October 17, 05
Analyze your business to reach your goals
Every entrepreneur large or small strives to build value in his or her business. In order for that to happen, it pays to periodically look at your business critically to make sure it is on track for that eventual exit and sale. Analyzing your business, or having it done by an outside professional, allows you to make corrections toward that very end. After several corrections, your business will be ready for an advantageous exit at top value when the right opportunity comes along. In the meantime, the periodic adjustments will have made the business ready for sale and/or supportive of your goals. This article will outline what basic analysis must periodically take place, and provide pointers as to what needs to be done before a business becomes sellable.
There are many different ways to looks at your business critically, the most basic one being to review a recent balance sheet. After making a few adjustments, you will, of course, obtain a mere snapshot at one point of time. Without any other way of looking at the business, however, you will not be obtaining any real perspective on what's happening.
Relative to itself over time. Trends analysis places balance sheets, income statements and financial ratios one next to the other over time in a spreadsheet. Now a picture is starting to emerge on how better or worse we are doing. This comparison quickly "tells a story" in terms of both favorable and unfavorable developments. As a manager, you can then take timely corrective action.
Relative to peer groups. Many industries have associations or consulting groups which publish industry statistics. With these statistics, you can compare your firm's performance with its peers. Are you at the forefront or in the back cut? If your industry is competitive - and few are not - you'd better be reasonably comparable to your peers.
Relative to budget or plans. Every business should have such a basic blue-print for the coming year. A budget signals what management expects to happen in light of competitive pressures, industry economic conditions and the strengths of the business. If you do not have a budget, you are "flying blind." Analysts always look at how you have performed relative to your plan in the past.
Relative to your unique potential. Every business has prospects of performing as well as can be expected if all goes well and all employees and managers perform. Presumably, you are expecting that you will perform at least as well as the industry, or your niche in the industry.
Relative to regulatory expectations or requirements. Are you playing by the rules of the game as they are increasingly set by the various levels of government?
Every valuation assignment my firm has completed starts with such comparisons designed to make the analyst understand the business. In addition, a picture will emerge from the exercise which will tell you what the firm could be doing to get on track for a successful sale.
What should you have accomplished before your business becomes sellable?
Besides profitability and growth accomplishments over which a potential investor or a competitor will get excited, you certainly want to have your business have a credible accounting system, have up-to-date procedures and contingencies in place, be lean, and be run by a seasoned management team. That team should, by then, have proven that it can run the business with or without you. At that point, you will be in a strong negotiating position to execute on your exit strategy.
J.L. Pierson, is a business appraiser based in Darien. He can be reached at 325-2703 or jlp@NYNJCT-BV.com. His practice's Web site is at www.NYNJCT-BV.com. s
Small Business Finance