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What Does a Good Business Look Like?

25th January, 2018

I am very fortunate to work with many ambitious business owners and often discuss with them how they can both grow their business and make it more robust to cope with unexpected shocks. This mind set has the added benefit of preparing a business for ultimate sale.

So, what do we discuss, initially I think that there are five key areas that should be considered.

  1. A defensible market position

A business should work to develop a market advantage in a business segment no matter how small and have products or services that are current and in demand. Importantly the products and services need to be constantly reviewed and developed to avoid obsolescence and develop new sales opportunities from innovation.

  1. Strong growth and profit trends

Annual targets and strategies should be deployed to maintain turnover growth at inflation plus 5% per annum with constant gross margin and an aspirational EBITDA margin of at least 10%.

Measurement is vital but of course measurement of traditional data, sales numbers, margins, profits etc. always occur after the event, so the measure lags the actual performance. Thought needs to be given to lead measures which are designed so that when hit they will deliver a positive effect on the traditional lag measures.

  1. Diversification

A business needs to be diversified across its customer base working to a stage where no customer accounts for more than 10% of the annual sales and the top ten customers account for less than 50% of annual sales.

Often forgotten is the desirability for similar diversification across the supplier base to avoid issues should there be supply chain failure.

Finally, thought should be given to staff being multi skilled and customers and suppliers having multiple contacts within the business.

  1. Strong Systems

Good accounting records, method statements, marketing collateral and IT systems are essential. A quick measure of this is how quickly monthly management accounts are available after month end – 10 – 14 days is ideal.

  1. An effective management team

As a business grows the recruitment and development of senior / middle management tends to lag sales growth. This can ultimately lead to a break down in systems as a structure designed to support sales of £1m is trying to service turnover of £3m plus.

It is important that management are developed and appropriately targeted, trained and measured to allow the owner to work on the business not in the business.

Implementation will of course encounter many challenges but get the above right and it should result in a good business that ultimately will sell very well.

Mark Hislop

Corporate Finance Director

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