Wednesday, February 19, 2020

7 Pitfalls Business Owners Should Avoid

In the iconic and timeless business book 7 Habits of Highly Effective People, Stephen Covey explains Habit #2: Begin with the end in mind. What that means is that there is a beginning and end to any business. The details in the middle will determine if you have a fulfilling and hugely profitable exit when it’s time to sell, or simply turn around and lock the door for the last time. Resigning to walk away and having nothing to show for it. We’ve identified 7 pitfalls that all business owners should avoid. Doing so will help you sell your business one day for enough money to enjoy the next phase in life, whatever that may be. Customer concentration Total sales volume doesn’t always tell the whole picture. It can provide a false sense of security if you have one or two customers that disproportionately represent too much of your revenue, and therefore, your profit. While it’s good while it lasts, it can cause other problems especially when the customer suddenly decides to cease doing business with you. Buyers will learn about your customer concentration in the due diligence process. If they spot a problem, expect a huge discount to their offer; that is IF they are still interested in moving forward at all. Work hard to diversify your customer mix and revenue streams. Messy financial records Buyers want to see clean books. This means accurately accounting for income and expenses. It can be tempting to blur the lines between a personal and business expense so make clear distinctions between the two. The more profit your company shows, the more a buyer will be willing to pay. Hire the right talent to keep good, accurate records and consider getting your financial statements audited periodically. Management team in place Buyers want the peace of mind to know your business will continue to operate long after the original owner is out of the picture. The only way to do that is to have a capable and loyal management team in place. Usually, it’s also in the best interest of the business owner, to guard against burnout. Work to decentralize decision making and empower others that have your best interests in mind. Buyers pay a premium for a management team that adds value to the business. Volatility of earnings Inconsistencies in quarterly or annual earnings are a value killer. Wild swings in earnings translate to risk and uncertainty in the mind of a buyer. Is the business being mismanaged? Did a key employee leave? Did a large customer go to the competitor? These are all the questions and doubts that come from erratic earnings reports. Pay attention to large orders and fulfillment and do what you can to spread those among multiple months. If peaks and valleys do happen in your business, be ready with a data-driven explanation about the periods in question. Seeing steady, consistent linear growth always brings more confidence to buyers. Having non-business-related expenses Avoid putting non-business-related expenses in your business. A buyer will review your expenses during the business buying process and once they spot an irregularity, they will need an explanation. Then, scrutiny increases and you run the risk of the buyer not trusting the numbers, in general. They will be confused and suspect. Examples could be health insurance for extended family members, vehicles and personal trips. Hiding the bad news Every business owner has had times they are not proud of, whether it was a result of their decision making or not. We advise being transparent about these times and doing it early in the discussion. Control the narrative by explaining the circumstances and your actions. Doing so will earn the buyer’s confidence and establish that your negotiating style is sincere and truthful. Purposely hiding information, only to be discovered by the buyer later, can kill the deal. For the transaction to move forward, both buyer and seller must have confidence in each other. Supplier concentration Similar to customer concentration, supplier concentration is equally important. This means that the sources of the raw materials needed to produce your goods must be diversified to insulate you from market price changes and interruption in the supply chain. Even if it may drive your costs up slightly, consider doing business with multiple competing vendors. However, there is a good chance It will have the opposite effect and help drive costs lower when vendors know you have multiple relationships. Ask yourself how NOT being able to do business tomorrow with XYZ supplier would affect your organization. If the answer scares you, look for solutions BEFORE it happens. These 7 pitfalls are learned through experience working with hundreds of clients over a lifetime of mergers and acquisitions. While there is no official one size fits all playbook for building and running a successful business, avoiding these common mistakes will move you from merely owning a job to owning a business that generates opportunities for yourself and those around you. The conclusion of your business life is always closer than it may seem, so start now to re-begin with the end in mind.
Alan Austin is president of Mt. Vista Capital, Inc., a full-service investment banking firm established in 2006 that provides professional M&A advisory, business valuation, and financial advisory services. He is dedicated to serving the needs of owners, shareholders, and management of privately owned, small-cap and public companies. His middle-market focus on sell-side advisory is designed to provide efficient execution of the clients’ transactions while maximizing value. The financial advisory services arm of the firm assists clients in structuring and sourcing the capital resources needed to fund organic growth or acquisition strategies. Whether in support of M&A activity, buy-sell agreements or estate planning, Mt Vista Capital can provide a fully compliant business valuation report. Mr. Austin has over forty years of broad-based corporate finance experience and has focused exclusively on middle-market investment banking transactions for almost twenty years. He is a Chartered Financial Analyst (CFA) and holds the Series 7 and 63 securities registrations. Securities transactions conducted through StillPoint Capital, Tampa, FL.

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