Steer Your Business Dec 2020 - Magazine - Page 5
ADVICE
The viability formula for business
success and long-term growth
The viability formula used to pull ailing businesses from
the deep end, typically consists of three considerations.
The product and marketplace in which the business
reigns, financial reporting and the strength of the
management team. The latter being the core driver of
the business, responsible for navigating the company
through success and failure. If a business has strong
viability, it is forecasted to succeed,; and that presents
opportunities to attract funding, investment, seek
acquisitive growth, and/or plan a strong exit.
Either way, achieving good profits and managing a
healthy balance sheet can help preserve the financial
health of your business and facilitate growth. When
embarking on a business recovery exercise, it is just as
vital to delve into the story of the company director(s),
understanding their short-term and long-term spirations.
Unlocking growth potential
Maintaining high profits is key, should you want to
attract investment, or funding, or to sell your business.
Funding can be used for organic expansion, thus
improving sales and, in turn, profits. Alternatively, this
money could be used for acquisitive growth by buying
market share and creating cost savings by acquiring a
competitor.
When considering a fund raise or an exit plan, the last
three years of profits, bolstered by high performance,
are instrumental in attracting investment/buyers.
For every £100,000 in profit that a business excludes
from the profit and loss statement to mitigate corporation tax (resulting in a £19,000 tax saving based on the
2020–21 corporation tax main rate of 19%), the value is
undermined, limiting the options available.
Every business has a sector multiple for valuing the
business, often between 4 and 8, and this multiple is
applied to profits. For example, if your sector multiple
is 7 (a common multiple), by having that £100,000
profit showing instead, your business value improves by
£681,000.
By building value and planning for exit or growth with
the above considerations, a business can improve its
value by millions of pounds.
In the middle of difficulty lies opportunity
A business can sometimes be overburdened by
unfortunate events, i.e. losing a key customer, cash
flow shortfalls, or as a result of challenging economic
conditions, such as Covid-19. By carefully analysing the
balance sheet and interpreting the financial information
correctly, you can foresee if the business is likely to
struggle financially. Providing relief from the balance
sheet may be achieved through an insolvency process
which embraces a rescue culture.
Karyn Pritchard of the Begbies Traynor Group is
a veteran in the business recovery and company
growth arena, having spent 20 years
rescuing viable businesses – she
just happens to be insolvency
qualified, thus providing great
objectivity.
Karyn
Pritchard
i
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