Soaring Profits Through Efficient Operations
— A Real Value Driver

by

Joan M. Gruber Ridley and Mervyn Price

Entrepreneurial wealth starts with a vision. Define it. Quantify it. Assess current performance accurately and rapidly. Then project future performance with precision and speed. You now have a goal that is clearly identified, a process to measure your progress, and a method to quickly re-set your course, if necessary. If your business is in danger of getting off course, you will know where the problem lay and can quickly correct your bearing. And, when you spot opportunities, you will have a system to rapidly evaluate if and when to pursue them. That sounds easy enough, but…

Driving Forward While Looking Backward

Most business owners try to run their businesses from historical financials. In other words, they are moving forward at full throttle with their eyes on the rear view mirror. The results can be a disaster. So why don’t most companies have a system in place to keep them on coarse and to warn them of approaching danger and alert them to opportunities? The likely answer is, most are not aware that tools and systems are available to assess their current and future situation, and to identify the necessary areas that need to be corrected.

Case in Point…

Harry owned a manufacturing company that he had taken over from his father and uncle 25 years ago. Now at age 66, he was ready to leave the business to enjoy the fruits of his labor. Harry and his wife did not have any children so he decided to sell to a third party. Twenty-five years ago, he had big plans to increase sales and grow profits far more than his father and uncle ever dreamed possible. He was successful at growing sales to $20,000,000, but in recent years, company profitability had declined and currently stood at only $1,000,000, or 5%. Since he wanted to be out of the business in two to three years, he didn’t think there was time to make needed changes to increase profitability. He didn’t even know what changes needed to be made, or if changes were even possible.

He approached a reputable broker to find out what the company might be worth to a third party. . The broker informed him that typically the EBITDA multiplier for his company would be around three. This likely multiple was low because the company’s performance was in the lower quartile for its industry, and, other value detractors were present. If only he could get the company to the upper quartile, it would have a multiplier of five or more, instead of three, especially if the other value detractors could be properly addressed and overcome. This would require an increase in net operating profit to around 15% as opposed to 5% where itcurrently stood. The value of the business could then approach $15,000,000, or, $12,000,000 more than it was currently worth.

If Harry sold the company now, it would only bring about $3,000,000, and at best, he would net about $1,500,000 to $1,700,000 after taxes and fees. He could expect to receive 20-30% cash down at closing and the balance over the next 2 years, if the company performed as Harry represented that it would. That’s not much to show for 25 years work. Harry did not know how much money he would need to support his lifestyle after the sale, but he guessed that even $1,700,00 would not be sufficient.

	PREVIOUS POSITION	CURRENT POSITION
Sales	$20,000,000	$20,000,000
Net Profit	$1,000,000	$3,000,000
Approximate Value	$3,000,000	$15,000,000

A Smart Decision Brings Rewards

The broker referred Harry to professionals who helped him improve company profitability, develop a strategic plan for sustainable cash flow, address other value detractors, and get his personal financial affairs and his estate planning in order. Within 12 months, company profitability had tripled, placing his company in the upper quartile of his industry, and the resulting value had more than quadrupled. Within 24 months, a strategic plan was in place to insure sustainable cash flow. In addition, Harry and his wife now had a personal financial plan and an estate plan to insure their financial security for a lifetime and to preserve and share their wealth with loved ones and their favorite non-profits on a tax-efficient basis. In addition, Harry’s company was now ready to attract top dollar as a result of a wellplanned and smooth transition and Harry and his wife were positioned to finally enjoy the life they had always envisioned.

 

Joan M. Ridley is president of Business Wealth Solutions, a Dallas-based advisory firm that consults with business owners about how to successfully grow and leave their business. Visit our website at www.bwsllc.net. Call us today at 214.692.9192 for a complimentary meeting to learn how we can help you get where you want to go.

Copyright 2006 Joan M. Ridley