We can all be busy fools. Rushing about, being all things to all people and losing focus on what is important to driving business forward.
In this case study, we are going to talk about a sale we assisted with in recent years within the IT sector. We will look at why this particular business, despite being profitable, was not valuable to an investor, and lost out financially as a result. We will cover
- too busy to be an owner
- record keeping
- lack of investment
- over reliance on particular customers
- significant completion delays
1. Too busy to be an owner
Like many business startups, the founders and owners of a business find themselves being jack of all trades. They are sales, manufacturing, accounts, admin, delivery driver and even cleaner. With every bit of business growth, we should see the owners of successful businesses stepping away from these roles and into a more strategic or goal setting position.
The problem for many is when. We tell ourselves that we haven’t got time to train someone up or we are not sure if we have the cash to invest in staff/systems yet or even that a client expects the owner to be involved , all without checking back on what benefits it would provide if those changes happened.
This particular business had grown but the owners had only partially stepped away from some of these tasks. Despite now having a team of 15 around them, the key role of sales and marketing still sat with the business owners. They were still bringing in the majority of new business in personally, personally issuing quotes and personally issuing invoices.
From a buyers perspective, every new bit of business that came in and every cross selling of new services to the existing clients rested with the business owners…..who wanted to retire.
That raised the question as to what would happen when they did retire? Would client acquisition continue at a steady level? Would existing clients stay with the business once they had to deal with a new contact?
For many buyers, this is too much of an unknown quantity for them to risk investing their cash. They will make no offer, or a much reduced one.
2. Record Keeping
A must have piece of information in the IT sector is how the revenue splits. Buyers want to know income splits
- by client
- by operational sector
- by geography
- customer retention
- whether one off pieces of work or recurring revenue subscriptions, and so much more
For this business, the record keeping simply wasn’t up to modern standards. That meant there was no report that could be run to download these specific pieces of information. It had to be re-worked manually from the order book and invoice systems. That was tedious and time consuming.
When key information like this is not quickly available to buyers (key information they need to judge the risk behind their investment) they begin to wonder what else might not be up to modern business standards within a company. They begin to doubt if the extracted figures you manually provide are accurate. They begin to doubt the value of the client base you say you have and what proportion of them are actually dormant.
We speak more about financial record keeping in particular here.
3. Lack of investment
The inability to provide customer revenue data was driven by the inadequacies of a workable CRM system. Remember, this was a business operating in the IT sector, you might expect them to have the functionality to run their business which was ‘state of the art’, not the opposite.
So, when buyers discover that basic information is not available because the business has not invested in basic systems, they wonder what else has not received adequate investment over the years, and that includes investing in employees and client relationships.
This is often a circle that holds the company back – the company is not sure it has the cash flow to fund investment, and starts to solve that problem by using the owners to handle new customers. However, with only 24 hours in a day, an owners time is limited and will eventually stifle the business which will stagnate. This is why cash flow planning is a vital tool for any growing business.
4. Over reliance on particular customers
There were 2 major customers on which the turnover of this business relied. Only one of these was on contracted terms.
If either one of these customers withdrew their business from this client, then profitability would have been seriously compromised. It would have been unable to cover it’s overheads within a few short weeks and jeopardise the very existence of the business.
The only way to mitigate for this issue in a buyers opinion is to stagger the payment terms of the business sale and offer an earn out payment structure for the business tied to the continued work from these 2 major customers.
And that is exactly what proved to be. The eventual buyer mitigated the risk of losing these 2 major customers by making the vendor wait for some of the sale proceeds.
5. Significant completion delays
Returning to previous points on the lack of investment in systems and the inability to provide updated breakdowns on revenue, completion itself also suffered from significant delays.
It’s probably obvious to say, but a business sale rarely completes on the final day of a company’s financial year, so there is a lot of work needed to produce interim completion accounts that the final sales value is calculated on. For this business, the completion work which might reasonably have been achieved in 6-8 weeks, took significantly longer because of the delays in gathering the data. This delayed payments to our client.
Being unable to provide updated information throughout the sales process sets seeds of doubt in a buyers mind and provides opportunity for them to review the purchase they are making, and withdraw from it if another opportunity comes along in the meantime.
Buyers have aborted purchases for lesser reasons than this, but why allow the thought to creep in.
Being profitable does not necessarily make your business valuable
And just to reiterate. this was a profitable business, it just wasn’t a business that investors were willing to bet their shirt on, so they reduced the value of their offers to reflect that.
Put simply to make your profitable business valuable, you need to make it investible as well.
If you can recognise any of the issues above with how your own business operates, you are significantly reducing the value you will be paid for your business when you bring it to market.
Our estimate with this particular IT business is that the final sale value achieved was around one third less that it could have been if these issues had been addressed. All because the business owners were too busy delivering for customers that they neglected the elements within the business operations that added to its invest-ability, and ultimately its value.
If you would like a benchmark assessment of your current business valuation and learn the areas which will improve the value of your business, complete a Value Builder Score for free now.
