Crafting a Strategic Vision: Building Blocks of Success
Your business strategy serves as the blueprint for navigating the competitive landscape and achieving your long-term objectives. At its core, a robust strategy comprises three fundamental components:
- Long-Term Objectives: Clearly defined goals provide a guiding light for your business journey.
- Competitive Understanding: A deep understanding of your competitive environment empowers informed decision-making and agile responses to market dynamics.
- Resource Assessment: An objective appraisal of your resources, both tangible and intangible, lays the groundwork for strategic execution.
By diligently executing these strategic components, you not only enhance your chances of ongoing success but also signal to potential buyers that your business is poised for sustained profitability.
Unlocking Value Potential: Beyond En Bloc Stand-Alone Value
For prospective sellers, understanding how businesses are valued is paramount. While the en bloc stand-alone value forms the foundation, demonstrating potential for future profits can significantly elevate your business's worth. Acquirers seek returns on their investment greater than the risk-free rate, underscoring the importance of showcasing growth potential.
Investor ROI Scenarios
Consider this scenario: a potential buyer seeks a 15% return on investment. Presenting a stable income stream over time is crucial, as illustrated by the discounted cash flow analysis below. The ability to project even modest profit gains can substantially enhance your business's value proposition.
| | PRE-TAX PROFIT | 15% DISCOUNT |
| 1 | $100,000 | $86,957 |
| 2 | $100,000 | $75,614 |
| 3 | $100,000 | $65,752 |
| 4 | $100,000 | $57,175 |
| 5 | $100,000 | $49,718 |
| 6 | $100,000 | $43,233 |
| 7 | $100,000 | $37,594 |
| 8 | $100,000 | $32,690 |
| 9 | $100,000 | $28,426 |
| 10 | $100,000 | $24,719 |
| | | |
| | Present Value | $291,131 |
Another thing to consider is that investors prefer stable returns. To accept a more volatile income stream, the investor would demand a higher return on the investment. Let’s look at another example where the total pretax profits are the same but are more volatile over the 10-year period. Assume the buyer wants a 25% return on the investment to offset the risk of these volatile returns.
| | PRE-TAX PROFIT | 25% DISCOUNT |
| 1 | $100,000 | $80,000 |
| 2 | $105,000 | $67,200 |
| 3 | $115,000 | $58,880 |
| 4 | $100,000 | $40,960 |
| 5 | $90,000 | $29,491 |
| 6 | $80,000 | $20,971 |
| 7 | $90,000 | $18,874 |
| 8 | $100,000 | $16,777 |
| 9 | $105,000 | $14,092 |
| 10 | $115,000 | $12,348 |
| | | |
| | Present Value | $179,082 |
An ideal situation for a potential buyer is if there is the potential for growing returns. An arm’s length purchaser may be able to take advantage of increased market share, economies of scale or synergies and cost reductions to make the business more profitable. Going back to that expected 15% rate of return and showing potential for even modest pretax profit gains of 5% per year could add significant value to your business.
| PRE-TAX PROFIT | 15% DISCOUNT |
| $100,000 | $86,956 |
| $105,000 | $79,395 |
| $110,250 | $72,491 |
| $115,763 | $66,187 |
| $121,551 | $60,432 |
| $127,628 | $55,177 |
| $134,010 | $50,379 |
| $140,710 | $45,998 |
| $147,746 | $41,998 |
| $155,133 | $38,346 |
| | |
| Present Value | $330,447 |
Harnessing Growth Potential: Adding Value Through Future Revenue Streams
As a business owner, strategic foresight is your greatest asset. While reflecting on yearly plans and current strategies is essential, the groundwork for a successful sale begins years in advance. Demonstrating consistent execution of a well-defined business strategy and showcasing potential for healthy revenue streams and growth can be game changers in attracting discerning buyers.