Scale-up Archives - The CFO Centre

5 key factors to help you sell your business

Any business owner will eventually be faced with the need to sell their business.

It could happen when a medical change or injury makes it impossible to continue, and you need to sell to secure your family’s future. Or maybe an offer comes along that’s just too good to refuse.

Regardless of the reason, it’s always a good idea to take steps to make your business ready for sale at any time. And as Chapter Seven of the CFO Centre’s book “Scale Up” points out, many of those steps will help make your business life easier, less complicated and with fewer unpleasant surprises, right now and ongoing.

To get the best possible offer for your business when the time comes – and make your life easier now as well, here are five key points on help you sell your business:

Ownership

A potential purchaser will want clarity around the question of who currently owns the business. If you’re the sole decision-maker in the company, it may be best to have all the shares in your name.

But if you want to reward long-time employees, and support their continued loyalty, you may want to grant or sell some shares to them. If that’s the case, a potential buyer will want to see that there is an effective shareholder’s agreement in place. This reduces uncertainty for the buyer.

Real property

If your business owns real estate, you need to understand that a buyer may view this as a problem – particularly if owning the land is not essential to the success of the business. Consider separating the property from the business, so that a potential owner has the option of avoiding a commitment to an asset that they may not want. One way to deal with this is to put the land into a holding company controlled by you, and then set up a lease agreement for the business to use the property.

Intellectual property

Over the years your company has likely developed trademarks, patents, brands, and industrial processes that are important to the success of the business. You may not think of them as something that has value, however, anyone considering buying the company will want to be sure about the ownership of this intellectual property and its value. So, it may be good to have your company’s IP valued professionally – you may be able to increase the purchase price based on that valuation.

Customer contracts

Many potential buyers will base their purchase decision on the expected ongoing cashflow of the business. So, they’ll want to know about how much of that cashflow comes through dependable contracts. But they’ll also need to know if those contracts will transfer to the new owner – and if a high proportion of the company’s income is due to the customer’s personal loyalty to the owner. Accordingly, it’s good to carry out an analysis of the company’s major customer contracts to see if the future business is sound. Because cashflow is so important in putting a value on a business, consider some of the points raised in our blog post “How your business can fly away from cash problems.”

Financial records

Many owner-operated businesses are operated in a fairly ad-hoc way. If an idea sounds good, the owner relies on their intuition and experience to decide on the next steps.

Potential buyers need to know that there is a plan in place – including a budget each year that they can see closely matches what was actually spent. They need to know that there are not a lot of unnecessary expenses, such as a local softball team sponsorship that is due largely to the owner’s personal interest, rather than its marketing value.

This is one of the areas where an experienced financial professional from the CFO Centre can help. This person can work with you well ahead of time to build a business that is financially successful and therefore attractive to a potential buyer. You’ll also get help with finding out what potential problem areas might cause a potential buyer to lower their offer or just walk away, so you gain the most benefit from the hard work of building your company.

The difference between a CFO and a Controller

If you’ve ever looked through a storage box holding clothes you wore as a child, you may have wondered, “How did I ever fit into something that small?”

Your company may be in the same situation. The equipment, personnel, and premises that fitted well when the company was starting out, may be constraining its growth as it matures.

One of the most pressing areas for change may not be your production system, office space or loading dock. If you find that cash shortages are constraining your business, if you don’t know if you can afford to expand your product offering, or you have no real idea which of your products are the most profitable, you may have outgrown your finance function.

Child-sized clothing might have fitted you well when you were small, and it could be that the financial system you had when your company was young, did what you needed it to do. Most companies start out with the founder keeping track of everything, maybe with the help of a bookkeeper or accountant, later growing into a department with a controller at the head.

But there is a world of difference between the “controller” mindset and the benefits available through someone who is able to help you take your company to a higher level – a Chief Financial Officer, or CFO.

Having access to those skills is important. A CFO brings enormous practical financial and strategic skills and knowledge to your company.

A report by the International Federation of Accountants[1] quotes James Riley, Group Finance Director and Executive Director, Jardine Matheson Holdings Ltd.:

A good CFO should be at the elbow of the CEO, ready to support and challenge them in leading the business. The CFO should, above all, be a good communicator — to the board on the performance of the business and the issues it is facing; to his/her peers in getting across key information and concepts to facilitate discussion and decision making; and to subordinates so that they are both efficient and motivated.

In this post, you’ll learn about the difference between a controller and a CFO, and why it may be time you made the change – and how you can do that without putting an undue cost burden on your company.

The controller mindset: accuracy, compliance, tactics

All companies need someone with a controller mindset, even if they don’t have that specific title on their business card. The controller watches the details, so you don’t have to. The controller focuses on making sure that financial records are accurate, prepares monthly financial reports, ensures payroll is made on time, invoices are issued and collected and ensures compliance with regulations.

Essentially, the controller manages the company’s books and records and is responsible for the transaction processing in a company and reporting on those transactions. With the focus on recording and reporting on past events, the controller’s role is mainly backward-looking.

And just to repeat – you need someone who makes sure all of these issues are covered.

But your company, even if it’s small, also needs someone able to watch the big picture. And as it grows, that need becomes more acute.

By comparison, the role of the CFO is to provide forward-looking financial management. It’s a proactive role since it is concerned with the company’s future financial success.

What are the signs that you may need more than what a controller mindset can provide? Maybe — if you need to understand the risks your company is facing, or you need to know which of several possible ways forward is best to improve performance or help you grow profitability, or it could be that you need to someone to help align the organization by establishing performance metrics and mindset throughout the organization, or perhaps you need to know how to finance your growth.

In short, you don’t just need someone to provide a utility function – you need a combination of coach/advisor regarding the resources you need to make your intended future happen.

The CFO mindset: big-picture, advisor, strategy

The role and responsibilities of a CFO have expanded in the past two decades, according to the International Federation of Accountants. That expansion it says has been driven by complexity as a result of globalized capital and markets, regulatory and business drivers, a growth in information and communications, and changing expectations of the CFO’s role. Whereas the CFO was once seen as a company’s ‘gatekeeper’, he or she is now expected to participate in driving an organization towards its goals.

The CFO still has the responsibilities for overseeing the Controllers role in record keeping to safeguard the company’s assets and reporting on financial performance

By contrast with a controller, the CFO expands that role to focus on improving the operating performance of a company, analyzing the numbers and presenting solutions on how to make those numbers better. This can include higher sales, lower costs or greater margins.

A CFO will focus on strategy, helping to shape the company’s overall strategy and direction, as well as a catalyst, instilling a financial approach and mindset throughout the organization to help other parts of the business perform better[2].

The controller looks to the short term, the CFO is long-term. The controller helps make sure your company is compliant with issues such as environmental reporting and taxes; the CFO helps you design and implement a strategy. The controller seeks to maintain what you have; the CFO helps you expand.

If your company is in a growth phase – or you want it to be in a growth phase, the controller has your back – and the CFO helps you move forward. It means together you can achieve better results, faster.

Feel free to reach out to us here at the CFO Centre. We’ll sit down and have a talk, even if it’s phone or video call, to get an idea of where you want to take your company, and what your options might be to support the growth you want.

Many of the issues in this post are covered in the CFO Centre’s e-book “Financial Reporting,” which goes into detail about the insights that you can gain from a CFO’s strategic view of your company’s financials.

[1] THE ROLE AND EXPECTATIONS OF A FD: A Global Debate on Preparing Accountants for Finance Leadership, the International Federation of Accountants (IFAC), October 2013, www.ifac.org

[2] ‘Four Faces of the FD’, Perspectives, Deloitte, http://www2.deloitte.com

7 Keys to Profitable Growth

Planning for growth is something every business owner will say they do, but not all business owners will do this effectively and with a focus that will generate profitable growth.

Many businesses plan for growth, but not profitable growth. Some businesses focus on growing sales without a focus on margins while others build infrastructures to support sales and growth that never materialize.

Michael Porter said, “If your goal is anything but profitability – if it’s to be big, or to grow fast, or to become a technology leader – you’ll hit problems.”

A business must focus on profitable, scalable and sustainable activities if it is to grow. Profit and the generation of cash to re-invest in your business must be made a priority, as it is an essential part of the financial strategy and structure of a successful business. Profit and a clear business plan will create a focus and the alignment of the organization, as well as attract investors and other sources of funds to fuel growth – all of which impacts the underlying business value of the business.

CFO Centre has identified 7 Keys to Profitable Growth:

Define your business goals & objectives
Produce a formal plan from which you can articulate a vision
Critically review your business
Identify competitive advantage, scalability & sustainability
Establish a financial plan
Identify milestones, KPIs & dashboards
Create organizational alignment
Nurture your culture, hire the right people & communicate the vision
Identify the financial resources required
Support the business with systems & processes to optimize performance
Measure, review, evaluate & course correct
Be proactive & prepared to be reactive

If you follow these 7 Keys and plan for profitable growth, you will ultimately:

Improve and grow profits
Maximize the scalability of your business
Enhance management team and organizational structure
Attract investors and other sources of funds
Increase business value

To enhance the value of your business and grow successfully, follow the 7 Keys and Plan for Profitable Growth.

Understanding Business Risk – How to Avoid the Road to Ruin

Entrepreneurship means taking risks, such as launching new products, entering new markets, or using new processes. Because this involves uncertainty, there are always chances that things will go wrong.

Our experience at the CFO Centre has been that the most successful companies take the time to understand the downside of the risks they take, and then find a way to compensate for those downsides.

As the CFO Cente’s book “Scale Up” says, a lot of business owners spend an unhealthy amount of time worrying about what might go wrong, but don’t have a formal risk management framework in place. One of the most dangerous positions to be in is not knowing what might harm you. That’s why “Scale Up” suggests starting with a comprehensive risk analysis, to identify potential risks to your business.

This post talks about how you can understand the risks your company faces, and develop a way to manage those risks.

Why is business risk analysis important to you?

Business risk analysis is an essential part of the planning process. It reveals all the hidden hazards, which occupy the business owner’s mind on a subconscious level but which have not been carefully considered and documented on a conscious level.

Not understanding the risks your company faces can bring your company to its knees, as a 2011 report, ‘The Road to Ruin’ from Cass Business School revealed.

Alan Punter, a visiting Professor of Risk Finance at Cass Business School, said the result of a detailed analysis of 18 business crises during which enterprises failed revealed that directors were often unaware of the risks they faced.[1]

“Seven of the firms collapsed and three had to be rescued by the state while most of the rest suffered large losses and significant damage to their reputations,” he said.

“About 20 Chief Executives and Chairmen subsequently lost their jobs, and many Non-Executive Directors (NEDs) were removed or resigned in the aftermath of the crises. In almost all cases, the companies and/or board members personally were fined, and executives were given prison sentences in four cases.”

“One of our main goals was to identify whether these failures were random or had elements in common.”

“And our conclusion? To quote Paul Hopkin of Airmic, the Risk Management Association that commissioned the research: ‘This report makes clear that there is a pattern to the apparently disconnected circumstances that cause companies in completely different areas to fail. In simple terms, directors are too often blind to the risks they face.’”

A lot of business owners spend an unhealthy amount of their time worrying about what might go wrong but don’t have a formal risk management framework in place. It is dangerous not knowing what might go wrong.

What are the risks facing your business?

Business risks can be broken up into the following:

Strategic risks – risks that are associated with operating in a particular industry
Compliance risks – risks that are associated with the need to comply with laws and regulations.
Financial risks – risks that are associated with the financial structure of your business, the transactions your business makes, and the financial systems you have in place
Operational risks – risks that are associated with your business’ operational and administrative procedures.
Market/Environmental risks – external risks that a company has little control over such as major storms or natural disasters, the global financial crisis, changes in government legislation or policies.[2]

The ‘shoot, fire, aim’ approach favored by many entrepreneurs is great for making things happen quickly but often jeopardizes the long-term stability of the business.

What is needed is balance.

Once the business understands the risks, it means that it can move forward decisively and confidently. It’s hard to do this when there is a cloud of confusion hanging over the business.

Where to start?

You need to assess your business and identify potential risks. Once you understand the extent of possible risks, you will be able to develop cost-effective and realistic strategies for dealing with them. Consider your critical business activities, including your staff, key services and resources, and the things that could affect them (for example, illness, natural disaster, power failures, etc.). Doing this assessment will help you to work out which aspects of your business could not operate without.

Identify the risks

Look at your business plan and determine what you cannot do without and what type of incidents could have an adverse impact on those areas. Ask yourself whether the risks are internal or external. When, how, why and where are risks likely to occur in your business? Who might be affected or involved if an accident occurs?

Assess your processes

Evaluate your work processes (use inspections, checklists, and flow charts). Identify each step in your processes and think about the associated risks. What would stop each step from happening? How would that affect the rest of the process?

Analyzing the level of risk

Once you’ve identified risks relating to your business, you’ll need to analyze their likelihood and consequences, and then come up with options for managing them. You need to separate small risks that may be acceptable from significant risks that must be managed immediately.

You need to consider:

How important each activity is to your business
The amount of control you have over the risk
Potential losses to your business
The benefits or opportunities presented by the risk

Conclusion

By managing the company’s risk profile and the risk profiles of the shareholders the whole business can be brought into alignment and can operate as a unit rather than as a set of individual parts.

This is actually one of the most critical roles in any business and your part-time CFO will support and guide you through the process.

At the CFO Centre, our CFOs have an intimate understanding of every conceivable risk that growing businesses face. This means that we can help you build a much stronger business by knowing how to navigate through the growth stages of the business cycle confident that you are equipped to meet the challenges as they present themselves.

It is never possible to eliminate all risks in a business, but it is possible to create a framework and implement systems which lower your exposure to risk. That, in turn, allows you to focus primarily on growing your business.

Knowing that you have a framework in place to mitigate risk means that you can free up time and mental energy.

Lower your risk today

Let one of The CFO Centre’s part-time CFOs help you with business risk analysis. To book your free one-to-one call with one of our part-time CFOs just click here.

[1] ‘The Road to Ruin’, Punter, Alan, Financial Director, www.financialdirector.co.uk, Aug 18, 2011

[2] Source: https://toolkit.smallbiz.nsw.gov.au

Is the problem your company solves BIG enough?

If you have ambitions to grow your small company into a large one, you need to make sure it has room to grow.

To see how that works, consider that humble box of baking soda in your refrigerator. Baking soda was originally developed for, well, baking. It solved a baker’s problem – the difficulty of getting baked goods to rise. But then, people discovered other problems the product solved – diaper rash, kitchen fires, grease stains … and refrigerator odors.

Manufacturers such as Arm & Hammer found demand for their product that was quite unrelated to their company’s original idea.

But what Arm & Hammer found out indirectly about solving wider and bigger problems, you need to do intentionally. How do you do that? Here’s a three-step process.

1. What problem(s) are you solving now?

You may have started your business to provide a specific product (such as baking soda) or service. But your customers may look at the situation quite differently. They’re looking to buy a solution to a problem they’re facing, like diaper rash or a carpet stain. Sometimes, it’s more than one problem – a box of baking soda helps bake cookies and helps clean the kitchen counter.

So, you need to get a clear idea of what problems you’re solving for your customers now. To do this, consult with your customers directly, get input from your sales team, and see what people are saying about you on social media.

Then ask yourself: are the problems we’re solving now the problems that will help us continue to grow? Should we be solving different, maybe bigger, problems?

2. Find the right bigger problems to solve

The world is full of bigger problems – climate change, overpopulation, civil unrest, and many more. But how do you find the right bigger problems? Some ideas that may guide your quest:

Do people with money feel this problem? If you’re running a business, you need to earn revenue – so the problems you solve must involve people who have the money to pay you. And, the problems must be pressing – those ideal customers must actually feel the pain and urgency enough to want to pay you to solve those problems for them

Does this problem give meaning and urgency to your life? As well as pressing on your customers, the problems you’re solving must motivate you. They have to help you get going in the morning and stay at it all day. Only then will you be able to motivate others on your team, even those who don’t interact directly with customers, to help solve those problems too.

Does this problem have staying power? You need a problem that will continue – and better yet, continue to grow. Only then will you have the basis for a business that has sustainability.

Now, let’s consider how you can bake that sustainability into your business.

3. Develop a solution that’s disruptive

If your answer to the problem of refrigerator odors is another box of baking soda, you may need to re-think your approach. You’ll be struggling against a well-entrenched competitor.

Instead, the solution you offer must be disruptive – in other words, it must be unusual and offer new solutions to existing problems. One reason is that if it’s a big enough problem, it won’t be solvable by current thinking, or someone would have solved it already. And, you need to seize attention, and offer an advantage compelling enough so that potential customers will say, “I want some of that.”

Our work at the CFO Centre is something like that. We saw a problem – entrepreneurs whose dreams crash to earth because they don’t have the financial lift they need under their wings. And we saw that many companies can’t afford a full-time experienced CFO (that cash problem again), and what’s more, they don’t need one.

What many (we like to think all) growing companies can use is ongoing access to a CFO’s ability to clear away the financial stumbling blocks, but without a full-time CFO’s cost. So was born our “fractional” CFO – a permanent, but part-time, financial advisor.

That’s our disruptive solution.

One thing we’ve found out is the importance of having the cash you need to build a way to solve the “big problem” you’ve decided to focus on. Without cash, it’s like you’re trying to walk when you need to fly. To learn more about the importance of cash flow, the reasons for it (such as slow-paying customers, high fixed costs), and some steps you can take to resolve them, download our free e-book, simply titled “Cashflow.”

Why are scale-ups more valuable than start-ups?

What if Bill Hewlett and David Packard had never got out of that famous Palo Alto garage? If they’d stayed a two-person company, we likely would’ve never heard of them – and the history of Silicon Valley would have been very different. Instead, at its peak in 2011, Hewlett Packard had nearly 350,000 employees around the world.

There are many small startups of the size Hewlett Packard was back in that garage, and it’s important for governments to encourage entrepreneurs to start companies. But the economic value of entrepreneurship isn’t in two-person startups. It’s in “scale ups” – companies that have hit a growth curve. Scale-up companies have particular value because:

Reliable jobs: Scale-up companies create ongoing employment– not only in technology, but ranging from marketing and sales, to production and support – and this creates more consumer spending to stimulate the economy and a larger tax base.

Skilled workers have a chance to shine: Successful scale-ups require leadership at every level as their organizations grow. Leadership can no longer come just from the top; it also needs to come from within. As companies grow and scale, they require access to specialist skills and are able to offer secure, well-paid jobs to highly skilled professionals. In turn, that keeps the knowledge and technical skills in the country while giving individuals the chance to build their professional and leadership skills as well.

Spinoff economic activity: Successfully scaled-up companies provide more than direct employment. They create spinoff activity, potentially creating new industries, and requiring increased activity from their own suppliers while supporting their customers’ growth. In turn, both the suppliers and the customers become stronger businesses.

Technological advancement: They can gather the financial resources and skills to invest in developing and commercializing new technologies. Scale-ups can also leverage the innovation and technological advancements coming from startups and bring them to a larger audience, helping other startups to also begin scaling.

Our book “Scale Up” quotes business guru and venture capitalist Daniel Isenberg, “One venture that grows to 100 people in 5 years is probably more beneficial to entrepreneurs, shareholders, employees, and governments alike, than 50 which stagnate at two years.”

This book points out that in many parts of the world including Canada, the focus for business growth is on helping start-ups succeed. People wanting to start companies find financial help, coaching, and other support through incubators and other institutions. “Scale Up” points out that startups are fun, exciting and sexy.

By contrast, the growth process is more of a hard slog. It’s not that common for a company to have a winning combination of a good idea or technology, along with the vision and determination, to grow past the “garage” stage into mid-size, scale-up stage. But when they do, there has not been the support network to help them successfully grow. Governments and organizations are now recognizing the need to create an eco-system for start-ups to help enable them to Scale-Up.

The CFO Centre has worked with thousands of companies over the past 17 years. Using this experience and the experience of our clients in Scaling Up, we have identified the key attributes and requirements for a company to successfully Scale. Over the next few posts, we will explore and explain our Scale-Up Framework. Because so many companies either fail or have trouble scaling, you need to have every possible advantage on your side.

So maybe you’re not working out of a garage, as Hewlett and Packard were when they started. But to follow their success path, you need to change your thinking from a startup mentality to a scale-up. Success isn’t a matter of predestination – HP’s founders hit many failures before they found what worked for them – but it does help to have a roadmap to help you on your journey.

The result is a company that is much more valuable when it comes time to move on to the next stage of your life and career.

Is your company ready for rapid growth and positioned to Scale-Up?

“First mover advantage doesn’t go to the first company that launches, it goes to the first company that scales.” – Reid Hoffman, co-founder of LinkedIn