Craig Alexander Rattray explains why the business owner should focus on building value rather than on operational matters
Despite widespread expectations, the Chancellor did not make any changes to the capital gains tax regime and business asset disposal relief in the Budget. So, what now? Most commentators expect the changes are inevitable and, sadly, I agree. We can safely predict that the new regime will not be more beneficial from a tax perspective for business owners. Should business owners prepare for exit? Should they sell now? Perhaps both. It is down to individual choice and preference.
I like to approach it slightly differently as there are many things that can be done that make any business more valuable and allow the business owner to have more time outwith the day-to-day running of the company.
As most of my clients know, I talk regularly about creating a business and infrastructure that allows them to “run the business from the beach”, or wherever else they choose.
What does that mean? How is that possible?
Ensure you have great people, effective systems and procedures, and focus on the right things.
Most companies use online banking and online accounting software. Many have a job management system or operational system that allows tracking of jobs, products or services provided and these can be set up on a red, amber and green basis.
The business owner can wake in the morning regardless of location, log onto the accounting software and see from the dashboard the bank position, who the business owes money to, who owes the business money and check the status of the operational system.
Green means everything is on track so no need to do anything; amber may need to be reviewed; red may merit an email or telephone call. All easily done in a short time and on a remote basis. Then back to the beach or location of choice.
That sounds fantastic, but like many things the practicality of it is a bit more challenging than the theory.
It can only be done if various things are in place, which include:
- Financial infrastructure with reports and real time information
- An effective operational/job management system
- A management team capable of running all day-to-day operational matters
- An effective cash management system
It also relies on trust and delegated authority from the owner. This is often the biggest factor – the owner must be able to “let go” of the day-to-day matters and trust the team that is in place.
If this does not work, then one of two things needs to change: the team or the business owner’s mindset.
If the owner is unable to take a holiday without involvement in day-to-day matters, in my view there is not an effective management team or system in place.
This significantly diminishes the busines value and exit opportunities.
In general terms, a business that is heavily reliant on its owner is worth significantly less than the same business that has an effective management team.
I have worked with clients over many years to develop and implement strategies that ensure that we are improving profitability, enhancing cash flow and building value.
It takes some time and dedication, but it is not difficult.
However, whilst that all sounds great, it still leaves the problem of exit.
I have always believed that if the company is profitable, cash generative, and building strategic value within its own niche there should be no rush to exit.
However, the current tax regime and anticipated changes create a degree of risk and uncertainty.
If the business owner is able to run the business on a very high-level remote basis then he is not integral to the day-to-day running of it and that makes the business very easy to be acquired by a third party or indeed the management team, and to allow him to retire without a prolonged handover phase.
It also makes the business significantly more valuable.
The business owner should be focused on building value and the longer-term strategy rather than the day-to-day operational matters.
Ten key areas to consider are:
- Management team
- Financial performance
- Financial management
- Cash and working capital management
- Growth and industry dynamics
- Barriers to entry – Intellectual Property; differentiation and positioning
- Recurring revenue
- Long term contracts
- Reduce reliance on key customers, suppliers and employees
- Customer satisfaction
If you do these things well, not only have you created strategic value in your company, but you have also given yourself options.
Yes, the Capital Gains Tax rates may go up, but increases in shareholder value as a result of focusing on these key areas could offset future tax rises.
My advice?
Take action and put these things in place – and enjoy your time on the beach.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays and his Cash Flow Tips appear every Thursday
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