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Value Acceleration in Your Business – The Triggering Event

27 Aug 2021 by: Brian Matter 

The Goal = A Successful Business Exit

The Strategy = Focusing on Creating Business Value in Addition to Income

Where to Start? = You may not be sure …

To start determining how to accelerate value in your business, which can lead to a successful exit, you need to understand what you already have today.  This assessment includes the “three legs of the stool”: business value (how much will the business contribute?), your personal finances (how much do I need?), and what you will do in your encore years (what’s next?). These areas combined are referred to as the triggering event, which provides you a baseline measurement from which you can measure your current value and assess valuation acceleration going forward.  

The triggering event often is the catalyst for business owners to focus on growing the value of their business. Why? Upon completing a business valuation, you will have a better understanding of what your business is worth.  Aligning that to what you need for your personal finances and what you plan to do with your time after exiting often leaves gaps that need to be filled.  Completing the actions in a triggering event provides you quantitative proof of the value of your business and often identifies actions you can take to lessen or eliminate risk or increase the value and transferability of your business. Even if you don’t plan to transfer the business in the near term, it provides you with a list of actions that will help your business perform better without you.  Most of all, a triggering event will provide you clarity on what to do next and the impact those choices will make on your business value and personal wealth.  

Some of the key components of a triggering event are:

  • Recast income statement and balance sheet—This helps you understand your “tax number” versus your “real number.” Your tax number is the number you see on your financial statements. Your real number is “re-casted” EBITDA, where you add back or take away one-time, non-recurring expenses; discretionary expenses that you may have chosen to charge to the business; and other expenses that may not continue after you are gone. The difference between your tax number and real number can be significant and will have a significant impact on your valuation.
  • Complete financial analysis—It has been said that an owner who doesn’t know his numbers doesn’t know his business! Once you have the recast financial statements, you will want to compare these to market trends to prepare a forecast. This allows you to understand where you fall in the range of multiples and values that comparable companies are selling for, and helps you determine if there are steps you can take to move into higher multiples that the best-in-class companies are selling for in your industry. An oversimplified formula is:  

 

In other words, recast cash and sales multiplied by a market multiple determine your value. Cash and sales are usually under your control (the more cash/sales, typically the higher value). While your focus may be on sales and income, the real opportunity for acceleration lies in the multiple, which usually relates to intangible factors that help differentiate your business and the multiple range in the private capital market.   

  • Personal, financial, and business assessment—This provides insight into the business’s attractiveness and the owner’s personal, financial, and business readiness.

The results of the triggering event should lead to a specific list of personal, financial, and business strengths and weaknesses that can be correlated to actions that can lead to value enhancements. This will allow you to create a prioritized action list and determine which actions can be taken and the cost/time involvement of each.

The triggering event gets you into the gate and on the path of accelerating value. You have to start somewhere. If you are ready to chat about how your personal finances fit into your overall journey to exiting your business, let one of our advisors know, as we would be happy to help you get started with your triggering event.




CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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