For the majority of most business failures, arguably the biggest cause of failure could be placed on the business analysis report, or lack thereof. By performing a business analysis, it identifies opportunities to develop and improve the business.
A good quality business analysis will identify what’s happening in sectors that impact your business, whether that’s your customer sectors, your supplier sectors, or indeed your own direct sector. It can identify key areas of potential problems in the business. A very simple example of this, could be for an Electrical Contracting business. An Electrical contractor relies on cabling which is manufactured from Copper & PVC. The cost of Copper can vary dramatically from year to year, and even month to month, so much so, that manufacturers have been considering substituting the usage of copper, instead using Silver for the manufacture of Cables.
By understanding what’s happening in other sectors from a Macro viewpoint, we know that prices may change, & for that Electrical contractor in the above example, they might lose money if they quote based on today's prices, should that price rise significantly before they place the order. Likewise, if they know that a price reduction is on its way, the contractor could reduce its prices, and get a head start on its competitors.
If you were the Electrical contractor in this example, and you’d just secured a contract for the next 3 years, based on a fixed price, but the price of copper cable was uncertain, how would you know the best option to take? You might be best placed to bulk order at today's prices, but that leads to high stock levels, and potentially poor cash flow. If you have regular workflow, you might balance the risk through cost averaging (dollar cost averaging in the USA), whereby you buy the same amount every month over a period of time, which then means the cost of those materials are averaged across the period. But buying the material, also means it has to be stored. Do you really want to buy and store 3 years worth of cable? There is a cost to storage, but there’s also a cost to finance that purchase, both the direct and the opportunity cost.
Of course, having the knowledge saves any guesswork. The more data you have, the better decisions that you can make.
It can also identify weaknesses and risk to the business, so that actions can be taken, and the risk removed. One example facing most small businesses at the moment, is the baby boomer generation all reaching the age of retirement. Around 60% of the workforce will reach retirement age in the next 5-15 years. This is more apparent than most, in the construction industry. For the last 15 years, there has been a serious lack of skilled labour in the UK. This was initially filled by migrant workers, but when the recession hit in 2008, of course the construction industry, one of the main primary industries, was one of the first & worst to be hit, and many people left the industry due to being unable to find work. Since then, people have continued to retire, but only a limited number of apprentices have come into the industry. There was an article written by a trade publication, stating that 6 apprentices were needed for every person retiring, just to fill the current demand. Now this shortage of labour will ultimately mean that wage rates will rise. Any employee will be grateful of a wage increase, but if you’re tying the business up to long term contracts, with little or no option to increase your billable rates, it could impact the bottom line of your business severely. The lack of staff will not only mean a rate rise is needed, but it also means your business will be limited to how much work it can take on. Suddenly you can’t take on as much work as you want to. This could all be identified as a weakness, or indeed a strength, depending on your current business situation, and positioning. Your capacity to earn as a business owner, is determined by the resource you have available.
Whilst performing the business analysis, you may discover a weakness. Not many business owners will ever admit to their being a weakness in their business, but every business has at least one weakness. I’ll give you an example of this. Compare your own business to the equivalent corporate, providing the same service offering. You might perceive them to be stronger in terms of the size of project they can take on, because of their vast number of employees, whereas the same might be seen as a weakness within your business, as you’re limited to the size of project you can take on. Vice versa, a very large company is like a very large ship. If circumstances change, its very hard for them to change direction, they have huge overheads - the very thing you consider to be a strength in work capacity, it takes a long time for them to adapt to those new circumstances. Whereas your business can change very quickly.
Just one area that data can be used in a business like yours, could be with your vehicles. An apparent weakness could be highlighted, that your vehicle's spend more time being repaired in the garage, that being driven out on the road. By collating data, as to how productive your vehicle's are, you can see clearly the best and most logical way to improve those weaknesses. In such a circumstance, you might otherwise have just continued, and put the problem down to the staff not treating vehicles very well.
Another area that the business analysis looks at, is the location of your business, in comparison to your customers. By using a map as a visual indicator, plot all of your customer sites. Plot your own locations too, and your staff locations, especially if they work remotely.
First of all, what does this data tell us. Well firstly, we can see where the majority of our customers are located. If from understanding the data, it shows us that we have two bulk areas noted on the map, wouldn’t it make sense to have two locations, one in the centre of each mass of customers, or one centralized midway between the two?
The second point, by knowing where our staff are based, we can identify their commuter time. This is especially important for staff morale, and also when attracting new staff. If most of our staff travel by bus to work, it wouldn’t make much sense to relocate to an area that isn’t on their main bus route. Likewise, you don’t want to relocate the premises further away from the staff, especially if you’re paying them to commute, such as those remote workers who just come to the office for meetings.
The analysis also looks at the opportunities to grow the business. What products or services are in demand, or will be in demand for the next 12 months, to 5 years. How could you utilise your existing resources to meet these demands?
It tells you what’s happening with your customers. Do your customers have an ambitious growth plan, planning to double in size every year perhaps. This could impact your business both positively and negatively. They’ll need increased support, but if you don’t set your business up to support theirs, you may lose them as a customer completely. Likewise, such growth from a handful of customers, could mean your order book is not diversified enough, and you’re too over reliant on some customers. This level of decision cannot be taken lightly nor can it be made properly without knowing what else is going on around you.
Does the business have a particular weakness that could be fixed by the buyer. For example, let's imagine you’ve been unable to recruit a manager in the business for over 18 months. A buyer may not see this as a problem, as they might have a member of staff, that can slot into such a position perfectly.
What’s happening in the market? A market trends analysis tell us, exactly what’s happening in the industry. For example, imagine you run a small hotel in a popular tourist destination. A market trends analysis tells us if the industry is increasing or declining. It can also tell you things like, people's buying habits - Do people prefer the personal approach of a Bed & Breakfast, or do they prefer the impersonal corporate style hotel? Are more people staying in Hotels, or in Self catering accommodation?
Within the business analysis, you’ll also want to make a forecast of your total sales, along with forecasted profits, based on the information you’ve uncovered in producing the analysis. Ideally this forecast will cover the next 3 - 5 years.
The business analysis isn’t meant to give you the answer. The primary purpose of the analysis is to tell you what’s happening, so that you can make an informed decision.
In the next post, we’re going to look at the ninth piece of the jigsaw, that you’ll need to sell your business. ‘Information Memorandum - Creating the Confidence to Move forward’ Click here to read it now.
We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.
If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen. It’s a full time job. - The time investment alone is enough to put anyone off. So imagine for just a minute, that you didn’t need to do all of this work. What if this could be done over the next 3 - 5 years (by someone else). Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.
Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market. We’ve worked in, and grown our own businesses in the exact same fields you work today. We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.
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