Business owners can substantially increase the value of their businesses if they can demonstrate that future levels of profit are higher than those currently generated.
However, acquirers are skeptical and will need to see strong supporting evidence that the future profits can be achieved. Thus the onus is on the business owner to provide convincing evidence. Also, the more reliable future profit projections are, the lower the discount rate which will be applied to them.
We often forget that a forecast is simply an estimate of what might happen in the future. A forecast based on existing business and one based on potential business are only forecasts. Until one looks at the probability of the revenue occurring, you have no basis to judge the projected revenue. In fact, an agreement for a large project which has just been signed may be much more probable than some of the existing customer projections. A reduction in expenses which flow from the implementation of a new process may be relatively certain even if the adoption of the process has not yet commenced.
What we need to do in preparing our business for sale is to look at all the different ways in which the business could be improved/expanded and then select those which have a high probability of success.
There are many possible strategies for expansion which the owner could use.
Consider, for example, the following:
a) New Products or Services to Existing Customers
New products or services could be developed which could be sold alongside existing products and services. These should be complementary to the existing range and able to be sold through the same distribution channel. The likely outcome could be demonstrated through market research, early customer orders and showing the channel has the capacity to handle the increased volumes.
b) Existing Products or Services to New Customers
Most businesses have a good idea of where they can expand their market, but they may not have the capacity or funding to undertake the expansion.
The business owner would need to show market research to substantiate the market demand and perhaps show early customer orders to demonstrate this. A business proposal should show the investment required to penetrate the new market with projections of revenue, resources required and profits achievable.
c) New Products or Services to New Customers
The business may have the capability and capacity to introduce new products and services to a clearly identified new market. This may be based on underlying capabilities in product development, opportunities in importing or knowledge of available distribution channels which could readily support new business.
This would need to be supported by an identification of the products or services to be introduced, a demonstration that the business has both the capacity and capability to be able to implement the new operations and market research to show the probable revenue and profit outcomes.
d) Product Extensions
It may be possible for the business to show avenues for increased revenue, either through higher prices and margins or through additional cross selling opportunities arising from further development in existing products. This would need to be evidenced by market research and/or requests from existing customers for such additional features. The extent of take up of the new developments would need to be substantiated with customer surveys and perhaps early purchase commitments.
The business would need to be able to demonstrate that it had the knowledge, experience, capability and capacity to develop and deliver the new offerings.
e) Additional Capacity to Meet Unmet Demand
A business which is able to show it has unmet demand could develop an investment proposal to increase the capacity of the business to satisfy the additional demand. The business proposal would need to show the business had the capability to undertake the expansion in management, operational and physical aspects. The unmet demand would need to be proven from lost orders, unmet enquiries and market research.
f) Potential Productivity Gains
The business may have the opportunity to take on new production or administrative processes which can show a well proven impact on revenue productivity or cost reduction. The new processes would need to be evidenced by similar gains in equivalent businesses. An investment proposal would need to demonstrate the applicability of the process as well as show the business had the capability and capacity to implement it successfully.
g) Expansion Through Acquisitions
Acquisitions can be made to expand the business. They could be undertaken to increase channel bandwidth, acquire strategic competencies which can be used to improve productivity, strategic assets which can provide additional channels to market or additional products or services which could be sold to existing or potential customers. The nature of acquisitions, however, shows that only a minority prove to add positive value to shareholders’ net worth. Most fail due to inherent problems within the acquisition or through the integration process. The latter is often caused by a conflict of cultures or a management team inexperienced in acquisitions.
Thus possible acquisitions can be seen to be problematic by potential buyers unless the business can clearly demonstrate the firm can deliver on the profit potential. The target acquisition must be able to satisfy a serious due diligence and the acquiring business must have both the capacity and capability to undertake the integration and reap the benefits. Clearly this is a high hurdle and would take some strong evidence of probable success. However, a business which can demonstrate a track record of acquisition success would have a strong case.
In the case of a potential acquisition, forecast revenue would only be capable of being included in the projections if the deals were either concluded or capable of being concluded within the near future. The due diligence would need to have been completed and a plan developed for integration and exploitation of the acquired business.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
Comments