To grow a business in today’s economy to a value sufficient to provide financial security for you when sold is an uphill ride into a strong headwind.
Headwind #1:
In my last entry, I compared leaving our businesses to a bicycle race and three macroeconomic factors that make successfully finishing that race to headwinds. Today I tackle the first of those headwinds: Our Stagnant Economy. Some may object to describing the economy at the beginning of 2014 as “stagnant,” but compared to pre-Great Recession growth rates, it is anything but robust.
“Larry Summers, the man who was almost chairman of the Federal Reserve, is awfully gloomy about U.S. growth prospects. In a Nov. 8 speech [2013] at the International Monetary Fund, he suggested the U.S. might be stuck in ‘secular stagnation’ – a slump that is not a product of the business cycle but more-or-less permanent condition.”[1]
A growing economy, like the one we enjoyed from 1975 until 2000, undoubtedly helped your company grow–it rose with the rising tide of economic growth. Conversely the economic doldrums that the U.S. has endured for the last 15 years exposes weaknesses in our companies and allows only the “best of class” to prosper. As a result, the great majority of us have retrenched; our companies have not regained their former growth rates, especially since 2007.
Here is my assumption: most businesses grow at a rate similar to that of the national economy as measured by the Gross Domestic Product (GDP). When GDP grew an average of 7.5 percent (1975-2005), per annum most businesses grew at approximately the same rate. Consequently, most businesses doubled their revenue about every 10 years.
Contrast that with the period from 2007 through today with GDP growth averaging 1.8 percent per annum. Applying the “Rule of 72” to that growth rate, businesses will double in revenue/profitability/value roughly every 35 years or so. [2] When the economy and your customers’ revenues are growing at two percent or less per year, it’s very difficult to grow your business by an annual amount necessary to experience significant increases in value.
My company, BEI, conducts ongoing surveys of business owners. When asked what prevents them from moving forward with Exit Planning, the most common answer is that their businesses lack sufficient value to allow them to transfer it and attain financial security. In short, most business owners need to grow value. When the economy “might be stuck in secular stagnation–a slump that is not a product of the business cycle but a more-or-less permanent condition–” growing value requires increasing revenue much faster, and more sustainably, than general economic conditions foster. [3]
“What is a sustainable rate of growth? As a benchmark, consider an annual growth rate in revenue and earnings of 5.5 percent. Most companies expect to attain that level or better – at least that’s what’s called for in their strategic plans. But a Bain & Company study of more than 2,000 companies indicates that only about one in 10 actually achieves that relatively modest goal over a 10-year period while earning its cost of capital. In other words, nearly 90% of companies fail to achieve that modest growth objective.” (Bain, Ibid.)
To grow a business in today’s economy to a value sufficient to provide financial security for you when sold is an uphill ride into a strong headwind. And it’s likely to stay that way for the foreseeable future. As the Bain study documents, substantial revenue and earnings growth at the level most owners will need in order to exit in style, is only enjoyed by about 10 percent of middle market companies. The question I pose for you is: how are you going to be part of that 10 percent? I’ll be addressing that question in future blogs.
I’ll write at length about how to wisely apply effort and use time most effectively in enhancing business value. For now, if I’ve convinced you that it will take, through no fault of your own, more time and effort to position your company for an optimal exit, I’ve accomplished my goal. I’ll simply leave you with this thought: For most of us, building necessary value is not a one or two year project. Think five to 10 years. I think it’s time to get started.
