Value Builder Driver #1: Financial Performance

In this episode of the Business Owner Breakthrough, Pete Mohr discusses the critical importance of financial performance as the first driver in the Value Builder System. He emphasizes the need for clarity, predictability, and strong financial metrics to enhance business value and attract potential buyers. Common mistakes such as neglecting bookkeeping and cash reserves are highlighted, along with actionable steps to improve financial understanding and forecasting.

Takeaways

• A valuable business has clarity and predictability in financial performance.
• Buyers prefer stable, profitable businesses with strong financial histories.
• Understanding EBITDA is crucial for assessing business value.
• Focusing solely on revenue growth without healthy margins is a mistake.
• Poor bookkeeping can lead to skepticism from potential buyers.
• Maintaining cash reserves is essential for operational stability.
• Tracking key financial metrics is vital for business health.
• Predictability in financial performance reduces buyer risk.
• Forecasting financials instills confidence in potential buyers.
• Understanding your financials is key to maximizing business value.

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Transcript

0:00

Welcome back to the business owner breakthrough. It's the value builder system series here, and we're going to kick it off today with driver number one, which is the financial performance. The true foundation of a valuable business is the clarity and understanding and predictability, consistency, profitability in your financial performance of your business. And it's, no, it shouldn't be a surprise to you that most people that are looking to buy a business want to buy one that is in good financial shape. And that's why it's driver number one. Right. The idea here is that buyers are really interested in stable, profitable businesses with strong financial histories, right? Not just ones with high revenue. So if you think about it, there's a lot of businesses out there that have millions and millions of dollars worth of revenue but really have no profit. And ultimately, without a line of profit and clear understanding of where profit can be made, how valuable is that if somebody was to invest in the business? Right. It's so important to understand your EBItda. And EBITDA is really one of the main things that people will look at. It's a key indicator that buyers look at. And what is EBITDA? For those of you who may not know, it's earnings before interest, taxes, depreciation and amortization. And when we think of it, a new buyer that's coming in may have a very different structure, capitalization structure than you might. So they may have lots and lots of money where you might be using a line of credit. Well, they won't have the interest expenses. They're looking at different things on depreciation and amortization and how they adjust that sort of thing along the way. All of these things, when we start to pull out and look at your books, we start to better understand your business. The way that they're going to run the business is not necessarily the way that you're going to run the business. And that's why we actually pull these out and look at the EBITDA numbers. It's so vital to really understand this because it focuses on operating profit, really stripping out these variables. Right. So the other thing I want to talk about here is basically the three common mistakes that I see in businesses that don't think about value acceleration in their business, that aren't thinking about this in the long term. And the first mistake that I often see is we're only focused on the top line number. Right. The revenue growth and growing the top line without healthy margins really doesn't necessarily make your business more valuable. If you're growing the top line and there's a reason behind it that's you're going to see the margins down the road that makes sense so long as you have the clarity and you can show potential new acquirer, what that's going to look like. So all of these things are, it's really around clarity of the decisions that you've made and the numbers that you have so that you can project that down in the future. Right. Because mistake number two is poor bookkeeping. And so many small businesses suffer from this. One. I know a lot of small business owners out there do their own bookkeeping, and it's fine to do your own bookkeeping, but if your books aren't in great shape and aren't really understandable, and if somebody sits down and starts looking, and I can tell you in due diligence, they, they will starts looking through things and has questions that really you can't answer. Right. So think about it. Business owners often neglect their financial records and it really makes potential buyers skeptical about the true performance of the business. Right. Number three is not having cash reserves. So many businesses don't manage their cash flow well and it really leads to stress in the operations and making the businesses less attractive to buyers. So the three mistakes that you want to be thinking about really here is not just focusing on top line, it's more about the bottom line. Number two, clean up your books. Number three, make sure you have cash reserves. Right. Another thing I just want to throw in here with regards to some action steps that we're just talking about here is I'll add a fourth, really to track and improve your key financial metrics. What are they? Know your EBItda, know your gross margin, know your net profit margin. Know the different things that are unique to you in your business and in your industry that people are going to ask about. And they want clarity and they want to see that you're at least at average and if not above average in those key performance metrics. As you look through those for your particular industry. If you've been listening for a while, you know that we own some shoe stores. And one of the things we do for looking at key performance metrics within our industry, in the retail industry, within the shoes, is that we align with the National Shoe Retailers association, which is a local association that we belong to. But they also do a business performance report every few years. And that business performance report gives us a, a lot of metrics within footwear that are really specific to the type of business that we run. So we can compare ourselves to other people and how they're doing within the industry and look at the metrics for us to improve or the ones that we actually see we're doing really well on. And I can tell you, for the most part, most industries have these kind of statistics available, and it's up to you to get into an association to get that knowledge back out so that you can compare yourself. How do you know if you don't have something to compare to a benchmark, right? And it's so, so important to have that. Ultimately it's going to give you a leg up. When you go to talk to the bankers, when you go to talk to a potential business broker to sell your business or anyone else that needs to dig into the financials of your business, one of the things that people really look at is predictability, right? I want to touch on the importance of predictability within the business. You know, buyers love businesses that have consistent financial performance because it really reduces their risk. Think about it. If you're putting down a million bucks or $10 million on a business, you're trying to look at all the risk areas. And if you can go back in the financials and look and see this predictable line of income, it's a lot more comforting. And you can look at that from your side as you try and prepare this because, you know, due diligence, people are going to look through this stuff, right? And creating the systems. Remember the five p's? If we're creating the systems, or as we call it, the process that ensures stable revenue and profit over time really increases the likelihood of receiving premium offers for your business down the road. A couple of real key drivers that we're going to talk about throughout this series, too here is if you can look at recurring revenue models in any given way or long term contracts with any of your customers. Just depends on the business that you're in. These sort of things add predictability. There's lots to do here, but I'd really like to encourage you to start forecasting your financials a lot more rigorously. It gives the buyer confidence that the business can perform in the future without the current owner, which is you running it. And when you look at this, and we have the people in place, we have the processes in place, we have the profit in place, you can see how the five P's align with this incredibly well. But when we can clearly show this, it's going to give ultimate confidence. So the biggest step here this week is to dive into the financial performance of your business. Do you have reliable, organized financial records and I. Are they clear and understandable? Do you understand them? If you don't understand them, how can anyone else that's looking at them understand them? Right? You need to know your numbers. It's that vital as far as understanding the value of your business. Because listen, the value of your business is going to give you your legacy that you're looking for one day. Because one day you will exit your business and you want that value to be at its maximum amount whether you exit a year from now or 20 years from now. We need to keep our eyes on the financial performance of the business. It is the most important driver of the eight drivers in the value builder system. So as we wrap up this session here today, driver number one, it's time to dig deep into your financial performance. You need to understand the numbers. Work with your accountant, work with your bookkeeper. If you're doing it yourself, make sure that things are clear, legible, understandable, explainable. You know, it's such a vital piece of the value of your business. Again, if you're interested in knowing a little bit more, all you have to do is go over to one of my new sites. It's called the exit ready Business.com and you can check out a free ebook over there as well as take the value builder assessment and understand where youre a needing a little bit of help and where you're really performing at the top of class for your particular business. And on the next episode, we're going to dig into growth potential. It's driver number two and we're going to talk about how to unlock untapped potential in your business and position it for future growth. Right. The growth potential. Stay tuned. This value builder system series is continuing here on the business owner breakthrough. Really excited to have you here with me. Now go and make it agree.