Reprint of Article Appearing in the New York Times on July 16, 2010

Determining Your Company’s Value: Multiples and Rules of Thumb

By BARBARA TAYLOR

My firm recently met with a business owner who told us right up front that he had started his business six years ago with the intention of selling it. He came to our meeting prepared with tax returns and financial statements and also informed us that he would be willing to stay on in a sales role with a new owner for up to three years.

The business — a specialty subcontractor to the commercial building industry — did about $7 million in annual gross sales in 2009, had been growing rapidly every year since its inception, and showed $725,000 in Ebitda and $900,000 in seller’s discretionary earnings (S.D.E.). Everything about the business looked great.

The meeting continued to hum along nicely as the seller recounted the history of his company and listed its biggest customers and possible buyer candidates. We listened carefully, impressed by how thoroughly he had prepared for this day. Then we asked if he had a particular asking price in mind. His number, he said, was $8 million. If I had sound effects in my conference room, I would have cued the needle scratching across the surface of a vinyl LP.

So, what’s the problem with an asking price of $8 million for this business? The primary issue is that the price would be a multiple of 11 times Ebitda, or almost nine times S.D.E. according to the seller’s financial statements. Given the industry and the asking prices for similar businesses for sale across the country, those multiples are far beyond what most buyers would consider reasonable in today’s market.

While there are many factors that help determine an appropriate asking price — including competitive advantages, opportunities for growth and historic financial performance — multiples and rules of thumb can be a good place to start. Several resources are available for obtaining data on pricing businesses for sale, including Business Valuation Resources and BizBuySell.com. A business broker, intermediary or transaction adviser will have access to a number of resources for small-business deal flow data, as well.

Business Brokerage Press publishes an annual guide to pricing small businesses for sale in both a print and online version. Here are some multiples and rules of thumb for a handful of businesses from the latest version:

Manufacturing (annual sales of $1 million to $5 million): three to four times S.D.E. plus inventory.

Retail auto parts: 40 percent of annual sales plus inventory.

Commercial printers (annual sales under $2 million): two and a half to three times recast Ebitda.

Retail apparel: one and a half times S.D.E. plus inventory.

Wind farms: 10 times Ebitda.

Some industries have their own rules of thumb. For example, an authorized reseller of wireless phones and service is sometimes valued at 30 times monthly residuals. While there is no such thing as a “comp” (comparable) when it comes to selling a small business, looking at multiples for similar businesses in the same industry — and preferably in a similar geographic area or market — can be the next best thing.

One of the keys to a successful sale is to have a clear understanding of how buyers will value your business, whether it’s an individual or a strategic acquirer. More often than not, that value will come down to a multiple of the business’s earnings.

“We recently completed a survey of a broad cross-section of business brokers and merger-and-acquisition professionals,” said Dave Kauppi, a mergers-and-acquisition adviser and president of Midmarket Capital, in a recent blog post. “One of the questions we posed was, ‘What is the biggest challenge you face in your practice?’ We gave them eight choices including lack of financing, sell side deal flow, not enough buyers, etc. The top answer was seller value expectations.”

And so it was with the seller mentioned above. Multiples for a business like his are around three to four times S.D.E., resulting in an asking price that is barely half of his current expectations. He returned to our office about a week after our initial meeting to pick up his financial statements and tax returns. Something tells me he won’t be back as long as his needle remains stuck on a multiple that is simply too high.

The first question is this:  Why Do I Need to Outsource Anything?

Now, that’s a good question.  After all, you’re probably an entrepreneur and, as such, you’re a successful individual who can handle many different aspects of the company.  You came up with the initial concept of your company, right?  And you built it from the ground up, I’ll bet.  You’re also the best salesperson for the company, too – sure, you finally had to hire a salesperson, but you may feel that no one is as good at selling at the owner (and you may be right).

But, at some point, you have found (or, trust me, you will find) that you don’t have your finger on everything in the company.  The first time you’ll see this is when your employees cannot create or manufacture the product or provide the service that you wish they could.  It’s just not the way you would do it.  You may very well step in . . . you know, to demonstrate how it should be done.

And, later, you’ll look at the financial results and wonder why you don’t have the results you thought you had.  This will often come when your outside CPA prepares the tax return.  And sooner or later you will say to yourself, “Why didn’t I know this sooner?” or “Wasn’t there anything I could have done to improve my results?”  That Eureka! moment.

If this sounds like you, it’s time to step back and understand that, yes, you could have known your results sooner, and you could have done something to improve those results.

But unless your company is the real exception, you simply don’t have the expertise within your company to help you help you get that information.

Your bookkeeper or controller has enough to do just to pay the bills and send out your invoices, to collect the receivables, get the employees paid . . . and just simply doesn’t have the time to prepare monthly financial statements.

But your controller may also not be trained or equipped to prepare, understand, and analyze financial statements, either.  That’s where a CFO comes in to play.

Regardless of the size of your company, you need a CFO.  The important thing to understand is that you most likely do NOT need a full-time CFO.  But what you do need is someone who has the knowledge and real-life experience from working in a number of companies over a number of years, who can bring all of that to bear in looking at your company.

And, by the way, let me debunk a popular misconception.  Many owners want to know if the person they hire has worked in the past in their industry.  While you may find someone who has, don’t be too narrow-focused.  While most companies think that they are unique, there is a real benefit to having someone with experience from other industries, for they are the ones who will ask the “stupid” questions because they haven’t seen or experienced the specific issue you have.  But the experience of one knowing how other companies have addressed similar issues is often far more important, and that person can bring that expertise to bear in your company.

In the next eNewsletter, I’ll talk in more detail about how you can benefit from bringing outsiders to help you address your issues.  That can be an outside sales manager or IT professional or senior financial executive . . . a CFO that brings expertise to the table on an as-needed, part-time basis. 

You just may discover that outsourcing some of the senior executive positions in your company is the best decision you could make.

Companies without a Chief Financial Officer are at a competitive disadvantage.  It's not unusual for small to mid-sized firms to have sophisticated operations and complex cost and financial challenges like large companies.  This often means that the CEO or the owner of the business needs the expertise of a senior financial executive.

As an owner or CEO of a company, have you ever wondered how to solve the problems you're facing?  Have you ever spoken with another owner and come to the conclusion that what you really need is the advice of a CFO . . . but knew that you either didn't need a CFO on a full-time basis or couldn't afford the cost of a full-time CFO?  Did you then decide to give up on finding the advice that you need?

You are not alone.  And, you are perhaps doing what many owners do - You try to figure it out yourself.  Let's be honest. Are you really the right person to do that?  Do you have the background or expertise to prepare accurate and useful financial statements, or even truly understand them?  And is your digging into these areas even a good use of your time?  As the owner, you need to be the visionary, focusing on the future-and you are the one who should be spending more time with your customers. 

Using your time to develop financial information or analyzing your cash balance and future needs is something that someone else should be doing.  What you need is the assistance of a high level financial professional.  Outsourcing this function is a cost effective alternative to hiring another employee because it avoids the cost of a full-time salary, payroll taxes, and fringe benefits. A contract CFO is a very affordable means to obtain that higher level of expertise and add significant value to your business.   

ADVANTAGES OF OUTSOURCING CFO’s

Better financial information for key decision-making.  It's a fact:  most small to mid-sized businesses either don't prepare financial statements, or they are not reliable.  Another fact:  you simply cannot make important business decisions while relying on bad, inaccurate, or incomplete information.  If you have found yourself frustrated with the lack of information from your bookkeeper or controller, chances are the information they are giving you is of questionable value.  You cannot effectively run a business in that situation.

More time to spend with customers.  To be competitive, you need to spend most of your time with current and prospective customers.  Particularly today, you need to be with your customers as much as possible.  Just as you are trying to get new customers, your competitors are trying to meet with your customers.  You simply need to be spending the majority of your time with them.

More money from the bank and from vendors.  Bankers and vendors are more sophisticated and less forgiving than ever.  With the current financial situation affecting all businesses, creditors will refuse to lend money to anyone other than the safest and most reliable companies.  And they will require regular and reliable financial statements. The financial statements must look professional, follow accepted accounting principles, and highlight the company's key ratios. A CFO working with you on a part-time basis can improve your company's external "image" and assist you with opening doors to banks and obtaining better vendor terms.

Other advantages to having an outsourced CFO include:

• A sounding board for the owner in making key decisions
• Fewer cash flow surprises
• Better trained accounting staff
• A theft deterrent
• Better documentation and controls
• Fewer surprises relating to tax payments
• Solutions to company problems

SOME THINGS TO CONSIDER 

A CFO is a proactive professional that has a pervasive knowledge of information important for the owner to properly run the company.  This includes handling not only financial matters but also addressing HR, operations, sales and marketing, IT, and other issues needed to help the company succeed.

A common misconception is that a CPA can take the place of a CFO.  The simple reality is that a CPA cannot do the work a CFO does because each has a different set of skills.  As noted above, a CFO has a broad range of experience in financial and non-financial areas.  The CPA and the CFO should work very closely together, but neither has the ability to step into the other's shoes.

So, when you are looking to outsource the CFO position, you need to look for a professional with 25-plus years of experience.  You should be sure that the CFO is supported by a national organization that has the resources to be able to give your CFO the support that may be needed.  In finding someone with this experience level and support, it is highly unlikely that a problem or issue will come up that can't be resolved. 

Avoid signing contracts.  If an organization is not confident and competent enough to perform these services based on a hand-shake, consider walking away. 

You should be comfortable that the fee fits comfortably within your budget.  Ask that there be a monthly "ceiling" for the fees to be paid; there should never be any surprise on fees.

Finally, be sure that you are comfortable with the CFO.  With a high level of trust between the owner and the CFO, the company will be in a better position to meet the challenges that it faces.

As discussed in the first of the 4 articles (The ABC's of Understanding Financial Statements-Part 1 of 4), there are always three main components to every financial statement.  They are:

1. Balance Sheet
2. Statement of Income
3. Statement of Cash Flows

This article will focus on the Statement of Income or Profit & Loss Statement (aka P & L).  Article 4 will address the Statement of Cash Flows.

As discussed in my previous article about the Balance Sheet (The ABC’s of Understanding Financial Statements (Part 2 of 4) - Battling the Balance Sheet), it represents the financial condition as of a specific point in time (i.e. as of December 31).  The P & L on the other hand will measure activity for a range of time such as a month, a quarter or a year. 

There are some basic concepts the reader needs to understand about the P & L statement.

1. Recognized Revenues
2. Cost of Goods Sold (COGS)  
3. Operating Expenses
4. Depreciation

Revenues must be recognized when they are realized (or realizable) and are earned.  This identifies when the revenue will be recorded in the P & L.  For small companies that record their accounting on the cash basis, revenue is recognized when they collect the money.  Unfortunately, the collection period will often be different from the period in which they incur costs required to make that sale.  In other words, revenues and related costs may not be reported within the same period of time and will make the P & L have dramatic profits or losses depending on when the actual transactions have been recorded.  That is why the accrual method of accounting (please read Part 1 of 4 above for more information on cash vs. accrual accounting) is more accurate when examining the financial results of a company.  It more accurately reflects the matching of the revenues and the related costs to generate those revenues.  In certain situations, a company may invoice the customer for future services.  In those cases, the revenue will not be recognized until the services have actually been performed.  The amount of the invoice will be “deferred” and will appear on the balance sheet until such time as the service(s) can be recognized as performed.

For example:

• A software company sells a copy of its software (actually a license to use it in perpetuity) and an associated annual maintenance contract.
• The revenue attributable to the sale of the license is recognized upon invoicing.
• The revenue for the maintenance contract is deferred.
• Each month, 1/12^th of the price of the maintenance contract is subtracted from deferred revenue on the Balance Sheet and recognized as revenue on the Income Statement.

Recognition of revenue is from four basic types of transactions:

          1)      Revenues from selling inventory are recognized at the date of sale, usually the date of delivery.

          2)      Revenues from rendering services are recognized when services have been performed.  In certain situations where the service extends for a long period of time (i.e. construction projects), revenue will be recognized incrementally over the life of that project.

          3)      Revenue from permission to use company’s assets (e.g. interest for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used.

          4)       Revenue from selling an asset other than inventory is recognized at the point of sale when it takes place.

COGS are all expenses directly related to the making and storing of the company’s goods:

• Materials used in the manufacturing or direct processing of the product or service.
• Labor directly related to the product or service
• Other costs incurred which are directly related to the product or service.

Note: Service businesses may not have this category.

Generally, operating expenses are those costs NOT DIRECTLY related to the processing of the product or service as defined above in COGS.  However, these costs are related to the daily operations of the business in general.  Typically, interest and income tax expenses are not considered operating expenses and will be reflected in a separate section below Operating Expenses, but above the Net Income of the business.

The cost of an asset is not fully expensed in the first year from its purchase, but is spread over the years of its useful life.

This “matches” the expense to the associated revenues over the life of the asset and accounts for the reduction in value of the asset over time.

Example:  Computers have a “useful life,” as defined by Generally Accepted Accounting Principles and the IRS Code, of three years. A company will book depreciation of 1/36 of the cost of the computer each month until it is fully depreciated.  While the computer may be used by the company for a longer period of time, it is the “useful life” definition that will determine the period for depreciation and not the amount of time actually used by the business.

FAQS

Q:  Does every sale result in immediate revenue?
    A: Not necessarily! Revenue recognition rules in some businesses, e.g. software, are complex and will be dictated by the specifics or each sale or contract.

Q:  If the Income Statement shows a profit, is my company healthy?
    A:  Not necessarily. While profit is a good thing, the Balance Sheet may show that the company is insolvent (liabilities exceed assets) or cash flow may be negative due to a host of other factors.

Q:  If the Income Statement shows a loss, is my company doomed?
    A:  Not necessarily. While a loss is a serious issue, the company may be implementing a strategy resulting in short term losses for long term gain.

Q:  If the most recent Income Statement shows a profit, is my company healthy?
    A:  Not necessarily. In addition to analyzing the details of that statement, you should be analyzing changes over time and projecting results into the future.

Definition of Key Terms when Analyzing a Statement of Income

• Operating Margin = Net Income before Tax, also known as Operating Income, as a % of Revenues/Sales.
• EBITDA = Earnings Before Income Taxes, Depreciation and Amortization (see below). Often used in conjunction with a “multiple of earnings” to measure the value of a business or business unit. EBITDA x multiple = business value.
• Amortization = the expensing of intangible assets over time (similar to depreciation for tangible assets).

While the P & L is an important scorecard of a company’s direction, it should never be reviewed by itself.  Combined with the Balance Sheet and Statement of Cash Flows, you will be able to get a complete of the company’s financial condition.     

When working with new clients and/or prospects that sell or carry inventory, I always ask the owner(s) how quickly their inventory turns.  Without hesitation, most reply 6 to 8 times per year.  Then I ask them how they calculated or arrived at that number.  The universal answer is "I just know".  Maybe correct or more likely, probably not.  I believe most of them are simply calculating their annual sales and simply dividing by their average inventory.  For example, if they sell $6 million a year and their inventory balance is $1 million, they will say their inventory turns 6 times a year.  Okay, that would be correct if inventory was carried at sales price, but inventory is carried at cost on the balance sheet, which assuming a 50% gross profit margin in this example, inventory would only be turning 3 times per year.  (Please see actual formula for calculating Days Sales in Inventory below).  Therefore, instead of having 60 days worth of sales in inventory on hand (360 days/6), they actually have 120 days worth of inventory on hand.  No wonder most small to medium size companies are strapped for cash.   I believe most of them don't realize the tremendous cash flow repercussions of having too much inventory on hand.

Granted, most of us have been taught from day one in our accounting and finance classes that inventory is an asset.  After all, it is classified on the balance sheet as a current asset, unless of course it doesn't turn within a traditional annual business cycle, which then would require it to be classified as long term. In accouting humor, we refer to long-term inventory as FISH (First-In, Still-Here).

Let me challenge the status quo and current way of thinking and suggest that we start viewing inventory like a liability. Why? Well, were all too familiar now with terms like "Toxic Assets", "Troubled Assets", "Impaired Assets" and inventory often falls into this category.  Why, because inventory can become obsolete, it can lose its value and it is highly susceptible to shrinkage (i.e. theft).  Doesn't it seem odd to hear terms like Toxic Assets, boy that's an oxymoron if I ever heard one, right on par with "Jumbo Shrimp".   Inventory can become a Toxic Asset or Troubled Asset very quickly. There is nothing worse for your working capital position than having a large asset go bad.  Inventory can be downright toxic if it isn't planned and managed properly.  Ever wonder why banks hesitate to lend against inventory.  They simply don't think they can recover enough cash value in the case of liquidation.

Days Sales in Inventory Formula = {Inventory/Cost of Goods Sold} x 365 

I think the underlying moral of this story is, don't fall in love with your inventory and think that you have a great asset on your books.  Remember this sage piece of advice when managing cash and working capital "it isn't what you sell, rather it's what you buy, particularly how much and how often".

As a B2B CFO®, I am experienced and skilled in helping companies analyze their optimum inventory and working capital components in order to maximize cash flow.  If you are concerned with your current ratio, quick ratio, inventory turns and/or lack of cash flow, take a look at your inventory levels.  Better yet, contact me and I can assist you in your analysis.

At B2B CFO® we genuinely care about our client's success and we want each and every one of our clients to realize their dreams.

Cash. We Help You Get It.

I am working with a new client in the health care industry who needs to have some key statistics each week to measure performance to know where changes in the business need to be made.  We have defined these statistics which are put into a weekly report as our key performance indicators or KPI’s.  We refer to our weekly report as our dashboard.

It is essential for any business regardless of size to have daily or weekly operating statistics or KPI’s to properly manage your organization.  These KPI’s are unique to each organization based on their culture and industry.  These KPI’s should provide direction and serve as a bench mark or target for the organization to track performance within specific timeframes (weekly, monthly or quarterly).

 KPI’s that are well thought out should follow the SMART criteria as described below:

·         Specific purpose

·         Measurable

·         Achievable

·         Relevant

·         Time Phased

In establishing your KPI’s, try to avoid measurements that are expensive or difficult to determine.  Keep in mind that as the business climate changes so should your KPI’s to reflect technological advances and shifting priorities.  Some measurements are not as useful because there are no benchmark standards so the usefulness of the statistic is limited.  KPI’s should be understood as an accurate but not precise measurement.

Some examples of KPI’s include:

a.       Increase sales per employee or location

b.      Improve the net income or EBITDA % to sales

c.       Increase in sales dollars or units

d.      Reduce employee turnover percentage

e.       Increase market share

f.       Increase average revenue per customer

g.      Improve inventory turnover

h.      Improve cash flow by %

I’ve been reading “The Business of Happiness” by Ted Leonsis over the holiday weekend.  I’m about half way through the book and have been giving a lot of thought to the “6 secrets to extraordinary success in work and life” laid out in the book.

Only the first, goal setting, strikes me as an obvious business secret to success.  Of course goal setting is critical to the success of your business.  If you don’t have a plan to get to a destination, the odds that you’ll ever get there are slim.  If you have clearly defined goals for yourself and your company, you are better able to manage toward achieving them and rewarding yourself (and your employees) for success.

The remaining secrets are slightly more personal in nature at first blush, but with logical parallels to business on further consideration…

• Communities of Interest – If you’re involved in a community then you typically develop relationships, connections, and an expanded network.  People like to do business with someone they know, like and trust.
• Personal Expression – Your Company should reflect your philosophy, ethics, and corporate culture.  This adds warmth and authenticity that your customers will pick up on.
• Gratitude – After the past 2 years, I would venture to say that if you’re still in business, this one is obvious.
• Empathy expressed by giving back – A company with clear community service goals tends to be a happier place for the employees and well received in its community.
• Higher calling – A company with a mission should experience increased teamwork and employee accountability.

The message I’m taking from the book is that a “happy” company generally has motivated employees and loyal customers.  And generally that same company enjoys success and profitability.  As in life, setting goals that revolve around doing the right thing will generally produce favorable results.  Remember that business IS personal; focus on finding reasons for your customers to love your product/service and you’ll go far. 

When getting ready to exit your business, it is important to set a plan.  One of the most valuable insights into designing an exit is to remember that the skills that you used to build a successful business are not perfectly transferable and useful for designing your exit.  From this bit of wisdom comes the quick conclusion that you need to think differently in order to form and execute your business exit.  The following bullet points address the general business areas that you should be considering for your business exit.

Who will take over the business?

Do you know who you want to run your business after you?  This question is easier asked than answered.  You see most owners have not given due consideration to the pros and cons of each potential future owner for their business.  For example, an outside company can provide money and management skills to help run your enterprise into the future.  If you don’t need either of those, you may consider a management buyout.  Or, if you want a partial exit, keeping control of your business, you may choose an ESOP.  Or there may be a combination of these strategies to assist with your planning.  Let’s examine each of them. 

Know your Exit Options – External Transfers versus Internal Transfers

Transfer to outsiders

If you envision selling your business to a competitor or to a financial or equity group, you need to look at your business the way that they would see it.  What are your value drivers?  Are you the primary asset or can the business run without you?  What resources are available to sustain your business in your absence?  Do you have protected and unique property that can be acquired in the transaction? 

If you can ask these questions and envision a future sale, than you can also ask the next series of questions to validate your notion of selling to an outsider.  Are you very concerned about the future of your managers and employees?  Remember that a sale of your business means to sale of control to an outsider.  Many owners get stuck here as they feel responsible for employees and family. 

Do you have family in the business who may not remain employed?  Are you concerned about your business legacy and its impact in the hands of an outside owner?  Are you aware of fees and taxes that you would pay in an outside deal?

Answering these questions will assist you in understanding whether you are candidate for an ‘external’ transfer.

Transfer to insiders

If a transfer of your business to an outsider does not feel like the best course of action, you can look to internal transfers to meet you goals.  Employee Stock Ownership Plans (ESOPs) and Management Buyouts are two ways in which you can convert your illiquid business into cash.  Each exit option has its pros and cons.  You should first reflect on the answers above and then determine whether or not your staff can lead your company in the future.  This approach will get you closer to the exit path that is appropriate for your business.

How will revenues and profitability be sustained – are you a bottleneck in your business?

Be honest with yourself as to how vital you are to your continued, profitable operations.  Many owners underestimate what they do and what they represent for their businesses.  Employees and managers will almost always defer to your expertise before making important decisions on their own.  They are usually not incentivized or empowered to do otherwise. 

Here is a good litmus test:  can you take a three (3) week vacation, without checking-in with your business, and have it run smoothly without you?  If the answer is ‘no’, begin to examine which parts of your role in the business are most transferable to someone else.  Then ask the question again to see if your business is more sustainable with your improved procedures.

What you will likely find is that exiting is as much about ‘letting go’ of control as it is about structuring a transaction.  You have developed a close working relationship with those around you.  Engage in some exercises that help you objectively evaluate your team’s ability to run the business without you.  Eventually you will no longer be running your business.  Take a pro-active approach to this contingency by making these evaluations today.

How is your management team aligned?

It is likely that your management team is not aligned with your exit goals.  You may have been relying on someone who cannot fill your shoes.  Or you may have one or more managers with strengths in certain areas, but fatal weaknesses in others.  Take the time to organize your managers and to put in place an incentive program that not only focuses them on profitability, but also focuses them on management and leadership within your business.  Remember that one day your guidance will not be available to your managers.  Tools such as financial incentives help to begin and/or facilitate the transition.

Aligning your management team

One tactical strategy that you can employ is to shift bonus dollars that are paid in ‘cash’ to ‘deferred & contingent’ payouts (similar to the way that vesting schedules may exist in your retirement plans).  Today’s economy has provided an opportunity to re-evaluate your manager’s compensation and to restructure the manner in which it is paid out to them.  Remember, these strategies are not about increasing your bottom line, but more focused on getting the buy-in from your managers on their interest in taking enhanced roles within your organization.

Financial statements and operations clean-up

If you have been remiss in ‘cleaning up’ your income statements, now is the time.  Begin to critically evaluate the personal expenses that you ‘run through’ your business, as well as your ‘excess compensation’, discretionary contributions, and your other perks.  Remember that each of these items impacts your cash flow.  Even though you may have employed these strategies to minimize your taxes, you want to be able to demonstrate to your future owner(s) your company’s true potential for generating free cash flow.

Organizing your advisory team

You have likely built a successful business by relying upon the expertise of others.  Now is the time to assemble your business (and personal) advisors to convey to them your intention to execute a successful exit in the future.  The insights that each of your advisors will provide to you will help you in addressing many of the following areas:

·       Taxes that you may owe for different transfers

·       Legal agreements that you may need to sign

·       Capital that you may need to attract

·       Cash flow projections that you may need to provide to successor owners

·       Insurances that you may need to purchase to protect your wealth

Remember that each of these different business issues is a specialty unto itself.  The sooner you can begin to gather and organize these various parts of your business exit, the faster you will be able to move forward with your plan.

Conclusion

No exit is easy.  The myth that business owners simply decide to exit one day and sell the next is simply just that – a myth.  Every owner struggles with finding the right exit path and developing the proper plan.  By thinking in new ways and gathering key pieces of information, you can align your resources and assemble your advisory team to assist you with a successful exit.

Here is a reprint of an article that appeared on Businessweek.com

What Chief Executives Really Want

by Frank Kern
Wednesday, May 19, 2010

provided by

A survey from IBM's Institute for Business Value shows that CEOs value one leadership competency above all others. Can you guess what it is?

What do chief executive officers really want? The answer bears important consequences for management as well as companies' customers and shareholders. The qualities that a CEO values most in the company team set a standard that affects everything from product development and sales to the long-term success of an enterprise.

There is compelling new evidence that CEOs' priorities in this area are changing in important ways. According to a new survey of 1,500 chief executives conducted by IBM's Institute for Business Value (NYSE: IBM - News), CEOs identify "creativity" as the most important leadership competency for the successful enterprise of the future.

That's creativity—not operational effectiveness, influence, or even dedication. Coming out of the worst economic downturn in their professional lifetimes, when managerial discipline and rigor ruled the day, this indicates a remarkable shift in attitude. It is consistent with the other major finding of the study: Global complexity is the foremost issue confronting these CEOs and their enterprises. The chief executives see a large gap between the level of complexity coming at them and their confidence that their enterprises are equipped to deal with it.

Until now creativity has generally been viewed as fuel for the engines of research or product development, not the essential leadership asset that must permeate an enterprise.

Needed: Creative Disruption

Much has happened in the past two years to shake the historical assumptions held by the women and men who are in charge. In addition to global recession, the century's first decade heightened awareness of the issues surrounding global climate change and the interplay between natural events and our supply chains for materials, food, and even talent. In short, CEOs have experienced the realities of global integration. The world is massively interconnected—economically, socially, and politically—and operating as a system of systems. So what does this look like at the level of customer relationships? For too many enterprises, the answer is that their customers are increasingly connected, but not to them.

Against that backdrop of interconnection, interdependency, and complexity, business leaders around the world are declaring that success requires fresh thinking and continuous innovation at all levels of the organization. As they step back and reassess, CEOs have seized upon creativity as the necessary element for enterprises that must reinvent their customer relationships and achieve greater operational dexterity. In face-to-face interviews with our consultants, they said creative leaders do the following:

Disrupt the Status Quo. Every company has legacy products that are both cash—and sacred—cows. Often the need to perpetuate the success of these products restricts innovation within the enterprise, creating a window for competitors to advance competing innovations. As CEOs tell us that fully one-fifth of revenues will have to come from new sources, they are recognizing the requirement to break with existing assumptions, methods, and best practices.

Disrupt Existing Business Models. CEOs who select creativity as a leading competency are far more likely to pursue innovation through business model change. In keeping with their view of accelerating complexity, they are breaking with traditional strategy-planning cycles in favor of continuous, rapid-fire shifts and adjustments to their business models.

Disrupt Organizational Paralysis. Creative leaders fight the institutional urge to wait for completeness, clarity, and stability before making decisions. To do this takes a combination of deeply held values, vision, and conviction—combined with the application of such tools as analytics to the historic explosion of information. These drive decision making that is faster, more precise, and even more predictable.

Taken together, these recommendations describe a shift toward corporate cultures that are far more transparent and entrepreneurial. They are cultures imbued with the belief that complexity poses an opportunity, rather than a threat. They hold that risk is to be managed, not avoided, and that leaders will be rewarded for their ability to build creative enterprises with fluid business models, not absolute ones.

Something significant is afoot in the corporate world. In response to powerful external pressures and the opportunities that accompany them, CEOs are signaling a new direction. They are telling us that a world of increasing complexity will give rise to a new generation of leaders that make creativity the path forward for successful enterprises.

Frank Kern is senior vice-president of IBM Global Business Services.

Let’s review some key analytical tools to aid you in maximizing the success of your business.

Working Capital/Current Ratio Of primary concern to all parties is the solvency – the ability of the business to meet its current (those due within one year) obligations. Basic accounting equation: Working Capital = Current Assets – Current Liabilities. Accordingly, assets and liabilities are generally divided and classified as (1) current or short-term items and (2) noncurrent or long-term and (3) fixed assets/equipment/machinery.

Examples of Current Assets (assets that will turn into cash or offset liabilities within one year):

• Cash and short-term investments/marketable securities
• Accounts Receivable
• Inventory
• Prepaid Expenses

Examples of Current Liabilities (amounts that are due to be paid within one year):

• Accounts Payable
• Portion of LT debt due within the next twelve months
• Accrued liabilities (taxes, payroll, other expenses, etc.)

 A business should have a minimum Current Ratio of 1:1…in other words, Current Assets equal Current Liabilities. A Current Ratio of 2:1 or higher is preferred.

Other Ratios and Earnings Tests

Acid-Test Ratio – Inventory of raw materials, work in progress and finished goods (or merchandise) often represent a large portion of total current assets. A considerable amount of time may be required to convert inventories into cash in the normal operating process. There is also the possibility of declines in market prices and a reduction in demand, both of which will adversely affect the ability to pay current liabilities. The acid-test ratio gives recognition to these factors. It is the ratio of the sum of cash, receivables and marketable securities, which are sometimes called quick assets, to current liabilities. Although there is no definite standard, an acid-test ratio in excess of 1:1 is usually considered to be satisfactory:

    2010                2009

Quick Assets:

• Cash                                                     $ 90,500            $ 51,000
• Marketable Securities                                75,000              75,000
• Receivables (net)                                   115,000            120,000

             Total                                              $280,500           $246,000

Current Liabilities                                               $210,000           $243,000

Acid-Test Ratio                                                     1.3:1                  1.0:1

Ratio of Sales to Assets – A measure of the effectiveness of the utilization of assets. Assume that two competing firms have equal amounts of assets, but that one company has double the sales of the other firm. The company with the larger sales is making better use of its assets.

Rate Earned on Total Assets – It is the measure of productivity of the assets, without regard to the equity of the creditors and stockholders in the assets. Therefore, the rate is not affected by differences in methods of financing a business.

Rate Earned on Stockholders’ Equity – This measure emphasizes the income yield in relationship to the amount invested by the stockholders, including initial investment and retained earnings.

Ratio of Owners’ Equity to Liabilities – Claims against the total assets of a business are divided into two basic groups, those of the creditors and those of the owners. The relationship between the total claims of the two groups provides an indication of the margin of safety of the creditors and the ability of the business to withstand adverse business conditions. If the claims of creditors are large in proportion to the equity of the owners, there are likely to be substantial charges for interest payments. If earnings decline to the point of inability to meet interest payments, control of the business may pass to the creditors.