From $50 Million to $100 Million: How to use finance and accounting to grow your business (Part 2)
November 5, 2021 •ROARK
Do you have a business that has grown to $50 million in revenue? Congratulations! That’s no small feat. But as your business continues to grow, what are some of the financial and accounting considerations for the next steps that you should be thinking about? In this blog post, we’ll cover some of these considerations as you grow to $100 Million. If you missed From $50 Million to $100 Million: How to use finance and accounting to grow your business (Part 1), check it out as we covered people and process changes that occur. In part 2, we’ll dive into systems and strategic considerations for your business at this stage of growth.
System changes in finance & accounting
With the expansion and growth, we are talking about how processes, employee size, and other factors make it necessary for businesses to have ERP systems.
So as I said, the company I know of that switched to an ERP was a billion-dollar-a-year company. They had a back office that helped support them with QuickBooks. But as soon as they switched to the ERP system, it was like they got revelation and were happy.
Once you have gone through a revelation and it has changed how you do things, it is almost impossible to say that you should not have done this sooner. The realization of change can be powerful, changing the way one does business for the better.
IT Infrastructure and finance and accounting
So a lot of times, when you get the CFO, they’ll have HR and IT that reports to them; different companies also vary in the way they operate. But at this time, your CFO and your IT team need to work together to build infrastructure for future growth. The business is growing to 100 million in revenue. That means that it will look more geographically dispersed, with offices across the country- meaning you’ll need to update our IT infrastructure accordingly.
Reporting demands from finance and accounting
Taxes are expensive and even more so with a business, not only because you have to calculate the spending on tasks such as paying employees but also because of the amount of paperwork involved.
Internal reporting can be frustrating. The problem is the lack of systematic processes for processing all that information and efficiently pushing it out to people.
Lastly, you should also provide this recap to people outside your company who might need it, including lenders, investors, and other professionals who rely on this information.
So really, the reporting demands increased tremendously. It would help if you had all this in place. GAAP financials and audited financials for your lenders so you can attract investors or be acquired by someone who already has capital on hand. Or get ready to spend that money on acquiring other companies.
The reporting is so essential to streamline, and we’ll repeat it, “efficiency, efficiency, efficiency” in that process will give you a good grade.
Thinking strategically about growing enterprise value
You start to see exits in that range of $50 million to $100 million; then you’re getting into exit ranges with significant, attractive levels of EBITDA. EBITDA refers to earnings before interest taxes, depreciation, and amortization
You’ve done a lot of good things, and the team’s put in place some excellent work. That said, it’s time to start thinking about not only today’s profits but enterprise value as well—optimizing for M&A..
Three essential things start becoming fundamental and easy when you consider the valuation, right? So all we need to do is look at enterprise value. Since valuation is really about looking at the company’s ability to generate earnings, it makes sense that an important metric for those types of calculations would be EBITDA.
When valuing a company, people might take the variable earnings (EBITDA or adjusted EBITDA) and multiply by some number to estimate value.
And there are ways to effect this, but it’s not something you can do tomorrow. It needs a lot of consideration and effort over time. The goal should be maximizing these multipliers, though– how do we make them work in our favor?
If you’re looking at the financials of a privately held company, lenders and investors may need to see adjustments for anomalies (often referred to as add-backs). In analyzing our clients’ financials, we help them identify these when they appear on their report so that outsiders can understand what happened in case it’s something like price changes.
Understanding EBITDA and Multiple
It is worth understanding EBITDA since it relates to a high P/E ratio. Again, EBITDA refers to earnings before interest taxes, depreciation, and amortization. These items should be added back when looking at the bottom line, net income to calculate the true value of a company’s financial performance.
One sometimes hears the term “EBITDA” when considering potential investments. However, it is essential to remember that EBITDA does not account for changes in borrowing or special tax treatments that could affect your bottom line.
To maximize profits, many businesses focus on EBITDA. However, it is also important for these companies to increase their value through the multiple of EBITDA per share to be successful over time.
Building and protecting your trade secrets increase company value. These well-known brand names, like Apple, Amazon, and Coca-Cola, have all built a lot of equity tied to their recognized name. The protection of intellectual property is vital for any company. Intellectual property will increase your value as a company.
Do we have an established revenue model that lets us simulate our profit and loss each month? A recurring revenue model improves valuation.
Suppose you’re only relying on a limited number of significant clients, or big box companies as they are also known, to bring in revenue for your firm. In that case, this could be detrimental to the valuation of your business.
There are many approaches to address this question. However, it matters that you’re strategic about each step you take and how it affects your multiple.
Exit Planning for Business Owners and Leaders
planning for your exit. Have you thought about your exit plan? I think it’s essential to start early in the planning process because it affects how risk-averse you are. You’ll also want to make decisions about what type of exit strategy is best for you.
If you go private equity, someone comes in from a private equity firm. There are some pluses and minuses to it. One thing is that they might look at the company differently, which can be good or bad depending on what their plan is. The other thing is that they’re going to bring in their professional management team who may do things differently.
Some people prefer this and some people do not. Understanding which type of person you are can be important here as it will help with your plans.
People might buy out your company is to purchase it from someone in the same industry that offers an integration – vertically or horizontally. Another option, known as aqui-hire, is when you are purchased for your talent and shifted focus. From a strategic standpoint, you may want to adjust your approach and position your company differently than if you were seeking funding from a private equity firm.
There are also other things, which are employee stock ownership plans (ESOPs). A lot of business owners typically don’t have a high multiple for their businesses. The ESOPs create tax advantages. It returns to thank the people who got you there. Essentially, what you are doing is selling the business to employees of the company. Employee ownership is something that most Americans talk about and address with positivity. But again, there are going to be different triggers and tactics available for you in this situation.
And one of the most obvious paths to an exit is through an Initial Public Offering (IPO). An IPO allows you to sell a percentage of shares in your company at the market price. However, this course is usually taken by larger companies due to its stringent compliance and reporting requirements. A company that goes public must comply with numerous SEC filings, including annual reports and quarterly financial statements.
Final Thoughts on $50 Million to $100 Million and exit planning
Many entrepreneurs put so much pressure on themselves to succeed, but they don’t care for their personal needs. And we’re not talking about vacations, but about planning your personal life as well. You need to make sure you’re exploring the available options–everything from investments to management teams–as these things will affect you after leaving and carry on for years. This is especially important if considering an exit as many focus on the sale and not life after the sale.
If you have any questions about growing your business from $50 million to $100 million and how finance and accounting can help you do that, we’d be happy to discuss that with you.
You can contact us at ROARK here.
Like this series? Check out each of them in our series, From startup to $250 Million: How to use finance and accounting to grow your business.