Heading for a big exit : Why does one company sell for more than another? Part I

Introduction

Most of us have bought or sold a house and understand that many factors determine the price we pay.

We are attracted by the size of the house, the location, and the proximity to schools, restaurants, and work. We have concerns about the purchase price, a higher mortgage, increased utilities and maintenance costs and what a home inspection might reveal.

It should be no surprise that a business purchaser also has to balance the excitement and ambition of expanding the business with the cost of acquiring it, the availability of finance, future profitability, and unexpected liabilities.

The key to maximizing value is to package your business as attractively as possible for potential purchasers. Once a buyer is found, business owners need to ensure there are no surprises or disappointments leading to a change of heart on the purchase price, extra restrictive conditions on the purchase or the sale falling through.

The price paid for a business is often quoted as a multiple of historical earnings. If a purchaser is buying the expectation of future earnings, the multiple tends to be higher in fast-growing industries and fast-growth companies. This is why many businesses move from low value-added buy/sell business models into higher value-added consulting/service models where profitability and opportunities for growth appear better.

There are many advisers around who claim to be able to sell your business for the maximum price. You need to be able to select an advisor with the credentials and experience in your industry, in your market and in your size of the business, to work with you over a period of months or years to achieve your goals. The right choice should maximize what is important to you: price, post-tax cash, the future of your staff, or the continuation of your culture and the values of the business. The wrong choice could end up losing a sale and wasting a lot of time and emotional energy that might even damage the business for a few years if handled incorrectly. The house sale analogy is relevant here. We can help with the information and introductions to make the correct choice for you.

The key to maximizing value is to package your business as attractively as possible for potential purchasers.

Planning an exit

Much of exit planning is actually implementing good business practices. As a business owner, you will exit at some time, hopefully on your own terms and at a time of your choosing. To achieve this, it is necessary to plan ahead to ensure the business you are selling or passing on is in good shape to generate future profits for your successor.

It’s equally important that as much cash as possible remains in the business to be distributed to its owners and employees rather than paid in taxes.

It is an often-quoted truism that you sell a business when someone wants to buy, not necessarily when you want to sell. If the dream buyer turns up with an unsolicited offer tomorrow, would you be in a position to maximize that opportunity? Probably not, but forward planning would make life a lot easier should that call come. When a sale takes place it is often the finance team that is placed under the most pressure, due to the need to prepare documents and analyses. It is, therefore, the finance team that is best placed to help you plan in advance.

Ownership, shares, options
Starting with the basics, look at who owns the business. The simplest structure is for all shares to be owned by one person who makes all the decisions and receives all dividends and payments (after tax) for selling the business.

If you have more than one shareholder, do you have a Shareholders’ Agreement? An agreement governs the relationship between shareholders, as well as if an exit opportunity arises, what happens if there is no unanimous agreement on the terms of the exit. It also includes the procedures to be followed, the valuation method and rights of shareholders during an exit, whether by way of a business sale or the death or critical illness of a shareholder.

Are there others who are expecting to become shareholders, perhaps have been promised that they will be? Would it make commercial sense to reward some members of management with shares or options so that they have an incentive to help add value to the business and remain with it? New shares or options may require a valuation of the business if you are going to take advantage of tax-saving opportunities. The basics of option plans have stayed the same for some time but the detailed rules change in most budgets so it is wise to get professional advice before implementing a plan.

Property
Property can be a major sticking point for a purchaser. Assume it will be regarded by purchasers as a large liability which will be a drain on the benefits they are planning on for their business after the acquisition.

If the company owns the property, has it been appraised recently and is the value reflected in the balance sheet? If a buyer is interested in the property, then it is better to have an appraisal available to include in the accounts rather than have uncertainty when sale negotiations have already started. That said, unless the premises are critical to the business and it has to be included in a sale of the business, many buyers do not want to take on a freehold property. You may need to consider how to dispose of property or lease it to another business going forward.

It is worth considering the sale or transfer of property to a holding company owned by yourself and/or a family member. The property can then be used by the company on a commercial lease and generate ongoing retirement income. As with any property transfer, there are complications: primarily the interaction of a number of provincial and federal taxes that require proper advice sooner rather than later.

A lease may be viewed the same way by a purchaser, regardless of the owner. It is, in their eyes, a long- term commitment that may be restrictive to a growth company or to a buyer who may want to consolidate operations. Clearly, you need to continue running your business and need some security of tenure but is a ten-year lease with upward only rent reviews the right thing to enter into when you might be wanting to sell within three years?

Pensions
When defined benefit pension plans were the norm, employee pension plans were treated with extreme caution by all buyers.

It is unlikely that you have such a plan but if you do, the funding position and the plan valuation will be major considerations. If there is likely to be a problem, it should be addressed sooner rather than later. There have been many instances of pension funding deficits exceeding the business value, which is not a good place to be.

Pension plans are a terrific incentive for employees, but as a business owner, a defined contribution plan eliminates many of the risks.

Intellectual property
Where intellectual property (“IP”) is obvious – physical inventions such as the bigger and better mousetrap – some businesses have registered patents and/or trademarks to protect the unauthorized use of their IP.

Have you considered what you have developed over time in your business? What products, processes or brands do you use that might be capable of being protected and would be worth spending time and money on to protect? Buyers need to know that if your business relies on particular IP to continue to operate, the IP is protected and the business will not be undermined by a competitor who can copy, produce at lower cost and sell in greater volumes.

Have you considered what you have developed over time in your business, be it a product, process or brand, that might be capable of being protected and would be worth spending time and money on?

Contracts
Do you have formal contracts or Terms and Conditions with all your suppliers and customers? If so, have they been reviewed for any legislative changes? Do you know what happens if you sell? Can the contract be replaced by the new owner (or will it remain in place after a change of ownership)?

It is another case of the buyer gaining confidence that the business will continue to enjoy the same or better terms of sale and purchase post-acquisition.

On a similar theme, are there any significant customers or suppliers (over 20% of sales or purchases) and how might they react to a change of ownership? A highly concentrated customer or supplier base can create risk, not only if they fail but also if they might refuse to deal with a potential acquirer for competitive or other more emotional reasons. If it is possible to reduce customer concentration risk by increasing sales, it’s worth doing (and doesn’t require professional advice).

Numbers
Do you budget and forecast the business? If so, how successful have you been at achieving your forecasts? If not, why not? How do you plan for the resources required to achieve your targets? Buyers can be helped to assess your business by reviewing your budgets and forecasts and gain confidence from your ability to achieve expected results.

Also important is to be able to show a rising trend of profits, profitability and cash flow. This should be demonstrated over several years if possible and is not something that can be done overnight. Any “blips” need to be explained honestly and consistently to be credible.

There may be one or two expenses or assets that are likely to be unattractive to a purchaser. Rather than have an embarrassing discussion during sale negotiations, consider removing anything that has dubious business benefit – company housing, overpaid relatives not contributing to the business, the nanny, gardener or handyman who never come to the office but can be found at the business owner’s home, the sponsorship of the local cycling club because it is a personal passion from which the business gets little reward.

Costs such as these indicate that personal and business expenses tend to get mixed together, leading to a suspicion that there could be more and that the taxman might be interested at some future date when it could be the acquirer’s responsibility.

It is also sound financial sense – the business should sell for a multiple of profits, but if those profits are deflated by extraneous costs, the reduction in the sale price will be several times the benefit from a few personal expenses.

Come back for the second part of this article, detailing the due diligence process, available soon!

The importance of a business plan and how to create one – Part II

In our previous article, we have highlighted the importance of creating a business plan. In this article, we will focus on the key elements of a business plan, the sections it should contain and how a part-time CFO can help you to create your business plan and implement it.

The key elements of a business plan

The most important part of your business plan is its financial information. Your financial forecasts should include your cash flow predictions for the next 12 months or more. You’ll also need to provide monthly sales estimates and costs to prove the business has enough working capital or to show that you understand you need to arrange additional financing.

You need to explain all assumptions in the business plan, with best and worst case scenarios. Detail the risks you’re likely to face and how they will be dealt with.

The Business Plan Sections

Executive Summary
The executive summary is usually the first section of any business plan and provides a condensed overview of what the business is and how you intend to reach your goals. If you’re seeking funding, you should detail the terms of the financing and the amount needed. It’s best to leave writing this section until after you’ve completed the rest. It should be less than 1,400 words.

Company description
This is like an extended elevator pitch. You need to explain your company history, business goals and how you satisfy the needs or wants of your market. You will also need to explain your competitive advantage.

Market analysis
You will also need to provide market analysis, size and expected growth as well as, industry participants, distribution patterns, competition and buying patterns, and your main competitors.

Organization and management
In this section, you need to detail your management team (and plans to fill any gaps within that team), your organizational structure, your Board of Directors, as well as a personal plan.

Service or product line
You need to describe your product or service and any associated copyright information or research and development activities.

Marketing and sales
You need to detail your marketing strategy (including pricing, promotion) and your sales strategy (including sales forecasts, programs, and techniques). Your costs, services, and support will also need to be included in this section.

Financial projections
This section outlines what you expect your business to achieve financially over the next three to five years. It needs to include your projected financial statements, expected cash flow and break-even analysis as well as key financial indicators and ratios. Don’t be tempted to overstate your numbers or expectations to obtain financing. It’s likely to harm rather than help you get that funding.

Funding request
If you plan to ask for a loan or capital, you need to include a formal funding request as part of your business plan. You need to include details of how much money you need now and how much you’ll need in the future.

How a part-time CFO can help you to create your business plan and implement it

The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:

One of Canada’s leading CFOs, working with you on a part-time basis
A local support team of the highest caliber CFOs
A national and internationally collaborative team of the top CFOs sharing best practice (the power of hundreds) Access to our national and international network of clients and partners

With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.

In particular, your part-time CFO will work closely with you to develop your business plan and your timetable for implementation to:

Gain a full understanding of the business and its operating
Work through the existing strategic plan with you and make necessary changes to build a plan which clarifies how the company’s objectives can be realistically achieved.
Agree on milestones and break down the plan into annual and quarterly targets.
Conduct a fresh SWOT (Strengths, Opportunities, Weaknesses, Threats) analysis, bringing the plan up to date.
Conduct a new PEST (Political, Economic, Social and Technological) analysis, bringing the plan up to date.
Carry out a full competitor analysis to understand in detail what is and isn’t working in the market.
Explore opportunities for effective market research to enable innovation and development of new products/ channels to market/operating procedures
Identify key players in the business
Identify skill gaps in the business
Agree financial incentive structures to retain and motivate key members of the team
Identify five key metrics for determining what the future course of the business should look like
Agree on the exit or succession strategy
Develop a clear, coherent message (vision/ mission/purpose) to staff and to customers
Work with the senior team to ensure individual department goals are aligned with the big picture strategy
Agree on a who/what/when set of objectives for all department heads
Implement accountability protocol for every member of staff
Determine methodology which allows the senior team to course correct periodically when a change in strategy is required
Agree on delegation of authority to department heads to spread responsibility across the business and to free up the CEO/business owners time
Create a feedback route so that strategic goals are regularly shared with staff
Develop a set of relevant KPIs (Key Performance Indicators) and a system which allows for regular (daily/ weekly/monthly/annual) monitoring and reporting
Develop a long-term efficient tax structure for the business and for key employees
Identify key outsource suppliers/advisors and, in particular, corporate finance contacts

This process will instill a deep feeling of confidence both within the senior team and throughout the rest of the business.

Conclusion

Installing an up to date business plan or ‘roadmap’ in your business will allow you to experience a sense of control, which may have been absent since the day you started your company.

The business plan (and the methodology for updating the business plan) will remove a significant amount of confusion from your operating procedures. There will always be challenges contained within new projects but you will have a proper framework against which all decision-making can take place.

The plan provides the blueprint for delegating responsibility to your team and allows you to create some space in your own environment to work on growing your business, with your part-time CFO as a constant guide and sounding board.

You will move out of the chaos and into a more serene working environment where each of the gears, which make up the bigger system, is able to move in harmony.

Potential hazards will have been identified in advance and dealt with before they become unmanageable. You will be able to move from a culture of fire-fighting to a culture of fire-prevention and the benefits will be felt by each member of your team and most probably by your customers too.

The business plan is the first key to profitable growth!

Keys to Profitable Growth – Financial Reporting

Have you ever been so far off the grid – on a wilderness expedition, maybe – that your smartphone doesn’t know where you are? If you click on your “maps” app, your phone just shows you a blue dot, figuratively shrugs its shoulders and says, “You’re on the blue dot. But I have no clue what’s around you, where you’ve been or where you’re going.”

That uncomfortable “lost” feeling applies to more than just wilderness trekking. It can apply to your business – when you have no clear idea of which products or services are most profitable, how much you can afford to spend on new equipment, and whether you are on track to your goal (maybe, a comfortable retirement?).

So what’s the “maps app” for your business, so you can see how to get where you want to go? It’s your financial reporting system.

Financial Reporting – One Key to Profitable Growth

To be successful, you and your senior managers need regular access to accurate insights into your business. You need to be able to spot problems when they first emerge; measure and assess what’s working; identify and capitalize on opportunities, and recognize and manage threats.

When you know the reality of how your business is actually performing, you have a platform to confront the reality and can make decisions based on facts rather than speculation, bias and anecdotal evidence.

The importance of business reporting is twofold:

To have visibility into the future (knowing what is likely to happen around the corner).
To have retrospective visibility over past performance (that is, to analyze performance data and use it as a tool to course correct for the future).

A lot of businesses wait too long to introduce a proper business financial reporting structure. But without the right information collected in a timely way, effective analysis and robust planning is impossible.

Well-constructed business reports are the secret weapon for CEOs and business owners of ambitious growth companies. They will reveal how your company is performing and how far you are from reaching your goals.

Three key aspects to your financial GPS

While large companies have sophisticated financial systems tied to human resources metrics, production equipment, and inventory controls, you don’t need to get that elaborate – yet.

Start with mastery of three key financial statements:

The Balance Sheet
The Cash Flow Statement
The Profit and Loss Account

These reports can reveal such information as:

How effective your team is at controlling costs and deploying expenses to generate sales
Which of your products or services are the fastest growing and the most profitable
Your highest growth potential and most profitable customers
Where your break-even point is (how much sales the business needs to produce to cover all its costs)

Having all your business data at your fingertips means that you can spot gaps and weaknesses at a glance, have clear visibility over the future and course correct daily to ensure you are still en route to your destination.

Your company’s balance sheet: shows what your company owes and what it owes at a given time. It reveals:

The net value of your company (which is useful if you plan to raise capital to finance future growth, sell your business, etc.)
Current and long-term debt obligations
Asset management (how effectively you’re managing your assets) and liquidity ratios

Lenders, investors and potential customers can use your balance sheet to assess your company’s creditworthiness, as well as its stability and liquidity – indicating its ability to fund growth without resorting to outside financing.

Profit and loss account: while the balance sheet is like a still image posted to Instagram, the P&L account is more like a video. It is the main way businesses determine how well they’re performing over time.

This is the main tool businesses use to gauge their profitability. It shows how well (or not) your company performed over a particular period of time in terms of revenue, expenses and earnings.

The Profit and Loss Account reveals the steps you can take to increase profitability (for example, whether to focus on more profitable product lines or services or to cut unnecessary expenses).

Investors will use your Profit and Loss Account to assess the ability of a Company to generate cash from operations, service current financing obligations and assess the level of risk involved in extending additional credit or venture capital to your company.

Cash flow statement: reveals how your company spends its cash (cash outflows) and where the money comes from (cash inflows) during a period of time. It is divided into three sections related to your company’s business operations: cash flow from operations, financing, and investing transactions.

Essentially, the Cash Flow Statement reveals whether or not your company has the cash to cover its daily activities, pay bills on time and maintain a positive cash flow. It also helps you to determine whether you’ll need additional working capital to buy inventory or to fund seasonal fluctuations.

Interpret your key financial statements using ratios

To interpret and understand the numbers contained in your financial statements, you should use financial ratios. The ratios are computed from numbers taken from the Profit and Loss Account and the Balance Sheet.

They measure performance in percentage terms rather than raw numbers. This means you can compare your company’s performance with other businesses in your industry, with your previous results and with your projections. _

Typically, owners, managers, and stakeholders look at four categories of ratios to analyze a company’s performance:

Liquidity ratios – show your company’s ability to meet its financial obligations
Profitability ratios – help evaluate your company’s ability to generate a return on its resources
Leverage ratios – show how your business is using debt, relative to capital
Efficiency ratios – reveal how effectively your company is managing assets.

Some ratios will be more applicable to certain industries and businesses than others. If you provide a service rather than sell products, then ratios like return on assets and inventory turnover are unlikely to be relevant to your company whereas the receivables revenue is critical to your business operations.

It’s best to choose the five most relevant ratios to your business and track those as part of your monthly management operating plan.

Conclusion

The benefits of having regular access to high-quality financial management reports are far-reaching. Good reports reveal the efficiency (or otherwise) of the constituent parts of the business and enable you to deal with potential threats and take advantage of opportunities to grow your business.

The compound effect of making regular, quick and high-quality decisions based on a strong set of data and reports cannot be overestimated.

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

Become a world class leader with a strategic plan

By Chris Carl
Regional Director at The CFO Centre

A part-time CFO is to an SME what a doctor, a physical trainer, and a world-class coach is to a superstar athlete. The superstar athlete will always be good – but they will only be great if they are healthy (the doctor makes sure of that), they are in great physical shape (the trainer takes care of that) and that they can compete at a world-class level (the world-class coach takes care of that). In a business setting, the CFO Centre refers to these same three levels of conditioning as Business Support (being healthy), Operational Skills (getting in great physical shape), and Strategic Planning (competing at a world class level).

The highly experienced and successful part-time CFOs from The CFO Centre can help make a company flourish in every respect. From increased profitability, to growth through financing or mergers and acquisitions, to increased happiness in the C-suite and all employees, a part-time CFO can literally help perform miracles. But, these results can only be achieved through sound business practices and a great strategic plan. A successful experienced CFO, that costs only a fraction of a full-time CFO, can make all of these happen.

This article (part 4 of 4) discusses developing and implementing a Strategic Plan to make your company able to compete in any market.

Read Part 1 | Part 2 | Part 3

Strategic Planning

In our final comparison to becoming a world-class athlete, regardless of how strong an athlete you may be, you will never compete at a world-champion level without a great coach. That coach helps you develop your plan to get to the top of the podium – from taking stock of where you stand today, to figuring out what actions might hurt you if not attended to, to laying out a timetable to achieve each part of your overall goal. That coach ensures that you have all of the right resources around you that you will need to win that championship, he/she does a lot more than sit on the sidelines and clap when you perform well.

In business terms, to be able to achieve all of your business goals, (and maybe some you thought were beyond your wildest dreams) you need a Strategic Plan. Don’t confuse this with a wish list. A Strategic Plan involves setting very high goals but it also requires taking stock of your current situation, identifying the risks you need to overcome to achieve your goals, a step-by-step path and resources required to get you there, and a definitive timetable for each step to make sure it all happens. Once in place, it also requires execution.

At The CFO Centre, we believe the highest value we can bring to any client is to help them develop, and execute a “Strategic Plan” that takes the company well beyond what the CEO even thought possible. By following the path of the four key elements, a part-time CFO will bring financial abundance to the company. At the CFO Centre, we define these 4 key elements as:

Strategic Planning can sound lofty and somewhat irrelevant to a company that is in the trenches every day just fighting to survive. But it is exactly what the company needs to get them out of the trenches and on to a much better playing field. A Strategic Plan is like a roadmap and without one, the company will wander aimlessly without direction. And when communicated properly, it helps great alignment and purpose within an organization.

For example, one company I worked with as an investor had world-class technology to help other companies optimize cleanliness and environmental compliance in a manufacturing setting. The small management team was very strong and had great breadth between technical, marketing and financial experience and skill. And while they knew they had a world-class technology, they could not generate the marketing and sales dollars sufficient for them to access and educate the larger customers they desired. By selling to smaller customers, their unit sizes were smaller and they had to keep prices (and therefore margins) low just to be able to make the sale. The result: they were losing money or barely breaking even month after month and year after year.

When I met them through a fellow investor, I found a team that was capable, very focused on getting the job done, and who really knew exactly what they wanted in the long term. BUT, they were stuck in a low margin rut and couldn’t find a way out. So I suggested we take a few more hours out of their life for a few weeks and develop a Strategic Plan.

This plan had to be real, but it also had to lay out a path for them to get to point that they could be selling this amazing equipment to the large customers who needed it most. We sat down and recorded all of the possible goals (crazy ones and real ones), and we looked at all the things that could stop us. While there were many small issues we solved, or developed a plan for, in this process, one of the best examples of how a great Strategic Plan could work was in deciding how to increase product awareness and sales to the desired customers.

Everyone at the company felt that they needed to bring on a couple of top-notch sales people who could cover the continent. The problem was that, just like a full time CFO, highly qualified experienced sales people are expensive to employ full-time and for this company the selling process could take up to a year. That was an added overhead the company just could not afford. So instead we looked to how we could leverage the skills of others and decided that if we could possibly find distributors who already sell products to our desired large customers, maybe they could be our conduits to sales.

So we laid out a plan, and a timetable (the most critical element is that you MUST have a timetable). We decided that we wanted a distributor in 50 States and 12 provinces. I suggested to the team that we set a goal of 1 year to achieve this and I was almost laughed out of the room. “Impossible” they said. But, not wanting to leave and still wanting to become an investor, I asked them not to think about it as 50 new distributors in the US and 12 in Canada a year, but rather 4 distributors in the US and 1 in Canada each month. I suggested that by breaking this seemingly insurmountable plan down into bite sized pieces that not only might we get there, we might just get there faster than we think.

After much debate, not only did we agree to give this a try, but with everyone being so busy we asked everyone on the team to contribute just a little bit. That meant sharing our plan with other customers and contacts, getting on line to research who might be out there, and start making calls. The admin assistant of the company drove the process by recording and organizing everyone’s efforts and new contacts daily, and by doing lots of outreach on her own as well. The team developed financial terms that were good for the distributor that would also be great for the company, and the sales manager found a draft Distributor Agreement that was only 2 pages and had the lawyer sign off.

In month one we signed off on 2 of the 5 that was our goal, and in month 2 we got 4 of 5. The numbers increased every month and by the end of month 10 we had a distributor in all 50 States and 12 provinces in Canada. We achieved this “unachievable goal” in 10 months instead of the year – even when the team thought getting it done in a year was impossible.

The result of setting the strategic goal to eastablish a network of Distributors was the company increased the value of the average sale from $20,000 per sale to $125,000, margins increased from 20% per sale to almost 50%, and the customer profile went from a privately owned business with under $5 million in sales to 80% of customers now being listed on the Fortune 500 – and three of them on the Dow 30.

To be fair, there were lots of fits and starts to get to this point, and there were times that it all seemed like it would come crashing down. But, by having that strategic plan to keep going back to and to measure themselves by, and by having a month to month plan of something achievable rather than a one year plan that seemed impossible, the Company did achieve what seemed like impossible goals. And today the same team is still working their butts off to continue growing the company – but they smile a lot more than they used to – and they know their now larger paychecks can be cashed.

There are dozens of stories like this from our CFOs at the CFO Centre. Strategic Planning may seem like fluff when you can barely make payroll next Friday. But in reality, a strategic plan is exactly the tool that a company with great products or services needs. Whether you are barely breaking even, or making millions in profit, EVERY company will grow and improve with a well developed, and well executed, Strategic Plan. The part-time CFO is the perfect resource to help an already busy team make this happen.

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Chris Carl has a 30-year career growing manufacturing based companies with novel technologies both as start-ups and within Fortune 500 companies. Having held both CFO and CEO roles, he has raised a combined $500 million in debt, mezzanine and equity financing in private and public companies listed in Canada, the US and Europe.

The CFO Centre provides highly experienced, part-time CFOs to small and mid-market organizations at a fraction of the cost of a full-time CFO. We are committed to helping companies work through complex financial issues, in order to maximize profit and provide senior financial leadership.

Our global team has over 400 CFOs across 13 countries; our services include business and strategic plan development, financial reporting, cash flow management, internal control, risk assessment and mitigation, training and development, and negotiations.

www.thecfocentre.ca
1-800-918-1906 or email: [email protected]