Business Management

Is there a killer loose in the business?

There are a number of business attributes that can be secretly dragging down the value of your company. If you do an assessment of what the business is worth there could be factors silently dragging down the value of the company. In many cases, fixing the problems is relatively easy as long as they know what the problems are.





Here's a list of some of the most common "silent killers" that are decreasing the value of businesses when you may be considering a sale.

• Customer Concentration
A business should strive to have a diversified customer base so that no one customer makes up more than 15% of your revenue.

• Declining Gross Margin 
If gross margin is declining as growth occurs a potential buyer may conclude that your competitive advantage is weakening and you have to compete on price to win customers.

• Supplier Over-dependence
Seek to have a variety of sources for your raw materials. If you are forced to buy from one supplier the negotiating leverage over you can drag down your company's value.

• Sloppy Financials
Keep your books clean. Nothing scares off a buyer faster than shoddy, inaccurate bookkeeping.

• Management Risks
Strive to ensure that your company runs well when you are away. After all, for a business to be valuable to someone else, it needs to survive when you are gone for good. If you have key employees, make sure they are locked into some sort of incentive plan that rewards them to stay beyond the sale of your business.

These are a few suggestions that can easily be repaired and can enhance the overall valuation as you prepare the business for sale.

Does the Business Fit?

Making an acquisition can be a great way to grow your business. After all, you're buying an established operation with staff, assets and customer relationships.
But be careful to buy a company that's a good fit for your business and makes sense in terms of your strategic plan. You also want to buy it at a price, and with a financing structure, that doesn't put your personal or business finances at undue risk.

Here are a few suggestions to help decide if there is a good fit with current operations.

1. Is it the right business?
Go beyond financial statements and ask questions about the business. Start with the most basic: Why is the current owner selling? Is there a hidden problem or is the industry headed for a cliff? Is the company overly dependent on a few customers or suppliers? Is the business dependent on personal relations the owner has with key customers that could disappear with a change of ownership? Do the brands acquired fit and strengthen the current portfolio?

2. Is it the right price?
Carefully explore the history on what businesses are selling for in the industry and region. It's important to be disciplined about how much you pay, even if your bankers are willing to lend you more. Overpaying will reduce you're financial returns, lengthen payback period, and increase your risk of default.

3. Is it a good fit?
Make sure the business you're buying has a culture that's compatible with your own. Issues with management styles, operational philosophy, and how the business can be integrated with the existing business must examined carefully before moving forward.

4. Are adequate resources in place? 
The financing of an acquisition should maximize repayment flexibility. Besides a loan secured on assets of the company, you could seek financing from the existing owner. Vendor financing usually comes with a reasonable interest rate, flexible repayment terms and no personal guarantees.
Management resources need also be in place to handle transitional issues to ensure an efficient integration of the business.

If you are in an acquisition mode, don’t hesitate to call on experts to assist in the deal. This could be a well-placed investment that could reduce overall risk of a bad deal.

Use Incentives to Retain Key Managers

There is a role for incentives in managing and retaining key executives for the company. Here are some reasons for and examples of how to structure effective incentive programs for management.


1. Stability
You want to retain key management personnel for a number of reasons. High turnover destabilizes the company and can have severe effects on moral of employees and the bottom line. You want to retain high performing managers to enhance your own company’s growth potential and to keep key people from wanting to look at other opportunities.

2. Bonus-Goal Setting
Good managers don’t expect a bonus without achievement but don’t set the bar so high as to be unachievable. That becomes a disincentive to achieve. Set goals that help improve your bottom line; just achieving new sales records is not a priority if the costs exceed the benefit. Sales executives should be just as concerned about profitable sales as the CFO.

3. Share Profits
Pay executives for overachieving by sharing profits. As profits goals are exceeded rewards can continue to be major incentives if shared fairly. Reward contribution. You don’t have to give everything away in this process. Be competitive but unique and allow key employees to participate in goal setting. When they are part of setting the goals they are more likely to increase efforts to reach the bar.

4. Review - Communicate
Conduct periodic reviews to ensure all incentive participants know where they stand. Let’s not have surprise results announced at year end….good or bad. Be completely transparent. If goals are profit based show actual revenue/profit results so that there is a clear understanding of achievements.

5. Look Longer Term
Roll plans forward and allow incremental bonuses for achievements in consecutive years. That’s a great way to keep a key person from leaving; that extra bonus for additional achievement may be too juicy to walk away from.
Stock options are often used as a tool for key employee retention. The chance to be a part of ownership can be major motivator. However recent issues in corporate governance have tended to dilute and weaken some incentives. Try to strive for balance without risking responsibilities to shareholders.

Incentives are important tool to maintain a motivated and dedicated management team and a well-designed plan can bear fruit over the long term. I hope these are useful ideas for your organization.