Our founder, Jennifer Peek, was recently interviewed by Diane Helbig on the Accelerate Your Business Growth podcast. Diane is a leading small business development and leadership coach, author, and speaker who is passionate about sharing valuable ideas, tips, and techniques with business professionals worldwide. Diane brings you the world’s experts and gurus in all things business, whether it’s sales, structure, social media, planning, or plateauing, guests bring their expertise and energy to each episode. Diane and Jennifer focused on building business value – not just for a possible sale but also for overall business health. Below are our favorite bits of wisdom – be sure to listen to the full episode to find your own.
The Downside of Minimizing Taxes
Diane Helbig: …I love this topic of business value, and I’m really looking forward to learning from this conversation. So I know if I am, so are the listeners. I want to start by talking about taxes, and why minimizing taxes would be a bad thing for business value.
Jennifer Peek: There are certainly a lot of different tax strategies that effect the value of your business differently. But generally what we’ve seen is that minimizing taxes often equates to maximizing expenses. There’s a lot of ways to maximize expenses and not have it affect your value. And then there are a number of ways that it really does affect your value.
To back up for a moment…let’s talk about how value is generally calculated. The vast majority of businesses are going to have the value of their company calculated based on their earnings. Whether that’s their net income or their earnings before interest, taxes, and depreciation. It varies depending on the industry. But, generally speaking, it’s going to be based off of your income statement. So the lower the number is at the bottom of your income statement, the lower your value is going to be.
Now it’s also going to be the lower your taxes and in the building phase of your business you often want to minimize the taxes so you can use that cash flow for other purposes. But, when you get to a place where you want to consider your exit options, and look at the value of your business, then is the time to consider what the best components and the mix of those strategies are for you.
Three Things to Maximize Value (and Cash Flow)
Diane Helbig: Okay. That makes sense. So if someone does want to maximize their value, what are three things that they can do?
Jennifer Peek: So three big things that you can do to maximize your value are to
- Look at your staffing and your compensation plans related to the staffing. As an example, there are opportunities for bonus programs that could be tied to the results of the company. So, you could still well compensate your employees, but have it correspond to the company being successful as well. Then if the company doesn’t achieve the milestones, those bonuses perhaps are minimized or not paid at all.
- Your terms with your customers and your vendors be as aligned as possible. One of the things that we see quite often is that your suppliers, perhaps, pass along annual price increases for what they’re providing to you, whether that be goods or services. And oftentimes those go unnoticed, and they may not be passed along to your customers. So your profit margins are shrinking, and you may not be aware of that.
- The other thing, and the final thing in terms of what we look at, and ways to maximize your business value, is how quickly can you, if you have inventory as an example, how quickly can you turn that into cash
One of the things that we try to do is help our customers and our clients move to a little bit more of a just in time basis, depending on the type of industry that they’re in. And not only does that show up on the value side of the equation that we just talked about, it also really helps small businesses and even mid-sized businesses get a better handle on their cash flow, which is something that I think every business struggles with at one time or another.
Diane Helbig: It’s so true. And I was just talking to someone, we were talking about government contracts and she was talking about the cash flow, and how you have to realize they don’t pay quickly. So you’re definitely going to be carrying that cost of whatever you have to pay for, if it’s payroll or whatever it is, until you get paid. So you have to be ready for it.
Buying A Company vs Starting One
Diane Helbig:…Why would it be better to buy a company than start your own?
Jennifer Peek: The biggest reason is what we call the difference between organic growth and acquisition growth. If you buy a company, whether as an add-on to a company that you already own, or as just the one company that you’re going to own, there’s a lot of things that are already in place in that company. You typically have employees, customers, vendor relationships. There may very well be a well known brand associated with it, even if it’s a local brand. There’s a lot of the infrastructure work that’s already been done. And you are getting a company, a business that is already running and going.
The new owner, and this is typically what we see and why people buy companies, gets to capitalize on what’s already been put in place, and use their talents and energies to grow it to the next level. Whether that’s expanding into a new product segment, going in to different geographical markets, or just redesigning the way the services are being delivered. So, they get to use their time and talent for that. And it’s faster, right. It’s much faster than building something from the ground up.
We could go on and on…we didn’t even get to the parts about what banks look for or financial due diligence or the mistakes business owners make! Be sure to listen to the full podcast to get these key insights.