Is Your Business Ready for the Next Step?

Tab 1

April 29, 2016


Business is booming. Just ask family-owned enterprises. According to “Big Four” auditor PricewaterhouseCoopers, 70 percent of family firms have experienced revenue growth in the past year, and 51 percent are “very confident” that they’ll continue growing revenue in the next five years. That’s a major shift from just six years ago, when less than half of family-owned firms grew sales. And as recently as 2012, only 39 percent were optimistic about future growth.

 

“We’re in a very, very strong environment,” says Dominic Trader, Co-Head of The Private Client Reserve’s Business Owner Advisory Services. “It’s not unusual these days for us to have a conversation with the owner of a privately held business who says business is as good as it’s ever been.”

 

Indeed, many companies have transitioned from licking wounds to building muscle.

 

“For the first couple of years after the downturn, if you were over-leveraged as a business, you were trying to figure out how to salvage yourself and keep the business afloat; if you weren’t, you were trying to figure out how to optimize your cost structure to take costs out of the business,” Trader says. “Today, that feels like a conversation of the distant past. Instead, businesses are now asking themselves: How do I take advantage of this robust business environment?”

 

Business owners historically have answered that question in one of three ways:

 

  • I can GROW my business by increasing my size
  • I can EXPAND my business by increasing my scope
  • I can SELL my business and get out while the getting is good

Although each of these scenarios might have different possible rewards and potential pitfalls, they have at least one thing in common. Each has significant financial implications that business owners should document in a meticulous business plan and share with financial backers assessing their prospects and plans. 

Tab 2

April 29, 2016


Growing Your Business

You can strengthen your business performance by opening new locations, increasing capacity or prospecting new customers.

 

 “If you want to grow, the first thing you should ask yourself is: Why do I want to grow?” says Kenan Aksoz, Co-Head of The Private Client Reserve’s Business Owner Advisory Services. “Is it because you have a needed product and a great, scalable business model? Or is it because you’re riding a short-term wave or trend? You have to ask those tough questions because there are a lot of costs associated with growth, and you shouldn’t spend the money if you won’t be able to recoup your investment.”

 

To assess what investments are required and whether you’ll be able to recoup them, ask yourself the following:

 

What does growth look like? Defining growth is step one in funding it. If you’re a retail business, for instance, growth might take the form of opening another store in another location. If you’re a service business, it might take the form of an expanded workforce. And if you’re a manufacturing business, it probably means increasing your output. “The investment required for a manufacturing company is going to be different than the investment required for a service business,” Aksoz points out.

 

How will you fund growth? The type of growth will dictate your potential funding sources. “In the case of a manufacturingcompany, you’re going to need money to buy new equipment and real estate; that’s financeable because banks will make a loan against hard assets,” Aksoz says. 

“But if you’re a service business that needs to hire more people, that’s different; a bank isn’t going to give you $10 million to hire 100 more people because there is no collateral against the money you’re seeking.”

 

Business Owners: Avoid This Mistake

 

If bank financing isn’t an option, you’ll need to use your own internal funding or raise external money through an equity offering, debt offering or other type of non-bank financing, according to Aksoz, who cautions that financing of all sorts may come with strings — high interest, for instance — that can potentially hinder growth instead of help it.

 

How quickly do you want to grow? The speed at which you want to grow also has financial implications. Growing slowly, for example, might require smaller investments over a longer period of time.

 

Growing quickly, however — to seize a market opportunity that might not last, for instance — will likely require a large investment in a short period of time. “If you want to grow, you can do it organically, or you can go out and acquire a company,” says Lou Gomez, Senior Vice President and Managing Director of The Private Client Reserve’s Business Owner Advisory Services. “If you’re going to acquire a company, financing becomes a very important issue because the added balance-sheet leverage and working-capital impacts typically have a powerful effect on how the buying company is perceived by its existing bank.”

Tab 3

April 29, 2016


If you plan to grow organically, you might not need financing. You will, however, need time, as it could take years to see a return on your investment. In the interim, your business will require more working capital than usual. “You need to make sure you have the financial wherewithal to be able to support your growth, which will probably have a negative return for some period of time,” Trader says.

 

Is it a good time to grow? Even if you can secure the capital to fund growth, that doesn’t necessarily mean it’s a good time to do so. “You might be tempted to take advantage of the availability of capital right now, but just because things are good now doesn’t mean they’ll be good forever,” Trader says. “That’s particularly true in cyclical industries, where we may be closer to a downturn in the cycle than you want to admit to yourself. Be careful not to make the wrong bet at the wrong time.”

 

How will growth impact my balance sheet? Even if growth is good for your bottom line, it might create additional liabilities and risks. “Am I going to go from having prime credit to having highly leveraged credit?

What risks are entailed with that, and how likely is it that I’m going to bring my debt load back down to a reasonable level?” Gomez asks. “You need to understand how growth will impact your balance sheet and whether your creditors are going to be comfortable with that.”

 

Expanding Your Business

 

If the market for your products and services is changing, now might be an opportune time to expand the scope of your business with new offerings.

 

“Consumer preferences are being disrupted at a very rapid pace. As a result, companies that have been successful pursuing a particular strategy oftentimes must repurpose their business in a way that realigns with consumer preferences,” says Gomez, who names Apple — which now sells not only computers but also phones, watches, music and movies — as a prime example. “Apple was a computer company, but it had to reimagine itself as something more in order to survive.”

Tab 4

April 29, 2016


Of course, reimagining your company often requires rearranging your finances. So before you wander too far from your core business, ask yourself these questions:

 

How will I pay for R&D? Expansion typically requires an upfront investment in the form of research and development. Depending on your business, that might include everything from product development to market research. “A bank typically isn’t going to finance R&D, but you can certainly seek investment through a debt or equity offering to make that happen if you need to,” Aksoz says. “There are pros and cons, but if it’s the only way to keep you competitive — if you have to come up with a hot new product to stay relevant — it might be worth it.”

 

Do I have the needed competencies? Delivering new products and services could require new knowledge and skills — and new employees who possess them — which might cost a premium if the needed skills are in high demand but short supply. “If you don’t have the internal expertise, you need to determine how you’re going to acquire it and how much it’s going to cost,” Gomez says.

Your need for expertise can influence not only the cost of expansion but also your options for funding it. “Equity is the most expensive form of capital there is,” Trader explains. “But if you’re embarking on a new business strategy, there might be a benefit in finding an equity investor who can help fund that new business and also bring some strategic expertise to the table.”

What other resources are required?
 In addition to human resources, new products and services might call for extra equipment, training, vendors, real estate and working capital. “Do you need a new type of office? A certain type of technology? Are there legal requirements that will require outside legal help? Will you need to double your marketing budget? You have to think about all of that,” Gomez says.

 

Selling Your Business

 

If the time is right for growing or expanding, it might also be a good time to think about selling.

 

“If there’s an opportunity right now to grow the business, and you’re not sure how to do that, it might be time to step aside,” suggests Gomez, who says changes in your life or health can be just as influential as changes in the market

Tab 5

April 29, 2016


“Another good reason for stepping aside is if you’re aging or reaching a point where you just can’t continue as the owner of the business. When that happens, you need to start thinking about transitioning your company.”

 

Along with practical considerations, there are financial ones. Asking yourself the following questions will help you uncover a few of the most important aspects of your decision:

 

Is now a good time to sell? You can’t time business valuations any more than you can time the stock market. Instead of planning when you should sell, look at the market and decide whether the current conditions are right for selling. “I recommend looking at your business as an asset; like any asset whose value goes up and down, you need to look for opportunities to monetize that asset at any given time,” Aksoz explains. “When things are going great, that might be the best time to sell because that’s when you’re going to get the most money out of the business.”

 

How much money do I need from a sale?How much money you can get today is one consideration — but how much money you will need for tomorrow is another. “When you’re selling, you have to think about whether that monetization event will provide you with enough capital to live comfortably throughout the remainder of your life and whether it will help you achieve your estate planning goals,” Trader advises.

 

Is my business sale-ready? Both internal and external factors can influence your company’s sale price. Although you can’t control the latter, you can maximize your valuation by controlling the former.

“Make sure you understand your financials — your internal P&L and balance sheets — and try to cut the fat, so someone looking at them will feel very confident about the way you’re managing your business,” Aksoz says. “Also look at your business model and your leadership. Can you make changes or add expertise that might make your business more attractive to buyers?”

 

Is a partial sale a good option? If changes are needed to make your business more salable, a partial sale might be the answer. “You could still keep 10, 20, 30 or 40 percent ownership, but bring on a partner or another company whose resources you could use to take your company to the next level,” Aksoz suggests.

 

“Five or 10 years down the line when they sell the company, whatever small portion you still own would be worth a lot more because your partners had the resources to make the company larger and more valuable.”

 

Planning Makes Perfect

 

Whatever’s next for your business — a larger footprint, a more diverse portfolio of products and services or new ownership — contingency planning with a financial advisor is critical before you pull the trigger.

 

“There are a lot of strategic decisions that need to be made, and they’re not easy. Every single business and every single business owner has different goals,” Aksoz says. “The takeaway, however, is that you need to have a well-thought-out plan and surround yourself with experts who can help provide clarity around your options.”

 

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Financial Planning