Conducting a year-end business review is good business practice. But if that review is not conducted and examined through the lens of your end-game, you're leaving substantial positive future impact on the table.
That's why I recommend my clients use the review for more than understanding the current health of their business. I advise they use it to identify opportunities to increase their business' value for a future transaction.
This is a “yes, and” approach, not an “either/or” approach. The goal is to focus on setting and achieving annual business goals while also recognizing that a healthy business must both generate cash flow today and build transferable value for the future.
Here are three areas to examine as you move into Q4:
Ask whether the business is financially healthy and ascertain if its performance is sustainable and repeatable.
To do this accurately, you'll need to look at revenue growth and profitability, EBITDA margins, cash flow and working capital. Then analyze your revenue mix to understand recurring versus one-time revenue, as well as customer concentration.
It’s important to recognize that revenue growth alone does not necessarily create value. The quality, consistency and profitability of that revenue are what make a business financially strong and attractive to a future buyer.
A future buyer will want to understand more than how much money the business makes. They will look at how predictable, sustainable and transferable those earnings are.
Next, evaluate how effectively your business operates and how dependent it is on the owner or other key individuals. Consider customer retention and concentration and the strength of the sales pipeline. Additionally, determine the maturity of documented processes and systems, technology and operating infrastructure. And, finally, analyze employee retention and leadership depth, key-person dependencies, and the extent to which the owner remains personally responsible for sales, customer relationships and critical decisions.
A business is more valuable when it has the infrastructure and capacity to operate and succeed in the absence of the owner. Building a strong team, documented processes and durable customer relationships reduces owner dependence and results in a business that can continue to perform through a transition.
The more successfully the business can operate without the owner at the center of everything, the more transferable and potentially more valuable the business becomes.
Assess where the company is headed and what will create value over time. Study the company’s competitive position, market growth and customer demand. Because future value is built before you decide to sell, it’s important to elevate opportunities for growth, new products or markets as well as risks that could diminish value.
The most valuable businesses are those intentionally developed over time by pursuing and ensuring durable competitive advantages, attractive growth opportunities and scalable capabilities – and not businesses prepared for sale at the last minute. Identify the few capabilities, opportunities or investments that could materially increase the value of the business over the next three to five years and pursue those value drivers.
