You have probably been setting and
reaching business goals for some
time, marking your progress by market share, sales or percentage growth.
Regardless of your stage in business, you
set targets for performance and reaching
them assures your success.
But what about setting goals with the
business? How will you exit the business
five to seven years from now? Your immediate goals for your business should align
with these plans for the future.
“If you want to pass the business to family or key management, do they have the
skills or will you need to train them?” asks
Joel Guth, an advisor with Citigroup Global
Markets Inc.’s Citigroup Family Office in
Columbus. “Or do you want to sell the business, and if so, what is your strategy to
grow it over the next three to five years so
you can get a premium for it?”
Because answering these questions
requires internal analyses, financial projections and a well-laid plan, Smart Business
talked to Guth to determine exercises to
help you determine if you are on track to
reach your goals with the business.
How does a business’s life cycle affect an
owner’s future business plans?
Businesses go through various stages.
The first stage is start-up, when you work
toward profitability. The middle stage is
profitability, when you ramp up growth.
The third stage is maturity. By then, your
business is much more stable, it is paying
dividends and the growth rate has slowed
down. Before this stage, you must ask
yourself if you want to take the business to
the next level, to grow and become an
industry player — and if not, what are you
going to do with the business?
Understanding your position in the business life cycle is critical before developing
a strategic plan for growth so you can eventually sell, or for training so you can pass
the business to family or employees. You
always want to time the sale or succession
to your advantage.
How does performance during the mature
stage of a business, even if an owner doesn’t plan to exit for several years, affect the future
value of the business?
If you allow the business growth to slow
to a 5- or 6-percent rate during the mature
stage, you could reduce the value of the
business. You get a better premium for a
business that grows at 20 percent versus 5
percent.
Timing the sale at a high point for your
business is critical. If growth has slowed,
you may need to consider ways to ramp up
growth before selling. That may mean taking on debt to expand the business, developing a new product line or reaching out to
new customers.
When the goal is to sell the business, you
must sell at the best time, meaning the best
profit margins and the best point in the
industry’s economic cycle.
What if an owner wants to pass the business
to family or key employees?
Then, ramping up growth is not necessarily the best approach. For example, if you
grow your business from $50 to $100 million
and you want your son to buy it, you have to
fund a $100-million purchase. So if the business is growing rapidly and you want to
pass it on, you should enter an arrangement that allows you to give shares to the heir at
today’s value, before you pass the baton.
When growth occurs in the successor’s
name, it is much easier for this person to
purchase the business down the road.
Regardless of whether you sell or pass on
the business, you should do a S.W.O.T.
(strengths, weaknesses, opportunities,
threats) analysis. This is a standard exercise designed to get you thinking about
what areas of the business you need to
improve. This analysis also serves as a
springboard for developing a strategic plan
for the next five to seven years.
What projections should owners figure as
they develop a goal for their business?
You may need to make operational
adjustments and invest in growth if you
plan to sell. For example, you may need to
expand your sales force or hire a manager.
You’ll need to plan for these expenses and
determine whether the investment of time
and money you put into the business to
make it more saleable is worthwhile.
Meanwhile, it is equally important to project financials if you are planning to pass
the business to family or employees. This
way if you foresee rapid growth, you can
discuss options with your financial advisor
to ensure the business will be within reach
for your successor.
Unless you are otherwise advised in writing, Citigroup Global Markets Inc. is acting
as a broker-dealer and not as an investment
advisor.
Citigroup Family Office is a business of
Citigroup Inc., and it provides clients with
access to a broad array of bank and non-bank
products and services through various subsidiaries of Citigroup, Inc.
Citigroup Family Office is not registered as a
broker-dealer nor as an investment advisor.
Brokerage services and/or investment advice
are available to Citigroup Family Office clients
through Citigroup Global Markets Inc., member
SIPC. Joel Guth is a registered representative of
Smith Barney, a division of Citigroup Global
Markets Inc., and has qualified to service Citigroup Family Office clients.
JOEL GUTH is an advisor with Citigroup Global Markets Inc.’s
Citigroup Family Office in Columbus. Reach him at (866) 464-2750.