Digging In With a Businessman’s Review

For Business Owners Looking to Optimize Operations and Prepare for an Exit in the Next 1-3 Years, a Businessman’s Review Can Help Set a Baseline and Outline Actionable Goals

There are numerous reasons why business owners enlist the help of investment banks, most notably: 1) the sale of their business, 2) the purchase of another business or multiple businesses or 3) raising capital to fuel organic growth or acquisitions. These type of engagements comprise the majority of our work at SDR Ventures, and we’ve helped a number of clients with all three of these objectives over a multi-year timespan.

Businessman’s Review

When examining the first objective above, the sale of a business, a key element must be in place to ensure the eventual success of the transaction – a clear decision that the timing is right. The timing must be right for the business owner (both financially and emotionally) and for the business itself (in terms of financial performance, market conditions and a handful of other factors). As advisors, we aim to be an objective third party that provides the business owner with as much relevant information as possible for that owner to make an informed, confident decision.

However, many business owners we speak to refer to a goal of selling their business in 1-3 years. They may be right in the middle of a growth initiative that they want to see through, a management transition, an acquisition or they simply aren’t emotionally ready to exit their business and move on to the next chapter.

As we examine these companies in more detail, we often end up agreeing that the timing probably isn’t right, but at the same time, an exit in five years without any significant improvements to the business and, more importantly, without an increase in the transferable value of the business, almost never makes sense. So even if an exit isn’t an immediate priority, it should stay top-of-mind throughout this 1-3 year timeframe to ensure that the business does in fact build up value. That’s where a “Businessman’s Review” comes in.

In a nutshell, a Businessman’s Review provides business owners or CEOs with a playbook to help get them where they want to go. The review may uncover unknown issues, help owners prioritize key business objectives and, most importantly, it puts a focus on building transferable value.

Businessman’s Review Goals

  1. “Open up the hood” and dig into the business
  2. Determine an appropriate, detailed valuation of the business
  3. Begin framing a strategy around a potential exit
  4. Outline next steps

1. “Opening Up the Hood”

If nothing else, a Businessman’s Review should provide an unbiased, third-party evaluation of where a company stands today. This includes an examination of the industry and relevant trends within the industry or the niche vertical in which the company operates. The review also examines competitors, and potential impacts on the company. There are always opportunities and directions that surface during the review.

As the illustrative chart below shows, a company may be experiencing gradual or even accelerated revenue growth, but this growth may be mitigated by increasing costs. While the report may outline opportunities to further increase revenue growth (i.e., geographic expansion and pricing), it will also provide guidance for ways to reduce supporting costs (i.e., automation or training opportunities).

“Jaws of Life” Chart

Jaws of Life Chart

The business owner(s) will be left with a list of prioritized strategic action items to help optimize business operations and profitability and high-level suggestions on how to achieve each action item.

2. Business Valuation

It’s hard to know where you’re headed if you don’t know where you’re starting from. One key element of a Businessman’s Review is a “present-day” business valuation. We think of valuations as being driven by a combination of the market environment (essentially, where the market is and where the company is positioned within it) and the financial performance of the company, its returns and projections.

Tactically, the valuation finds the nexus point between public company comparables and precedent transaction analysis, which results in average market multiples on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), as well as the analysis of the company’s financial performance and projections, which results in understanding present value. A “field” of valuation ranges from these different methods may end up looking something like the illustrative chart below.

Valuation Analysis Sensitivities Summary

Valuation Analysis Sensitivities Summary

Note: A full Businessman’s Review will typically provide much more detail, including valuation assumptions, base vs. aggressive case analyses, a discounted cash flow (DCF) analysis, a complete list of precedent transactions and key business factors affecting valuation.

Now that a current likely enterprise value range of the company has been established, we can look forward and help determine healthy but reasonable returns and projections based on the implementation of the strategic action items outlined earlier. In the illustration above, the company may be worth $45-$48 million today, but may be able to achieve an exit of $63-$66 million within a reasonable timeframe. For a company like this, selling later is likely a smart strategy if the objectives can be met and market conditions remain the same or improve.

3. Exit Framework

You probably wouldn’t go into a business partnership without some sort of contract or agreement in place. You’d also probably discuss key issues that the business will encounter right away (i.e., how to get your first customer, get more customers, increase margins, reduce expenses, etc.), but the business exit often seems like a tiny dot on the distant horizon. This mindset can leave business owners unprepared. There are many factors that should be considered as early as possible.

Are you ok selling your company to a direct competitor? Do you want the new owner(s) to uphold your company’s legacy or culture? Are there multiple shareholders in your company? Are their goals aligned?

It’s never too early to start exploring these questions and putting a plan in place. The Businessman’s Review will explore multiple exit structures and options, pros and cons of each and potential effects on liquidity.

4. Next Steps

Regardless of the eventual exit structure, a focus must be placed on the main factors and initiatives that will drive future transferable value of the business. For instance, a business with two primary customers with $50 million in annual revenue may be worth less than a company with $40 million in annual revenue dispersed between 20 customers. A business where the owner is heavily involved and relied on in day-to-day operations may be seen as more difficult to transition than a business that has a capable management team in place and doesn’t rely heavily on owner involvement. These factors have a significant effect on the transferable value of a business, but the good news is they can often be improved with focused effort and attention. A Businessman’s Review puts these factors under the microscope.

With a clear roadmap in place, the business owner can drive positive shifts within the company that will leave it primed for sale in 1-3 years. This will put them in the position of knowing that they’re prepared to exit when the time comes, rather than hoping they are.