An exit strategy for an owner managed business is fundamental and unavoidable – none of us will live forever – and it should be the foundation on which all business planning activity is based.  In simple terms, knowing where you want to end up makes the job of getting there a whole lot simpler.  It may be that your exit is still many years away – and your circumstances and those of the business will undoubtedly change over time – so invest your time appropriately.  Spend a little time to explore the options and develop a first draft – a “work in progress” if you like.  Do this as soon as you are able and check it with someone who can provide an objective assessment and make suggestions about how it could be improved.  Review your strategy regularly for two main reasons.  Firstly to see how much progress you have made towards your goal and, secondly, to check that the exit strategy still meets your needs. 

As you get closer to the time when you want to exit the business, commit more time to the process.  Just common sense really.   

Let me give you one interesting example.  Nearly all businesses need to find new customers on a regular basis – to deliver “organic” growth and to replace customers who, for one reason or another, stop buying your products and services.  Acquiring customers is therefore a fundamental process for every business and in most cases it is going to be one of the most expensive activities on which the business spends both time and money.  With our measurement hat on, the obvious question to ask about this process is “How much does each new customer cost the business?”.  Coming up with an answer is not difficult – it is a straightforward exercise is activity based costing - although there are some things you will probably need to estimate. 

Can you answer this question for your business?  To start with, do you even have a process that you control and that is repeatable?  Can you improve the efficiency of this process?  Do you know if winning a new customer cost you more last year than it did the year before?  Do you have a plan to reduce the cost of winning new customers this year? 

I am sure you see how important the question is - so why do so few businesses measure it? 

Under the most favourable circumstances an angel invester could acquire shares in a new business to the value of £100,000 for only £22,000.

The changes take effect in April.  In the meantime it may be that that investments will be a little harder to come by - as investors hold out for the new rules to take effect so that they can benefit from the more advantageous tax regime! 

For more information please read the article

As well as being relatively easy and safe, the real virtue of this approach is that – in almost all cases - the option delivers economic or financial benefits to the business in several ways.  You will not have to incur the costs of finding new customers – which is always expensive (It is surprising how few small businesses calculate or track the cost of winning a new customer but it is a very important metric - Bob).  Secondly, the incremental selling time required will be modest – it’s like adding the shoe polish when you buy a new pair of shoes.  Lastly, by driving up the value of the transaction for substantially the same selling cost you should improve overall gross margin.

Once you have a list of possible product or service extensions that your customers have indicated they would buy from your company, you can evaluate which option is the best fit for your business or situation and develop an overlay business plan.  Like any business plan you need to make allowance for all the costs you can reasonably anticipate – like sourcing or developing the new line, training, marketing collateral and the rest.  You will need to get down into the detail to prepare a financial plan and establish how much it will cost, how the new activity will impact cash flow and the requirement for additional working capital. 

If everything still looks good – all you will need to do is take the decision. 

And, as Jean-Luc Picard might say – Engage!

You will also now be able to identify a set of “second division” accounts where you know, or can reasonably surmise, that your share of their business is quite a bit lower.  These accounts should be good hunting ground for you - however, you need to get closer in order to understand what you need to do to win more of their business.  This will take some time and effort certainly – but much less than penetrating a competitively held account.  Every time you win more business in this fashion you take income away from your competitors. 

In an ideal world you would prefer the win the business by providing a better product or service – or by configuring the offer in a new way (see my earlier post – August 22).  In some situations you may have little choice but to compete on price.  Just remember that if you are going to give something of value away you will need to secure some kind of value in return.  The way this usually works is a better price for a more significant commitment – a call-off contract perhaps - but there are other options.  The opportunity to use the account growth as a case study is a good example – the additional publicity you can generate will help you to win more business that will more than offset the discount you offered. 

It is quite common to discover that your largest customers are not the most profitable – they may even your least profitable - once you allocate all the costs in the business correctly.  As well as trying to get a picture of profitability by account, you will also need to look at profitability in terms of the various products or services within the portfolio.  This analysis may also produce some quite surprising results.  Once you have worked out which types of sale to which types of account are the most attractive, you just have to work out how to close more business of this kind.   The converse is equally true – you want to be closing fewer of deals that are actually costing you money. 

The good thing about customers is you can talk them.  You can find out what they like about your product or service and what they do not like.  And, plan to do more of the former and less of the latter – but only once you have made sure that increased sales will deliver increased profits.

Business growth - Selling more to your existing customer Part 2

However, there are almost always constraints inside the business that will eventually impede or prevent growth.  Some, but by no means all, can be fixed with money.  This is one of the main reasons why growth stalls once the business reaches a certain size.  We see the same thing time and time again.   You can take this idea one step further.  It is often possible to identify just one single factor – the finite limited resource – that determines the maximum capacity or throughput for any process and, by extension, the capacity of any more complex system of which this “constrained process” is a key part.  In small businesses the time the owner managers makes available to the business is often one of the limiting factors but this is not always the case and it may not be the most important.

Once you understand the constraints you can work out what needs to be done to optimise the revenue and the profit “working within the constraints” – and you then can work out how to change the process to remove the constraint and release the potential for further growth. 

No problem?  Sadly, life and business are seldom quite so simple.  Something that what may be quite apparent to an observer is often entirely invisible if you spend every single day staring it in the face. 

The outcome probably links very directly to your reasons for embarking on a growth initiative – perhaps increased income, or a more saleable business.  To succeed you will need to be motivated, stay motivated and provide motivation for those around you.  A clear understanding of the outcome is by far the best way this can be achieved.  Securing support for a growth programme from your staff requires that you to explain why growth is good for them - how a growing, or a bigger business, will benefit them as individuals.  The benefits will be different for different people.  It will take some time but it will be worth the effort. 

The other reason for having clearly stated objectives is that good management is about setting targets for yourself, and those in your team, so that you can track and report on progress.  No matter how many case studies you review, the need for managers to communicate effectively with the whole team is always in the list of critical success factors – and usually top of the list.   

Bob Brown, CMC Partner

Depending on who happens to be talking, we are either deep in recession, climbing slowly back out or perhaps ready to slide back down into negative growth.  If you are serious about growing your business you should just ignore them all.  The current recession has been a catalyst for change on a spectacular scale – if you need evidence just look at the automotive industry!  It has changed the way that people behave, changed the patterns of buying behaviour for both individuals and businesses.  In addition, the recession has changed the "rules of the game "in many industries sectors.  The world has changed and the changes are permanent.  There will be no going back to the way things once were - so get used to the idea. 

Recession is something for economists to wrangle about – not entrepreneurs.  Individuals and business are still buying the goods and services they need in order to function – they are just buying marginally less than last year.  Who really cares if the opportunity you are looking at today is no bigger than it was last year?  If you run a small or medium sized business your share of market is relatively small – there is still loads and loads of business to go after.  Focus on that!

Businesses that hunker down and focus solely on survival – and that probably includes some of your more established competitors - have already lost the initiative.  Businesses that put more effort into talking to customers and understanding how their market has changed - and who respond with appropriate solutions can grow very quickly.  Recession is a fantastic opportunity for entrepreneurs. 

Seize the day. 

Bob Brown, CMC Partner

It is very commonly the case that certain things will need to be done to ensure the business is attractive to a potential buyer.  This does not necessarily mean there is anything wrong with the business although, of course, there may well be areas that need attention.  The precise list will vary but will certainly include any problem that a potential buyer would uncover as part of their due diligence.  Even if everything is in good shape, the truth is that your business is designed to operate around you – and you are not part of the deal.  So work must be done to ensure the business can function with you.

Provided you have a reasonable amount of time to prepare, the best way to mitigate any costs associated with the preparation phase is to ensure that these incremental costs are funded through increases to revenue or improved gross margin – or some combination of the two.    Most businesses (see my earlier post) have lots of opportunities for growth and most also have some opportunity to flex the gross margin as well – through improved productivity or more efficient processes.  The improvements are not a cost but an investment - one that should pay back better than anything else you could do with your money. 

Not only will the business be producing more, it will also be worth more when the time comes to sell.  So a Win Win Win scenario?  Well, you win twice and we also win because a part of our fee is linked to the sale price that we help you to achieve.  No wonder we say “Your success is everything”.