In the first phase of your Business Estate Plan, the first step is preparing presentable due diligence. Why is this step so vitally important?
Presentable due diligence is simply the foundation for Value Maximization. It is the preparation and analysis of everything about your business that enables you to establish and defend the price you desire for your business.
If you do a good job, you could command a 3X EBITDA price. If you do a great job, you could command a 5X EBITDA or more price.
Let’s not even contemplate the impact of doing a poor job.
Your internal analysis examines your business in six dimensions:
What’s your ownership structure? How well are your contracts written – with owners, employees, customers, suppliers and others? What intellectual property have you protected? How have you handled any litigation? Yes, the legal dimension is very important to maximizing the value of your business.
It’s not surprising that there is a lot of Financial due diligence work to be done. You’ll need to assemble 3 years of historical financial data, build your 3 year financial forecast and complete thorough analysis of your Balance Sheet, Cash Flow, Revenue, Expenses, Taxes, Capital Budget and Investments. Your numbers matter, but your business is more than your numbers, isn’t it?
What are the internal (employees, contractors) and external (advisors, suppliers) structures of your business? Who are the key people integral to your business success? What are your compensation and benefit programs? How are you measuring employee productivity, engagement and retention? Are your people your greatest asset or a liability for transitioning your business?
How is your business different form your competition? What are the unique benefits, features, functions and advantages of your products and services? What are your pricing strategies? How many ways do you promote your business? Do you have multiple distribution channels? How do you sell – and how well? What’s your commitment to service? Marketing touches every aspect of your business and can greatly enhance the value of your business.
What technologies have you deployed in your business? How have you applied those technologies? When did you implement them and when are they obsolete? What are your plans for replacement and innovation?
How do your business policies, processes and procedures impact your business productivity and performance. Your operational play book will go along way to enhancing the value of your business when it is time to transition.
Your external analysis also examines your business in six dimensions:
What are the macroeconomic indicators and how do they impact your business? What microeconomic indicators impact your customers, suppliers, employees and access to capital? How have they impacted your business in the past and today … and how might they impact your business in the future?
What are the trends in your industry? What are your market demographics and how have you segmented and targeted various markets? What are the needs in your market and what barriers to entry are in place to keep new competition out?
How have current global, national, regional and local laws and regulations impacted your business? How might potential legal and regulatory actions impact your business in the future? If you do this work in your own due diligence preparation, you can prevent issues from emerging in the transition process that could adversely affect your price.
Who are your key suppliers? What are your purchasing trends and forecasts? How strong are your relationships? What are the risks with your suppliers and how would you mitigate those risks?
Who are your competitors? How do you differentiate your business from their business? What are their strengths and weaknesses? How do you stack up against them in terms of market share and rank? Where do you win and where do you lose in competitive situations with each of your competitors?
Who are your key customers? What are your sales trends and forecasts with each? How strong are your relationships? What are the risks with your suppliers and how would you mitigate those risks?
Due diligence is typically considered the work of the buyer in transitioning your business. By taking control of the due diligence process, you take charge of framing the price of your business and maximizing your value.
Even if you are not planning to transition your business today, preparing for your transition now not only makes your business more valuable when you do sell, it can make your business more profitable now as well.
Founder & Chief Executive Officer
Alex has advised hundreds of small businesses on strategic planning, business development and all areas of corporate finance, specializing in helping business owners sell their business or raise capital for growth and acquisition. In his work with business owners, he has found many have done very little planning for an eventual transition away from the day to day operations or out of the business altogether.
As a native Arizonan, his passion is working with and advising local companies and helping business owners gain comfort in their eventual retirement and have the knowledge that when the time comes to sell the business they have a well designed plan of action already in hand, a good idea of what that business is worth, and who the next owner will be. He founded Arizona Business Transitions to assist business owners plan for an exit or transition, even if that transition is not on the horizon.
Alex attended Brophy College Preparatory and graduated from DePauw University – Economics and Management. Member of the Tempe Diablos Charities. He lives in Tempe with his wife Trish and two boys, 10 year old Carter and 7 year old Aidan.