6 Steps to Prepare for Business Owner Disruption Risk

This past year, the owner of a family business died and the general manager quit. My role? To keep the company operating and prepare to sell it. The business had been very dependent on the owner and there was no plan for business owner disruption, which made my role very difficult. Would your business survive if you died or had a serious health issue which prevented you from working? Does your business have a solid transition plan? If not, you need to read this.

No Business Owner Disruption Plan? You’re Not the Only One

You are certainly not alone if you don’t have a transition plan which should include a business owner disruption plan. According to a recent study in the US by Wilmington Trust, only 58% of small business owners have one, and I believe if you ask those owners, most will say that it isn’t written down, which isn’t truly a plan.

So, let’s discuss business owner disruption planning. Because so many older business owners haven’t done business transition planning, and certainly not business owner disruption planning, I foresee that there will be many more situations where the owner’s family will have to bring in someone to keep the company operating and potentially get it ready to sell.

Planning Your Business Without You

Ideally, your business would continue to grow and thrive without you whether your absence from the business was planned or not. Doing this is one of the ways to increase the value of your business and make it more saleable.

(Read “Major Part of Increasing Value Is Decreasing Risk” in the December 2018 issue of The Wise Business Owner Gazette – go to www.profitablewisdom.com to subscribe and receive this issue immediately.)

A plan to address business owner disruption should do the following:

  • Highlight your guiding principles and philosophy that you follow in conducting business so that those running the business without you can follow these same principles
  • Name a successor to run the business and if this successor couldn’t fulfill this role, the plan should provide for interim management
  • Outline the outside support that you recommend your successor seek
  • List the external relationships that should be maintained in your absence
  • Provide the location of important documents
  • Create a step-by-step guide that outlines what to do when the owner is absent

After you have created the plan, communicate it to everyone who could potentially be affected and describe to each person their role when this disruption occurs. Review this plan frequently. Even better, give it a test drive by going on a 3- to 6-month sabbatical from the business.

Start Your Business Owner Disruption Plan Today

Business owner disruption planning is a key component of business transition or exit planning because sometimes events don’t always go according to plan. Many articles have been written in the last ten years on business transition, but it seems that most business owners are still not heeding this advice. I explain more about business transition planning and business owner disruption planning in my course, Finance for the Non-Financial Leader. Sign up for the course today.

If you have any questions about Finance for the Non-Financial Leader or would like help with your business transition plan or your business owner disruption plan, contact me at info@profitablewisdom.com or (226) 791-0374 and arrange a no-obligation conversation.

 

 

Planning for Profits

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In order to make your business profitable, you need to plan for profits

Each year, owners of small and medium-sized businesses receive annual reports from their CPA which are often long after the year ended, difficult for them to understand, don’t help them make business decisions, don’t help to plan for profit, or reflect what’s working or not working in their business. In this article, I’ll share with you five actions you can take that will help you plan for profits that you will be able to put your in hands.

Does this sound familiar to you?

Almost six months after your company’s year-end you met with your CPA to review last year’s financial statements. It was so long ago that you couldn’t remember the details and from what you did remember, the financial statements didn’t look at all like the reports your bookkeeper gave to you 30-days after the year-end.

When you looked at the statements from your CPA, they didn’t mean very much to you. You skipped over the Balance Sheet because you didn’t understand it and went right to the Income Statement where you saw that your sales were higher or lower than last year and you could see if you made any profit.

If there was a profit, you probably asked yourself, “where is that money?” “Shouldn’t I be able to put my hands on it?”

One business owner I know asked her CPA, “How do I increase my business profits?” He answered, “increase sales.” This flippant remark made her feel dumb because it seemed like such an obvious answer. However, the glib comment was unhelpful, caused resentment and wasn’t even correct because increasing sales doesn’t necessarily cause profits to increase.

The CPA firm isn’t at fault in most cases.

The time between November and the end of March, (tax time), is the busiest part of the year for your CPA. So busy in fact, that your CPA doesn’t have much time to really get to know your business or properly advise you. In addition, most businesses are slow to get their year-end information to their CPA, causing a large backlog to form close to filing deadlines.

Is there a solution that will help me plan for profits?

How can you get timely, accurate and understandable information that will help you make sound decisions, truly understand what is working and what is not working in your business, and be in better control of annual profits?

Here are five steps you can take to plan your profits, measure business performance through the year, and help you to reach your targets.

  1. Create a monthly profit forecast and incorporate it into your financial statements. Be sure to include all the activities and resources needed to achieve the projection. You may need to understand where your business is making profits and where it isn’t. If your initial forecast doesn’t end up with your desired profit, then you will need to adjust expenses, sales, staffing and resources in the forecast plan to hit your targets. (Read “Determining Where Your Profits Are Made” in the October 2018 issue of The Wise Business Owner Gazette – go to profitablewisdom.com to subscribe and receive immediately)
  2. Create financial statements that include the monthly forecast and be sure to include financial ratios to indicate financial health and progress in reaching the targets you set.
  3. Have your bookkeeper, or with the help of a Part-time CFO, make journal entries to your monthly statements to record sales and related expenses in the same month and accrue expenses like depreciation and prepaid expenses. Adopt a policy and develop processes whereby accurate statements are delivered to you no more than one week after each month-end.
  4. Request that your CPA deliver your financial statements within one month of your year-end. In steps one, two and three, you are now receiving timely and accurate monthly financial information, which you can pass on to your CPA at year end. There will be very little work for your CPA, and you will get it from them much sooner. You may even negotiate a lower rate.
  5. Set aside your monthly profits in a separate bank account so that you can indeed put your hands on it and give yourself a much-deserved reward. Because you have done steps one through four above, you will be more likely to achieve your targets and your planned profits.

I explain everything you need to know to about finance to help you reach your goals in my course, Finance for the Non-Financial Leader.  Sign up for the classes today.

If you have any questions about Finance for the Non-Financial Leader or would like help implementing these five steps in your business, contact us at info@profitablewisdom.com or (226) 791-0374 and arrange a no-obligation conversation.

 

 

 

One Tweak That Can (Instantly) Add Millions To The Value Of Your Business

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upward trending business valueIf you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

Obsessing Over Your Multiple

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open To Interpretation

Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

Testimonial from McCann Redi-Mix

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Kevin Ballantyne from Profitable Wisdom has been our Part-time CFO for the past four months. In that time, he provided us with accurate and timely comparative financial statements that included comments and ratios that help us understand the financial performance of the company better than before.

He was also able to close our year-end financials and provide supporting documents to our external accountants within a month of our year-end. Kevin completed a 2-year financial forecast including cash flow projections, helped to straighten out our HST filing, trained our accounting clerk on month-end procedures and analyzed the potential return on investment for an expensive piece of machinery in which he helped to save money on foreign exchange. Kevin also created a detailed fixed asset ledger, documented our office processes and is now reviewing ERP systems for future conversion.

Kevin has been and continues to be a great help for our company, working for us 6 days a month initially and now about one day a week.

Bill McCann
President and Shareholder of McCann Redi-Mix

Reference letter McCann

Improve Cash Flow by Decreasing your DSO

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Cash is critical to the survival to all businesses and increasing the speed with which cash flows in, improves your business’ overall health. Increasing the speed with which your customers pay you is one way to increase cash flow. The best measure for this is DSO (Days Sales Outstanding) which measures (more…)