fbpx
855-236-0600

Mother of All Value Drivers – MOAVD

Mother of All Value Drivers – MOAVD

By Michael Stier

A business with strong Value Drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average Value Drivers. Value Drivers are specific business characteristics that drive growth. While each business is unique, there are nine characteristics that sophisticated buyers (e.g., strategic buyers, private equity firms) look for when evaluating business value. 

A recent survey of exit planning advisors identified Next-level Management as the “Mother of all Value Drivers (MOAVD)”. Reminded me of the movie ‘Under Siege 2: Dark Territory’, when the lead mercenary sternly chastised his team with, “Assumption is the mother of all screw ups.” However, more relevant to this post is a quote that came later in the movie by the same character, “Chance favors the prepared mind!” Adapted for this post… “Valuation favors the prepared business!” 

Next-Level Management 

Next-level management is indeed the Mother of All Value Drivers (MOAVD). The management team you start to build today, including an experienced fractional CFO, will be the team overseeing the growth of the business and in the other areas that drive value for the business. Not only do you have to attract and hire this management team, but then they must also retain them through the transition of ownership. This can be accomplished through well-thought-out incentive plans. 

This is not to say that your current management team couldn’t bridge the gap between where the business currently is and where it needs to be to sell. With proper mentoring by an experienced hand – and incentives – the current team in place could be the trusted team to help achieve your business goals. However, let’s face it, most entrepreneurs don’t have the time or the inclination to be that mentor. Unless you’ve got an experienced co-pilot, there really is no time to mentor and develop talent for the next level. You really need someone who can come aboard and begin immediately to improve value. Small business owners can even utilize fractional c-Suite help for next-level management. 

Other Value Drivers 

With your next-level management team in place, these are the other eight value drivers identified by exit planning advisors as being the most critical to address. 

Improving Cash Flow 

Enter an experienced CFO who can help business owners think of creative ways to improve cash flow in their business today. Ways to operate the business more efficiently: increase productivity and decrease costs. This Value Driver alone may not allow to achieve your objectives, but it’s a place to start for building a strong foundation. The success of this Value Driver heavily depends on the operation of the other Value Drivers. 

Financial Foresight and Controls 

Many companies lack reliable financial reporting to the extent that buyers can’t determine what the company has or track the source of its revenue. This is a common problem our fractional CFOs work on correcting. To potential buyers, sloppy financial reporting indicates other underlying problems, increasing the risk of the sale and often lowering multiples if there is an offer. 

Another factor that plays a part is that without proper forecasting, the current stakeholders, key employees, management team, original owner, and new owner have very limited insights into the strategic growth plan. Again, something our CFOs typically focus on. 

Operating Systems Demonstrated to Increase Cash Flow Sustainability 

The establishment and documentation of standard business procedures and systems demonstrate to potential buyers that a business can maintain profitability after the sale and after the original owner leaves. 

Demonstrated Scalability 

Could the business improve its profit margins if it increased its revenue? This is often a focus of our fractional CFOs, finding opportunities to improve – and document for buyers – scalability of the business model. 

Diversified Customer Base 

Potential buyers typically look for a customer base in which no single client accounts for more than 10% of total sales. The company could be considered a high-risk investment if a few of the top customers generate more than 40% of the company’s overall revenue. 

Proven Growth Strategy 

Developing a growth strategy helps attract potential buyers. A growth strategy could consist of the development of new product lines or augmenting existing ones, market plans, growth through the acquisition of other companies, expansion into new territories, or increasing manufacturing capabilities. 

Recurring Revenue That is Sustainable and Resistant to Commoditization 

It goes without saying that sustainable recurring revenue is a highly valued driver for any buyer. Having pricing margins resistant to commoditization is another significant opportunity for business owners. 

Competitive Advantage 

Competitive advantage is the product or service that a company offers that is better or cheaper than its competitor. Find out why your customers buy from you instead of your competitors and publicize this. Demonstrate you know your marketplace and have the ability to take advantage of that knowledge. 

    Start Planning Today!

    Rome was not built in a day, nor is transferable value. Having seasoned next-level management or trusted advisors will put you in a much better position to tackle and improve on the other 8 value drivers. The sooner you start on creating and growing transferable value within your business, the better.

    Michael Stier is an Area President for FocusCFO based in Charlotte, NC. 

    Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. For more information, follow us on LinkedIn.

    FocusCFO Logo 2021

    855-236-0600

    Welcome David Hanley

    Welcome David Hanley

    Welcome to the Team!

    Over 20 years of experience in finance and operations, including working directly with entrepreneurs, high-net work individuals, and institutional investors. Experience in the Professional Services, Private Equity, and Real Estate industries. Experience also includes sell-side mergers and acquisitions for companies ranging from family-owned businesses to divisions of large publicly traded companies. Strong financial, operational, and executive management experience.

    FocusCFO Logo 2021

    855-236-0600

    Arthritis Foundation – Central Ohio Leadership Board

    Arthritis Foundation – Central Ohio Leadership Board

    With Richard Murch

    Sales Pipeline Fractional CFO

    Arthritis Foundation Golf Classic – 09/20/2021

    Read more about the upcoming Arthritis Foundation Golf Classic in the LinkedIn post by Richard Murch, Principal at FocusCFO.

    Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

    FocusCFO Logo 2021

    855-236-0600

    Ways to Improve Billings in a Construction Company

    Ways to Improve Billings in a Construction Company

    Construction company billings are a process, not an event. If that process is carried out with thoughtful consistency and an awareness of the many potential pitfalls, cash flow can be accelerated and reliance on credit can be reduced. 

    Sales Pipeline Fractional CFO

    Contract Documents 

    A contractor should never begin work without a signed contract or, at minimum, a properly executed Letter of Intent. “Properly executed”, means that it is signed by someone who has the authority to bind the contracting organization. If you do proceed based on a Letter of Intent, you must be certain that you understand the conditions that are preventing entry into a formal contract and what the consequences will be if the project is abandoned prior to contract signing. The most common reason that a Letter of Intent is used in lieu of a formal contract is that an up-stream contract with the property or facility owner is not yet in place. This would also indicate that project financing is probably also not yet in place; therefore, any work that is done carries a higher risk of non-payment. 

    Your company should use industry standard documentation for all contracts entered into such as AIA Contracts or Consensus Documents to ensure a balance between the economic interests you, the contractor, and your customer. Any customer-specific contracts or significant changes to industry specific contract documents that are proposed should be reviewed by an attorney representing your interests. 

    Once under contract, you need to be aware of all details of the governing contract documents including the contract itself, incorporated terms and conditions, supplementary terms and conditions, inclusions and exclusions, design drawings and specifications, material schedules, and any other documents. These documents comprehensively define your obligations. Your initial proposal will have no weight in resolving later disputes unless it is specified as a contract document. 

    Information Gathering 

    Contractors must verify that field supervisors understand the importance of deadlines for all approvals of pending change orders as well as for the submissions of monthly progress information upon which monthly draw requests are based. 

    If site conditions allow, receipts of stored materials should be scheduled for just prior to a monthly cutoff, rather than after. If you intend to claim credit for stored materials, have supporting supplier invoices, photographs, proof of insurance, and other evidence available to submit along with the invoice, rather than waiting until the customer requests it. This will help to avoid delayed payments that will negatively impact your cash flow. 

    Any requests by the customer for unplanned work must be routed through the project manager for confirmation that the request is within the contracted scope of work, or that the mechanism established in the contract for authorizing extra work has been followed. 

    Invoice Preparation 

    The contractor and the customer should have an agreement in place stating that each month’s draw will be prepared initially as a “pencil copy” for review by the customer, the customer’s representative, the architect, and/or other appropriate parties to pinpoint areas of disagreement prior to the formalization of the invoice. Disagreements later will waste time and delay payment. Billings for change orders that have not yet been fully approved should be avoided because adjustments may cause a delay in payment for the entire draw. 

    Invoice Submittal 

    The contractor must submit the pre-reviewed monthly draw invoice on or before the contractually defined due date, by both email and hard copy. The email copy provides an easily verifiable date of transmittal and is the first step is setting an expectation of payment. 

    Invoice Tracking 

    The contractor must have a thorough understanding of the customer’s invoice approval process – who receives, reviews, and approves the invoice, and who controls the ultimate disbursement. Once that process is understood, you need to communicate to the customer that you will be tracking the draw as it proceeds through each stage of that internal handing process. Learning about circumstantial delays in the invoice process (employee illness, vacation, etc.) after the fact, will delay payment further and negatively impact your cash flow. 

    Funds Acquisition 

    Until the funds from a paid invoice are actually in the bank, they remain unavailable to you for your labor and material costs. Payments that come in that are not deposited right away also create the potential for mishandling or fraud within your own office; therefore, it is best to establish an expedited process to get customer payments to your bank account. 

    The best option is by electronic transfer. The ACH (Automated Clearing House) method is preferable to wire transfers due to the high bank fees for wire transfers, half of which are charged to the recipient. ACH payments are fast and save the issuing organization the cost of accounts payable check generation, which should provide an incentive to your customer to utilize this method. 

    The next best option is to establish a bank lockbox for mailed payments. The address appears to be a Post Office Box, but the payments are actually received directly by your bank. A minor downside of this method is that accounts receivable recording may be delayed while you wait for transaction details from your bank. 

    The third option is to receive customer checks at your office and run them through a Remote Deposit Capture device. This is a bank-authorized scanning device that sends images of both sides of the checks for deposit to the bank in lieu of the actual paper check. Due to the Check 21 Act, the digital image of the check is just as binding as the original check (which is retained for record purposes by the recipient). As with any other internal funds handling process, adequate internal controls must be in place. 

    Until the funds from a paid invoice are actually in the bank, they remain unavailable to you for your labor and material costs. Payments that come in that are not deposited right away also create the potential for mishandling or fraud within your own office; therefore, it is best to establish an expedited process to get customer payments to your bank account. This process should be managed by your CFO, who will understand the best options to use to get funds in your hands quickly while at the same time ensuring that adequate internal controls are in place. 

    Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. For more information, follow us on LinkedIn. 

    FocusCFO Logo 2021

    855-236-0600

    Is a Fractional Executive in Your Future?

    Is a Fractional Executive in Your Future?

    By Todd Peter

    The world has seen disruption like never before due to the Covid-19 pandemic and experienced fractionalization and structural disruption in many industries; some of the best results being Zoom video conferencing, DoorDash food delivery and any retailer that was able to pivot their business to online ordering and delivery. The business models are all unique in their implementation, based on insightful changes to how goods and services are purchased and delivered. In fact, these new models became equally (or perhaps more) effective for the consumer. 

    Sales Pipeline Fractional CFO

    Another disruption, the use of fractional executives, is also on the rise. Small businesses suddenly become more competitive with larger businesses, because they are able to utilize seasoned executives too. These fractional executives work part-time, and are usually in the second half of their career, bringing a life-time of experience and knowledge to help small businesses with strategy, analysis and building value. They come in all the favorite varieties like CMO, COO, CTO and CFO. This article will review the role of the fractional CFO. 

    Setting the Stage 

    The term Chief Financial Officer (CFO) is used to describe a senior level executive, typically with 20+ years of experience, who is fluent in strategy, capital markets and banking, acquisitions, budgeting, forecasting, and forward planning. They have insights based on their experience in sales, marketing, engineering, and operations. A CFO’s focus is on assuring that the company’s profitability, growth plans, capital structure, and short- and long-term strategic action plans are consistent, coherent, and are building value for the shareholders. The CFO works intensely on the financial health of the company, but is not the one primarily focused on financial reporting (the controller). Most companies under $50M in sales do not employ a Chief Financial Officer (some will have a controller with that title) due to the relatively high expense of a CFO. 

     

    CFO vs Controller vs Accountant vs Bookkeeper

    In most smaller businesses the role of CFO gets blended with the role of controller; the same person is chartered with the management of the cash cycle (AR/AP) and financial reporting, and in their spare time between the daily pressures, is expected to change gears and time horizons and look to the future, dive deep into profitability or capital planning. While on average these true CFO tasks may entail a day a week, experience shows that the forward planning and deep analytical “CFO” tasks are often deferred, short changed, or tackled only once a crisis has arrived. 

    Enter a fractional CFO, who can be laser focused on key performance indicators (KPIs), strategy and analysis. The premise of a fractional CFO(f-CFO) is to engage the highest possible skill set and experience base to “work” the CFO tasks, typically one day a week, and allow the financial accounting staff to “work” the daily routines and reporting mechanics. Depending on the size of the business, the finance team may be “f-CFO plus controller”, “f-CFO plus senior accountant”, or even “f-CFO plus bookkeeper”. This is a mighty combination of skills that should give the entrepreneur/business owner a level of confidence and security. Knowing your numbers and having a plan for the future, will provide the best chance of having predictable cash flow, and best managing business risk, and providing focus on accelerating growth and value. 

    Disruptive business models typically offer a large step-up in value to the buyer. The business owner can now engage seasoned c-Suite level help, at an affordable price, by engaging a fractional executive. Almost like a free doughnut with your coffee! 

    Todd Peter is a Principal with FocusCFO based in Cleveland.

    Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

    FocusCFO Logo 2021

    855-236-0600