on most of the business presented to them, even great ones. Henri insisted that it’s a mistake to reduce the pool of potential buyers to such an uncertain group. Sybil and Ronda said that finding and training people to do what they did was too much work, and maybe not even possible. They were so used to self-made success that the idea that managers would want to build a business for someone else was a foreign concept. They quickly became overwhelmed and were tempted to give up on planning altogether.
Doing things differently than what has brought you success can be hard. In this case, Sybil and Ronda were used to doing everything themselves, and they had been doing it for 20 years apiece. How could they possibly train anyone to do what took them 40 combined years to perfect themselves, especially when they wanted to sell the business within the next five years? The idea was overwhelming, and because they thought it was impossible to tackle at once, they began to rethink their planning efforts.
Rather than giving up when confronted with a difficult challenge, we suggest using a process to overcome the overwhelming parts of planning.
Set and Evaluate Your Goals
It’s difficult to determine what will overwhelm you if you aren’t sure what you’re trying to do. Determining your goals—including how much money you’d like from your exit, when you’d like to exit, and to whom you’d like to sell—gives you a baseline for how you can act on those goals. More specifically, you can speak with advisors and other business owners who have Exit Planning experience to set realistic goals, which can minimize the likelihood of tilting at windmills.
Do What Comes Easy First
When planning a large undertaking, it’s helpful to start with what you know. This is especially true when planning a business exit. Once you’ve set and evaluated your goals, you have the freedom to address more manageable aspects of your Exit Plan. So, if you feel more comfortable working on your estate plan or personal financial plan foremost, you can start there. Then, after finishing the portions of your Exit Plan you’re most comfortable with, you can use the confidence, motivation, and momentum you’ve built up to approach bigger, more challenging tasks.
Ask for Help
This might be the most challenging aspect of planning, but it’s critical. There will be times and situations in which your expertise will not help you make a valid decision. There are aspects of Exit Planning that can be incredibly complex and may require several advisors. You can always ask your most trusted advisors for help with these challenges, and we recommend that you do. But when the most overwhelming parts of planning arise—such as finding a next-level management team, creating a Deal Team, or implementing incentive plans for key employees—you may need to enlist outside help. Don’t be afraid or ashamed to ask: Asking can save you a lot of future stress. High-quality advisors will work collaboratively, not competitively.
Planning a business exit can be overwhelming. If you’d like to discuss how to approach the hardest parts of planning your exit, please contact us today.
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Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.
Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer. What did Breedlove do right for a successful exit? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.
To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. At The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.
- Sell Less Stuff to More People
When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.
Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.
Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.
- Strive for 50%+ Net Promoter Score
One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.
The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.
Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.
When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.
This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.
- Create Recurring Revenue Streams
The third thing that made Breedlove’s company attractive was recurring revenue.
Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.
By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.
- Reduce Reliance on Customers, Employees, and Suppliers
Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.
Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.
- Find an Acquirer You Can Help Grow
By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.
In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.
At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.
In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding and successful business exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.Read More