Small business entrepreneurs are an incredible breed. These individuals are risk takers who believe in an idea, themselves, and the upside of an opportunity to the degree that they are willing to invest their life’s work and net worth into a single business. Through their spirit and drive, they have become the innovation engine of today’s marketplace and the creator of the majority of this economy’s employment opportunities. While small business owners are becoming more demographically diverse, they generally continue to hail from middle-class or even challenging backgrounds as they strive to provide a better life for themselves and their families. Many owners are motivated to see their children better off than they themselves were, a sentiment that can powerfully translate to a business’s success.
This generational element fuels the natural tenacity of this model but also—somewhat paradoxically—its weakness. Some family members do pick up the baton, but only a small minority of businesses last beyond two generations. One reason for this is that successful entrepreneurs prioritize sending their children to the best schools and exposing them to a broad set of global opportunities, often resulting in children choosing career paths other than running the business their parents worked so hard to build.
As this dynamic is manifested, these business owners must face a new challenge: succession planning for their business. In most cases, this is a good problem to have because it signifies that the business possesses the success and sustainability to warrant a long-term plan. But given the nature of what it takes to be successful—hard work, innovation, and a resolute focus on the bottom line—small business owners typically haven’t focused on operationalizing their business in a manner that optimizes their exit valuation.
The great irony is that these exits really are the ultimate moment of truth for business owners since they occur in a single instance but represent the final valuation of a life’s work, in many cases. Recognizing a need for owners to evaluate their business prior to an exit through a buyer’s perspective, Consilium Partners developed the Value Accelerator Diagnostic (VAD) tool. Initially formulated for the Technology Services segment, the VAD specifically focuses on the performance indicators of businesses that deliver labor-based services through proprietary technology and highly skilled technical staff. These businesses often additionally provide intellectual property assets in the form of software or hardware as a component of their offering portfolio.
Our objective is to increase ownership value of these types of businesses through a holistic and data science-driven evaluation. We use a structured workshop scoring approach to obtain a complete view of these businesses based on “7 Keys” to determine current valuation. This unique machine learning approach uses historical data of similar businesses that have transacted in the last three years. The VAD then yields a predictive market valuation as a multiple of revenue and a specific set of recommendations based on our market research and experience. The recommendations are provided in a prioritized manner based on the business value to a buyer and achievability to the owner. A sensitivity analysis is performed with a re-valuation of the business based on the execution of these recommendations.
Integral to the comprehensiveness of Consilium’s approach is the personal investment of each of our managing directors in the success of our clients. Our senior bankers are especially sensitive to the unique – and often, emotional – set of challenges that business owners face when the time comes to prepare their business for the next chapter. Our technology industry operational expertise and capital market backgrounds provide the necessary context to assess these businesses through the lens of a future buyer, and every engagement we manage is foundationally grounded in a deep understanding of our clients’ goals.
This is the frame in which we developed the Value Accelerator Diagnostic advisory service – to help small business owners maximize the valuation of their business as a key component of their exit strategy. Every personal investment—every late night of work, every dollar of profit funneled back into the company, every idea written on napkins and the backs of envelopes—deserves to be acknowledged and properly accounted for, whether a transaction is a few months away or a few years. In this competitive landscape, it is increasingly important develop a plan that will provide your business with the best set of opportunities in the years to come. At Consilium, we are committed to the small business owner, the value that small business owners bring to our society, and the belief that every owner should feel equipped to understand and cultivate their business’s potential.