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Your Business’ Enterprise Value – Where Compliance Meets Business

As a businessperson you enjoy a distinctive DNA. You create success through creativity, vision and the assumption of risk. You prefer to have control over your personal and professional life. Working for a large company or taking direction from someone else is just not in your genes. You are extremely passionate about your vision. More than likely you work harder than most, drafting detailed business plans, establishing a foundation for your firm, and building policies and procedures in order to scale the business. You‟re involved in hiring additional staff to manage the business functions where you may lack strength, while building long-term value and finally earning the right to enjoy the business that you created and its success. Most importantly, during this endeavor you will discover your “unique ability”, your core talent and the tasks which you enjoy and for which you have passion.

Business planning points
Entrepreneurs are some of the most driven people in the business community. They are highly focused on their vision and bringing it to market. The areas where most need assistance is building and maintaining their firm‟s infrastructure. They want a proficient operation but due to their “unique ability” they are challenged with execution skills but are talented in the management and even identification of those business functions. Each business has internal and external facets that need to be in the business owner‟s radar. RegMaven with the use of Core Value Software, has quantified these areas and categorized them into 18 functional groups –  unfortunately they do not reside on the golf course.

To assist the entrepreneur with managing all the functional areas of the business, RegMaven‟s Enterprise Business Valuation Assessment process provides a planning tool which quantifies the efficiency of each area and how it impacts the overall enterprise value of the company. A well-oiled machine operates most efficiently and creates the most value; the entrepreneur has to pay attention to those areas that could be perceived as blind spots. No matter what stage your business is in – early stages of start-up, profitable practice or mature, these functional areas will significantly impact the value being built. Note: Compliance is a key factor in so heavily a regulated industry when reviewing each of these functional areas. A non-compliant firm will significantly dilute your enterprise value and risk the success of your business and possibly its reputation. Having an established and well-documented plan will not only provide you and your team a road map and accountability tool, but will also strengthen your firm‟s value when the subject or time of succession planning nears. During this journey you will be focused on financial stability, reputation, growth and operational efficiency for the most part. All of this focus is difficult without knowing where the company stands at any given moment. Taking an active NOT passive role will provide you with the confidence needed to make sound decisions in all of the 18 identified drivers for your business. Your management team will also be led by a clear plan for optimal results. This focus will lead you to your plan to capitalize on your vision to create value and someday…

Key succession planning points
Succession planning is perhaps the last plan you will develop. As your business matures, so do you. You begin to step into more of a leadership role and you move from working in the business to working on the business. The question to ask is, “Do you run your business or does your business run you?” – early planning may help you resolve this dilemma.

Basic points that need to be considered in your succession plan include:
• What do you need out of your business?
• What is your timing?
• What are the market conditions?
• How can you maximize the value?
• What assumptive terms need to be considered?
• How can you ensure a smooth transition of clients and employees?

What is next for your firm?
Your succession plan options might include one or a couple of these options: 1) keep it in the family; 2) sell it to an internal candidate; 3) hire a replacement; 4) sell it to a competitor; or 5) sell a portion of the business. The key to successful transition is readiness and planning. The transition process is not easy and will develop over time. The approach above upon which you settle will need to be vetted and structured. Much of the structuring will actually take place at the commencement of the transaction, but you can build into the plan today the terms that are important to you.

Maximizing your firm’s value
The recommended sections of a well-thought-out succession plan include several options; preparing for the sale, maximizing your capital gain, timing the market, identifying the buyer, valuing your business, and structuring the right deal. Whether you are selling your business outright or transitioning it to an internal candidate, your goal is to maximize the value of your business. You need to know what is working and what is not to best capitalize on your efforts. Your sale terms are up to you and will have different properties, depending on the buyer. If your business is firing on all 18 drivers running at peak efficiency, you will command top dollar. If your firm is not, your valuation will be diluted, and in some cases, more than you believe to be fair and reasonable. This will typically be identified during the due diligence process. Having the ability to demonstrate the journey and planning your business endeavored over the years will support the due diligence process.

For instance, if you have a strong product offering but your internal operations and client service component does not reflect your sales success, your valuation will be greater than if your accounting department needs stronger leadership. To maximize your value, you need to monitor the business‟ market drivers, e.g. growth, recurring revenue, brand, customer service, financial stability, operations, senior management, HR, legal and innovation, to name a few. Staying on top of these drivers will highlight the areas of weakness and allow you to direct your efforts to strengthening them.

Preparing for the sale
When your firm is running at peak proficiency and your brand is well-known, the market and your competitors will find you. The phone will ring or a letter will arrive with a buyer on the other end. No need to rush the process; make sure the sale will create the return that you desire. A well-run business that can adapt to fluctuating market conditions has a strong chance to be worth even more into the future. 
Timing the market can be difficult; if the market has declined when you are ready to sell, you may have to put your retirement plans on hold until market conditions improve. If you cannot wait, you may have to reconsider your options or your desired deal structure.

Who is the right buyer?
Perhaps the most significant area where value can be added is finding the right buyer. They could be strategic, financial or a management team. A strategic buyer needs entry into your market and values your client base, believing they can increase distribution of their core products and services. A strategic buyer will likely pay you the highest price relative to the alternatives. A financial buyer could be an investment group or private equity firm looking to build return, but will certainly be looking over the numbers with a fine-tooth comb. A management team could be a family member, your internal team or a group that is leaving a larger firm and is looking to buy an established platform that they can leverage for growth. While they may be willing to pay more over time, they are likely to not have the cash desired at closing. If you still want to be active in the business, any of these alternatives would be happy to structure a deal that includes your continued participation. Just don‟t confuse your active work efforts with the value of the business – they are distinctly different.

Determining your firm’s value
Coming to grips with the actual value of your business can be emotionally draining. While the industry has some standard valuation methods that you can use as a guide, the actual deal will depend on your negotiating skills and the apparent operational efficiencies your company can demonstrate. It may make sense to consult with an investment banker or business broker with expertise in the advisor space to at least provide you with some ballpark estimates. 
While there are some industry „rules of thumb‟ that sound like some multiple on your annual fee base, most businesses are ultimately valued on a multiple of their cash flow  EBITDA). To capture the highest valuation, your business must be running well on each of the business drivers: strong management team, profitability, low turn-over employee base, established policies and procedures, established and respected brand, strong core operations in a growth market, to name a few. 

Planning for the exit
In structuring your deal, you should seek the advice of counsel through an attorney or consultant. 
Your business is likely your most valuable asset. You can control the deal structure, but you want to make sure that it meets your requirements. When you started your business you created a plan that has guided you through the life of your business. You have been monitoring and strengthening the enterprise value of your business. Succession planning is just as important. Don‟t leave this plan until it‟s too late; by planning early and setting your goals, your exit will be that much more enjoyable with few surprises. Put the plans in motion!  Contact RegMaven to learn more – 603-965-7791 or 

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