Recently I came across a report by the Boston Consulting Group (BCG) about opportunities for Mergers and Acquisitions (M&A) in a downturn. For those of us in small business, what they call M&A, we call buying or selling a business. At my last “M&A” opportunity I made a fundamental mistake. I want to share that mistake with you so you don’t make the same one I did, one that potentially cost me hundreds of thousands of dollars.
Predator or Prey?
M&A language makes use of the words “predators” and “prey.” These terms may have some nasty connotations for you, but let’s agree for our purposes that there is a mutual choice involved and a positive outcome for both parties. Instead of something dark and dangerous, a predator is someone with the financial and operational strength to purchase a business. And prey is a business that actively seeks a buyer.
Many, many companies have become prey as a result of the current reshaping of the global economy. But even in a healthy economy, the day will come when we become willing prey. How do we become smart prey – able to reap the highest dollar final rewards of our efforts?
There came a point in my business life when I willingly became prey. I was moving on to another project and I wanted the capital built into my business to fund my next move. This business was originally a bookkeeping business, which over the years morphed into an accounting and financial planning business. In the beginning years I was happy to gain each new client. In those years I had abundant time and too little money; each new client filled in my time and increased my total billing. As my business grew, I had less and less time and more and more money, so I hired a few people to help me. The day came, though, when my time was absolutely full. It was a typical supply and demand point, where the demand for my services exceeded the supply of my time to provide them. I saw two options:
I could hire more people and continue to grow my business. If I hired more people, the direct interaction with my customers would get farther and farther from my personal supervision. And a larger share of my time would be spent in business and staff management. My gross revenues would increase but expenses would increase too.
I could limit my client roster to those who could afford my services at higher rates. If I limited my clients, I could limit my staffing level and limit all of the time it takes to manage a large staff as well. I could spend more of my time in actual one-to-one interactions with clients and selectively mentor staff members for these rewarding personal interactions. My gross revenues would increase much less than option 1, but the expenses would also be less, potentially yielding higher profits.
Fundamentally I saw the choice as, which do I enjoy more: actually doing the work or managing the business? I chose to develop my business into a more boutique service with fewer clients, more personal interaction, higher rates, and the current staff level. I set a minimum monthly rate and only accepted clients who had businesses or personal situations that warranted that level. I actually did this several times in the course of my business: again and again I reached the point of saturation at the new level of billing and raised my minimum rate, effectively limiting potential clients to higher and higher income levels. And it was wildly successful in the short term – I developed an excellent client roster, high personal income, a few core staff, and more interesting, higher level client issues to grapple with.
But I had made a big mistake. I had forgotten the end game.
In this type of service business, the sale price of the business as a whole is generally calculated as 1 x earnings; in other words the annual gross revenue becomes the price of the business. So if the gross revenue before expenses is $500,000, then the sale price is $500,000; if the gross revenue is $1,000,000, then the sale price is $1,000,000.
When I restructured my business, the choice I made to offer a boutique service had restricted my gross revenues. The other choice, the one with more employees, less personal interaction with clients, and more business management, would have led to much higher gross revenues. From the point of view of day-to-day personal satisfaction, I made the right choice. From the point of view of eventual sale value of the business, my choice was dead wrong. I could have easily doubled the sale price of my business had I been planning ahead.
I wanted to share this with you and mention these key take-aways that I hope you will consider:
We should be aware, even if just starting out, that there will be an end point, either through sale, liquidation, dissolution, or succession.
There is potential value in our business, beyond the day-to-day earnings.
We should always know how our business will be valued for sale or succession.
We should keep our eye on building that value.
Look ahead two, ten, twenty years. Where will you be then? What will the value of your business be? What are you doing today to insure that value will be there? You could be building a much more valuable asset if you plan ahead.
Ellen Longo’s background includes business management, accounting, financial planning, astrology, writing, and teaching. A licensed CPA and CFP, she owned and managed a business advisory practice, Taos Financial Strategies, for twenty years. She then was the Chief Financial Officer and Director of Headquarter Operations for a large international non-profit based in New York. As leader of the Executive Team, she was responsible for the Finance, Legal, Marketing, Products, Risk Management, I.T., and Strategic Planning areas. In June 2009 she began writing about the intersection of business and astrology on her blog Astro4Business Intersections.
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