The Benefits of Knowing your Growth Potential
Do you know your Growth Potential? Preparing for a sale or exit from your business might seem like the end but it’s important to realise that for whoever is taking your place, it’s the beginning. Potential buyers aren’t solely concerned with past performance, they need to be assured that there’s a future in your business too.
Naturally, you tend to look at the value of a business based upon historic performance and metrics. Creating a successful business is a proud legacy; it’s an achievement. The way you extrapolate that is through how the business has performed so far.
However, buyers are not buying your past. Whilst the positive and profitable past of a business is undoubtedly a huge factor in the buying process, potential buyers also need to see a scalable future in your business.
They are looking to buy the future stream of profits. If you’re exiting, you’re at the end of your journey; they are only just starting. It’s fresh and new and needs to be scalable enough to demonstrate a viable future.
Can you show that your business would survive?
Knowing your Growth Potential adds value to your business. Importantly, this shows buyers that your involvement in the company hasn’t been focused solely on the immediate performance, but also on the long-term goals.
Allow buyers to see the potential and understand the current position and potential direction of the business. Think about how you’d answer the questions below if a buyer asked;
- What is the future potential of your business?
- Is there room to expand into different markets? Which would you approach?
- Can you begin cross-selling your products or services?
- What are your major competitors doing that you’re not?
Be prepared to show your industry knowledge and understanding of the opportunities that exist within your sector and how they impact your business.
Scalability affects value in multiple ways
In a geographical sense and in terms of capacity. Could you cope with international interest or spikes in demand? Our research has shown that businesses with international reach usually experience higher offers.
In its current position, can your company cope with an increase in demand or would this cause problems? Paul at Uscita notes that; “If a substantial increase in sales represents short-term problems with staff, cash-flow, storage, premises etc, of course a buyer will reduce their offer, to reflect any further investment they have to make. A business with in-built scope for huge increases in demand is much more appealing, especially for a buyer with plans for growth.”
Buyers are looking for scalability when considering an acquisition. High risk businesses, with low growth potential are off putting for those looking to grow and expand once they’ve purchased. Don’t forget, when you are exiting or selling, think like a buyer. Remember how they will calculate the value of your business.
The focus therefore, is on how profitable the business will be moving forward aligned to the risk involved in this future growth, for the buyer. It’s important that you understand the inherent costs in your business and the impact rapid or sustained growth will have on profit margins.
If you are interested in finding out more about your growth potential and how you can create a more scalable business, whilst planning your exit, please contact us today in the strictest of confidence. Call 01606 535020.