The Business Exchange Swindon & Wiltshire Edition 19: June/July 2015 | Page 10

FINANCE

CREATING AN EXIT STRATEGY
Profit: Quality not quantity, short to medium-term
growth and profitability is essential for any business,
but do they ensure the long term value of your
business is maximised? How can you strike a balance
between the quantity and quality of your profits?
These are the questions considered by
Mike Lloyd, partner at the Swindon office
of national chartered accountants and
business advisors, Haines Watts.
In the corporate world, where shares are in
public ownership, it is left to the market to
determine how well that level of profitability
translates into the market value of a business
For owner-managed businesses, there is
generally no market for the shares unless a
full or partial exit is planned.
This means it can be very difficult to
gauge how much enterprise value is being
created in the business. Yet enterprise value
is both the ultimate test of a business’s
quality and is often the main source of
personal wealth when it becomes time to
exit and transfer ownership.

Quality over quick wins
The quality of a business’s earnings, profits
and consequential cashflow is defined by
the profit multiple that a potential new
owner are prepared to pay to buy the
shares. Two businesses in the same sector
might have the same operating profit, but
due to a higher quality of earnings, one
could command a multiple of six times
annual profits while the other may only
achieve four times multiple. While both
multiples are within what is considered
to be the ‘normal’ range, this could make
a difference of millions of pounds to the
capital value an owner can extract.
The benefits of focusing on building
enterprise value are magnified when the
difference in tax treatment on capital gain
when compared to dividends is considered.
While a more conscious and determined
approach to raising the profit multiple of
your business can sometimes delay the
satisfaction of shorter term profits, it can
make a big difference in the long-run.

Build to run, not just exit
It’s important for businesses to embed this
thinking in the early stages of growth.
Often this cannot be retrofitted, as ownermanagers need to build it into the fabric
of the business. Research shows us that

owners who work hard to develop the
quality of profits have businesses that are
more enjoyable to run and to work in,
attract better customers and suppliers and
are more stable than those of competitors
who focus only on short-term profit.
Mike said: “Business owners’ concern
with operations profit can be traced back
to the traditional measurements used in
management and financial accounting
through both the profit and loss account
and the ability to build a stronger balance
sheet by creating reserves.
“At Haines Watts, we tune in to the
distinction between performance as
measured through the profit and loss
account – we call that the quantity of
profits – and the less visible performance
measured through the creation of
enterprise value – the quality.
Thinking about quality of profits is not
only the preserve of those planning an exit:
it is just as valid if your motive is to build
and run a business to be proud of. The
earlier you start thinking about it and the
less mature the business is, the better the
outcome.
For more information contact Mike Lloyd
at Haines Watts Swindon on 01793 533838
or email [e-mail]

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THE BUSINESS EXCHANGE 2015