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Pitfalls to Avoid When Growing Your Business

A strong economy drives business growth. I think most of us can agree on that. Growth is usually good…

But if it is not controlled growth, it simply will not be sustainable.

In this blog, I outline several pitfalls to avoid when growing your business (especially in a high growth scenario). It’s all about managing the growth properly.

We have two current clients that are experiencing high growth, and they can barely make payroll.

With a pipeline of huge sales, how can this be possible…?

Their lack of planning on systems and procedures has also caused the management to not sleep well at night.

SCFO Lab Members: The reason most income statement projections fail is because of a lack of ability to accurately project sales! Start the Sales Genie EP now.

What Happens in a High Growth Scenario?

So, what happens in a high growth scenario? It should be all good news… The problem is that many times the decision maker(s) of a high growth company have never experienced high growth. Sometimes, these can be startups or a business that developed a new product.

If you have not experienced it, then it really is hard to imagine all the things that can take place.

Example of a High Growth Scenario

Let’s look at an example of a high growth scenario in a made-up company…

You are a manufacturer of widgets and you own a manufacturing facility. You have 50 employees before the company is about to explode in growth.

Your VP of Business Development or VP of Sales brings you new contracts that will significantly change the size of your company.  These contracts will double, triple, or even quadruple your business in the next 18-24 months.

So no worry about generating sales….

But there are several questions that need to be asked and pitfalls to avoid in this company.

Pitfalls to Avoid When Growing Your Business

Inventory: How are you going to fill all those orders?

You need to purchase a lot of inventory of raw material. In addition, your purchasing transactions just tripled in dollars and quantity. Finally, you have enough machines to manufacture items for the next 12 months… But next year, you will need to acquire more machines to keep up with demand.

Labor: What about labor?

The purchasing person is working already 50 hour weeks, and you know you will need to hire another purchasing person. Your plant labor needs to increase to compensate with the increased workload.

Right now, your 3 person accounting team includes 2 bookkeepers and a controller. You realize you need a cost accountant.

Systems, Process and Procedures

You have used a basic accounting system for 10 years, but you realize that you have outgrown the accounting system. It is not the right system because it does not handle cost accounting or standard costs. You want to integrate purchasing and inventory modules.

For years, you kept inventory and work-in-process on spreadsheets. Now, the dozens of spreadsheets are not reconciling. It’s time to automate inventory.

The once per year physical count of inventory is no longer enough. You need to have cycle counts and maybe at least a full physical count quarterly.

For years, you have operated informally, but you now you realize you need to have written policies and procedures.

Accounting

You have run your business on a hybrid cash/accrual system, never really got to full accrual accounting, and never really worried about GAAP financial statements. Maybe you should…

You never considered having your financial statements audited; however, with all this growth, you might sell one day. Having your financial statements audited would add value to your business.

Your company is growing so much, you need more than financial statements that tell you what happened in the past. Now, you need projections, budgets, and dashboards.

It’s time for a strategic financial partner. It’s time for a CFO.

Click here to access our Goldilocks Sales Method, and learn how to build your sales pipeline and project accurately.

Human Resources

Your admin person that did a great job all these years is now dealing with 3 or 4 times as many employees. It’s time to hire someone that has a good understanding of labor laws.

Payroll was done in house. Now with so many hourly people and manual time sheets, it’s time to upgrade and integrate payroll to the accounting system or have it outsourced.

Consider automated time keeping and get away from the multiple spreadsheets.

Legal and Tax

Your new sales take you out of State. Now, you are selling in 5 different States.

Have you created nexus in these other States? They have State taxes… Oops!

You had to hire a few people on the ground in the other States; your labor laws just got really complicated.

Sales and Use tax… Are you paying the correct taxes, not paying them, or over paying them?

You developed a new process or Intellectual Property (“I.P.”). Did you register this? Did your attorney suggest maybe creating a new legal entity that has the I.P.?

By creating the new legal entity or new legal entities, did you realize you just created a lot of complex accounting work by having all those legal entities?

Note: We recently had a client that created 19 legal entities because their attorney wanted to “protect” them from everything. Now, they had to consolidate all those entities with hundreds of intercompany transactions.

What is your Exit Strategy?

You will be quadrupling the size of your business in the next 2-3 years. You thought to yourself one day… I might want to sell this business.

What does it take to sell your larger company?

It takes time to set a strategy for an exit. It takes time to “professionalize” management and your back office.

Do you have a succession plan so that the business does not look like a one man show?

Do you have a 3-year budget with projections?

SCFO Lab Members: If you want to build your exit strategy and/or access your readiness for market, check out the Exit Strategy EP

How to Have Sustainable High Growth

I have hit on some of the basic topics that come up in a high growth scenario. There are many more things to consider.

The first thing that comes to mind is how are you going to pay for all this?

Do you have sufficient working capital?

Sometimes, you can manage working capital and have sustainable growth.

Many times, you need some sort of financing because of the timing differences in working capital. You cannot afford to sustain this high growth with out the financing.

Cash and working capital are key to the sustainable growth.

But just as important is having the right people. Not just having the right people on the bus… But having them in the right seat on the bus is critical. Not everyone is meant to sit in the same seat in a larger company. This applies to the management team as well as employees.

I have actually seen situations in high growth companies where the person that really needed to be fired was the owner or CEO.  Because the CEO of a $5 million dollar company is not necessarily the same CEO of a $50 million dollar company.

Don’t get me wrong… The ownership does not have to change. You can still own the business. But that does not mean you need to be an employee running the business.

Summary

In order to have sustainable high growth that will allow you to sleep well at night consider the above items but you must have the following…

  • Enough working capital
  • The right people in the right seats “on the bus”
  • More and different systems, process, and procedures
  • A strategic plan that will allow you to have a sustainable bigger company

Projections are a helpful way to grow sustainably and avoid an uncontrollable high growth scenario. Download our free Goldilocks Sales Method to start building your pipeline and projecting accurately.

Pitfalls to Avoid When Growing Your Business

Pitfalls to Avoid When Growing Your Business

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Planning Your Exit Strategy

When you start a company, you should generally know how you are going to exit the company. It could be a merger or acquisition, leave it to family, an initial public offering (IPO), a management buyout, etc.. Whatever the case, planning your exit strategy is almost as important as running your company because it’s the end goal. If you go into a business without the end in mind, then you may be building your company for the undesired exit. Before we go into planning your exit strategy, what is an exit strategy?

Planning Your Exit Strategy

What is an Exit Strategy?

Investopedia defines an exit strategy as “a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once certain predetermined criteria for either has been met or exceeded.” When an exit strategy is implemented, the valuation process begins. Traditional approaches to valuation require the company to present their financial statements, cash flow models, and competitive analyses comparing companies in a similar field or industry.

Cleaning up your accounting records is just one method to protect your company’s value. Read about ten other “destroyers” that could be taking value away from you in our Top 10 Destroyers of Value whitepaper.

Why is Planning Your Exit Strategy So Important?

Exit strategies are crucial to responding to issues like the following:

  • Divorce of an owner(s)
  • Lawsuits
  • Change in market conditions
  • Retirement
  • Cashing out
  • Death

When you inevitably run into this life events, it’s either going two ways: according to plan OR some way. The second option leaves you open to a lot of unwarranted risk. It could also go really well or it could be a disaster. You would never know though without a plan in the first place. Of course, no plan is going to be perfect; however, it does allow you to think of solutions outside a stressful environment.

Planning Your Exit Strategy

Planning your exit strategy requires you to think from two different angles – business and personal.

Business Exit Strategy

Planning your exit strategy can take a long time. Sometimes, it can take years. It is certainly not something that is done in a month or two. There are many things to take into consideration when planning your exit strategy, including the following:

  1. Where are you personally in life?  Are you young, mid life, or of retirement age?
  2. Where is your company? Is it a mature company with a lot of good historical financial records? Or is it a young startup?
  3. Or are your accounting records less than perfect?
  4. What is the condition of your industry and the general economy?
  5. Is your product or service technology based?
  6. Is your management team ready to take over?

These are just some things to think about as you plan your business exit strategy.

While you are planning your exit strategy, it is a great time to start identifying “destroyers” in your business that are taking away value. Click here to learn about the Top 10 Destroyers of Value.

Planning Your Exit StrategyPersonal Exit Strategy

Personal exit strategies are going to take a little different approach. Life events like death, illness, divorce, relocation, retirement, etc. are going to happen. If you are the owner of the organization, then start listing all of the potential situations that would impact your company. Write those specific plans down, and share them with the people that need to know – other owners, spouse, attorney, etc. The key is to let others know. If you spend your valuable time writing and developing an exit strategy, then the people that are carrying out need to know what the plan is and where to find it.

Valuation

The valuation process helps determine the economic the company. We all have some magic number that we would love to have once we sell our business, but is it realistic? Find out what your company is really worth well before you decide to sell. Listen to advisors and be realistic. I have had many entrepreneurs tell me their company is worth $X, just because that is what they want. After all, they did put their entire life into it. Well, just because you want $X, it does not mean you will ever sell it for $X. Remember, a sale actually takes place between a willing buyer and a willing seller. Understanding what your business is worth is not that difficult to do. Valuations also change considerably with time, markets, and the economy. So, timing your exit is critical.

Read about business valuation methods and purposes here.

Here are a few questions to ask when valuing your company:

Goal of Planning Your Exit Strategy

There is one major goal of planning your exit strategy: don’t leave any value on the table. If you are not ready to get out of the business now, then this is great opportunity to identify and address those destroyers of value that are taking money off the plate. Click here to access our free Top 10 Destroyers of Value whitepaper to prevent leaving any value on the table.

Planning Your Exit Strategy

Strategic CFO Lab Member Extra

Access your Exit Strategy Checklist Execution Plan in SCFO Lab. The step-by-step plan to get the most value out of your company when you sell.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Planning Your Exit Strategy

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What is your business worth?

So, you’re considering selling your business… Whether it’s to pursue new opportunities or to get out while you can, you need to start thinking about your business from a valuation standpoint. Even if you don’t intend to sell your business in the near future, building a business to be sellable is a sound strategy. So, what is your business worth?

When It’s Time to Leave

How do you know when it’s time to leave? If you’re experiencing these signs, you should strongly consider creating an exit strategy for your business:

Sick and Tired

Sick and tired… Literally. Entrepreneurs by nature are constantly looking for new opportunities. As a result, business owners often feel tired, fatigued, and overwhelmed by the business. Imagine constantly building your business for 25 years… it never ends, and it gets exhausting! The natural reaction is to look elsewhere, but before you start searching for the next big thing, you have to take care of your current business first. After all, it is your creation.

Declining Revenues

Decline in company revenues. A decline in revenues is never a good sign for a company. Let’s say that you’ve been trying new methods for years now, but revenues continue to decrease. Even zero growth is a red flag that you should take action.

Keep in mind, some business owners make their decisions based on this one reason, and some make a move based on a multitude of decisions built up over time.

Market is Declining

The market for your business is declining. I used to work with someone that owned a small business before the attack on the twin towers. He flew in nurses internationally to work in his medical business, which provided him steady cash flow and a healthy bottom-line. The demand was also constant… until the terrorist attacks on 9/11. From that moment, it was more difficult to operate a business that relied upon flying in workers from other countries. The delay of bringing in nurses wreaked havoc on his business. Because of this difficulty, he decided to create an exit strategy.

When market changes are out of your control, the best thing to do is prepare. Getting your exit strategy ready before market changes force your hand is better than waiting for it to crash.

Partner Disputes and Relationships

Starting a business with partners is easier than exiting a business with them. This may be a legal issue, as easy as looking at a contract.

Sometimes, it does get ugly. Facebook is a great example. If you’ve ever seen “The Social Network,” you’ll probably recognize this story. Mark Zuckerberg and former business partner/investor Eduardo Saverin started Facebook together, but when Saverin displayed breach of fiduciary duties, Zuckerberg diluted Saverin’s stake in Facebook. This ended with Zuckerberg’s majority ownership and Saverin’s minimal-to-nothing ownership.

How would this relate to your business relationships? When starting a business, you want to choose a partner that will be able to carry out responsibilities completely. You also should flesh out your contracts, terms, and exit strategy.

“Life is like a box of chocolates; you never know what you’re gonna get.” 

Things happen in life, like getting married, divorced, sick, and busy.  What are your priorities as a person – what do you value most? Is a business more important than your family, or vice versa?


Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.


What is Your Business Worth? | Assessing Valuation Methods

There are different methods to assess the value of your business. Many of these methods are specific to the type of business you have.

Asset-Based Valuation

This method, as the name indicates, calculates total asset value minus total liabilities. This method is criticized, however, for its ambiguity in valuing assets. The assets may not have been recorded on the balance sheet, or may be unique or custom products that are difficult to value.

The method is best used when focusing on real estate or other similar investments.

EBITDA Valuation Multiple

This is the most popular method, and usually references the market in relation to your business.   Businesses typically sell for 3X-5X EBITDA, but this can vary widely depending upon the type of business and the buyer. The ratios are calculated by taking the market value of a business, and dividing it by EBITDA.

According to ValuAdder, EBITDA valuation multiple removes the following when you value your business:

Who should you give the valuation to?

So, who should you give the valuation to? There are two people you should give it to:

Conclusion

Investors or buyers calculate the value business based on more than just numbers. You might be selling to a current employee, someone well-versed in the industry, or a friend. There are many reasons a business owner might sell the business – relationships, cash flow, new opportunities.  Both the buyer’s and seller’s motivation will affect the price of a business, so it’s important to consider all of the angles and ensure that the method of valuation you choose accurately assesses the value of your business.

Want to know some of the things that may be hurting the value of your business?  Check out our whitepaper Top Ten Destroyers of Value to see where you might be leaving money on the table.

what is your business worth

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

what is your business worth

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Exit Planning

See Also:
Economic Value Added
Employee Stock Ownership Plan
Future Value
Balance Sheet
Income Statement

A Guide to Preparing an Exit Plan

Are you like many business owners? A majority of closely held and family owned businesses will change hands within the next five years. But many Business Owners may not have taken active steps to transition out of ownership. Again, if you are like many of our readers, the reasons for failing to plan may be:

  • You may have simply been too busy working in your business to be working on it – at least until now
  • You may be unsure of how to begin Exit Planning, who to use or even where to begin. Those uncertainties can be addressed today.

Exit Planning

This issue of The Exit Planning Review™ and every subsequent issue will encourage you to work on – not in – your business. Your education about the Exit Planning process begins now. Proper knowledge and preparation can possibly mean millions of dollars to you when you ultimately leave your company. Start Exit Planning today and you can help to avoid the sad (but too common) fate of TJ Construction.

Years ago, I met with Jim and Tim McCoy, two owners of a thriving construction company. What I assumed would be a business planning meeting, turned out to be a “We’re getting out of business, how do we do it?” meeting. As successful as they were, they were tired of the government regulations, changing tax codes and day-to-day grind of running a multi-million dollar company.

A sale to a third party was not an option because Tim and Jim were not willing to stay on after a sale – and they had failed to develop a strong management team, which any savvy purchaser would require as a condition of purchasing the company. Transferring ownership to a group of key employees was also out of the question. None had been groomed to take on this type of responsibility and nothing had been done to fund this type of buy out.

Both owners were too young to have business active children so their only option was to liquidate.

Jim and Tim’s highly profitable company had little worth beyond the value of its tangible assets. After the sale of those assets, dozens of the employees lost jobs, the business disappeared, and Jim and Tim left millions of dollars on the table.

Engage in an Exit Planning Process

How can you help to avoid Jim and Tim’s fate? By engaging in an Exit Planning process that you control. An Exit Planning process begins by asking yourself the questions that follow. Your Exit Plan will begin to be created as you answer each of the following questions affirmatively:

1. Do you know your exact retirement goals and what it will take – in cash – to reach them?

2. Do you know how much your business is worth today, in cash?

3. Do you know the best way to maximize the income stream generated by your ownership interest?

4. Do you know how to sell your business to a third party and pay the least possible taxes?

5. Do you know how to transfer your business to family members, co-owners, or employees while paying the least possible taxes and enjoying maximum possible financial gain?

6. Do you have a continuity plan for your business if the unexpected happens to you?

7. Do you have a plan to help secure finances for your family if the unexpected happens to you?

These questions are almost misleadingly simple to ask, but to answer them affirmatively requires thought and action on your part.

Creating and implementing your Exit Plan may be the most important business and financial event of your life. But there may be some “destroyers” that are limiting its potential value. Click here download the Top 10 Destroyers of Value to maximize the value of your company.

exit planning

exit planning

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