Category: Enterprise Performance Improvement

You have started a company and have grown the company and now you’re starting to think what’s next. Is your company’s industry changing and you’re not certain of what the future holds? Do you want to spend more time with your family but can’t find the time to spend with family and run the business? As owner, you should always be thinking about your exit. Whatever the reason, business owners should plan for an ultimate “exit” from your business enterprise. In doing so, consider the following keys to growing and building value for your enterprise.

What to consider when crafting a business exit strategy:

Leadership: Hire or develop a C-Suite or board of directors with experience in value-creation. The team should be directly involved in making decisions to achieve a “successful” sale. The team is accountable for all outcomes. The leadership team should demonstrate competence in:

• Developing and implementing business strategy and financial structure
• Developing management talent and building productive teams
• Growing profitable sales
• Linking management performance to organizational goals
• Managing crisis, transition, and rebuilding processes

Strategy: An effective strategy is key to enhancing enterprise value. You must establish a credible vision, distill the vision through the organization and implement the vision. Focus the company’s strategy on profitable products/services, profitable markets/segments and developing and incenting the organization’s human resources.

Growth: The value of the company increases substantially by demonstrating the growth in profitable sales. A company can increase sales by selling new products or services to existing customers or selling existing products or services to new customers. Organizations should tailor their growth strategy to the market and adapt their products/services to changing market conditions.

Reasonable Capital Structure: Create reasons for buyers to buy your company. A sound strategy with a viable market, efficient delivery and production, coupled with a dynamic management team, will attract potential buyers. As important as having access to cash to finance working capital is making certain that cash resources are used for appropriately-structured debt obligations. Establish relationships with secured and unsecured lenders and make an effort to be transparent with all stakeholders.

Systems and Processes: The development and implementation of processes and systems in the business to control the day-to-day operations allows management the available time to focus on building strategic value. Many managers waste time on tasks where results are essentially the same. Focus on the important things: sales, cost of sales and cash, among others. Processes help layout expectations and create a de-facto delegation of authority. Also, highly functioning systems and processes bode well for value from potential buyers. Essentially, great systems allow for new owners to focus on value rather than spending time on “fixing.”

Value Resources: Invest in, develop and leverage resources, especially human resources. Frequently, potential buyers value the target company’s personnel the most. As owner, you invest appropriate financial resources in developing both senior and middle management. After all, they are the people that execute and implement the strategy.

Exit: “Cash is King.” Running a business is a risky proposition and the longer you hold on to that business the more chance you risk loss or failure. As such, anytime an opportunity arises for a liquidity event, you should seriously consider it.

Planning how to exit your business and implementing the strategies listed above can help assure that you are getting the best possible value for your business.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Every business should provide management with timely reports of key drivers of the business. Management must then read and, as necessary, respond to the results in order to successfully operate the business. For a business that operates multiple locations, such as retail locations, a 4-wall analysis is an essential report that must be created and maintained.

What is a 4-wall analysis?

A 4-wall analysis is a profit and loss schedule for each location and is a combination of what happens within the four walls of the store as well as transactions incurred outside the four walls of the store but that need to be allocated to the store. Direct items include sales, sales returns and allowances, discounts, and cost of goods sold which should all be easily identified with each location based on each store’s POS system. Examples of direct expenses include occupancy, compensation and benefits, utilities and other operating expenses.

Some expenses incurred beyond the four walls need to be included in the 4-wall analysis. These indirect expenses are captured outside the four walls but are attributed to a store, such as freight, insurance, regional marketing and advertising programs, regional field support and interest expense (funded CapEx or operating losses applicable to individual locations).

Why is a 4-wall analysis important?

A 4-wall analysis allows management to stratify store performance using various filters, such as store contribution or EBITDA, by state or region, or by line item such as sales, sales per square foot, sales per head count or other expense line item. Often the 4-wall analysis is sorted from worst to most profitable from an EBITDA perspective as EBITDA is a proxy for cash. By sorting in this way, management can monitor underperforming locations. Store attributes, such as headcount, staff hours, and square footage enhance management’s ability to dive deeper into the metric by looking at line items on a comparative basis, such as sales per square foot. Comparative analytics allow management to quickly identify outliers and begin to take corrective measures.

Are any expenses excluded from the 4-wall analysis?

Generally, costs which are not impacted at the store-level are excluded. Examples of these costs include back office support like corporate sales/marketing, human resources, legal, IT, finance/accounting and corporate management.

Are there limitations to a 4-wall analysis?

The 4-wall analysis is intended to capture the performance of each location. As eCommerce has grown in significance, the importance of traditional brick and mortar locations may not always be reflected in the 4-wall analysis. The value of a brick and mortar location in support of eCommerce activity (e.g., comparison shopping, exposure to new products, sizing/fitting, color validations, customer pickup and returns) is not easily allocated to stores.

How often should the 4-wall analysis be updated?

Since a 4-wall analysis is an essential component of management’s toolkit, it must be updated on a daily basis. In order for the information to be produced in a timely manner (often it is included with the CEO/CFO morning financial dashboard), the 4-wall analysis is generated directly from the company’s financial reporting system.

A 4-wall analysis is a vital reporting tool that provides management with timely and critical operating and financial information and comparable metrics enabling management to quickly identify problems and take action.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.

Some businesses start out small but over time, grow to occupy more space, add employees, increase capital expenditures for equipment, technology, marketing or raw materials, acquire other companies, and take on new and bigger goals. But often the basic business processes do not keep pace with growth. Management, too busy with the day-to-day, may neglect the company from a financial or operational standpoint. The result? A company that is in distress with a prognosis that can range from “We can turn this around,” to “Sorry, this company can’t be saved.” Recognizing relevant issues and implementing solutions can possibly keep a business…in business.

Here are some of the common issues found in troubled company situations:

• Poor accounting practices and weak financial reporting. Nearly every company that experiences financial distress utilizes poor accounting practices that lead to a lack of timely, detailed, and accurate financial information. There often is not a clear correlation between financial reporting and operational reports, but the combination of both in the right form supports a more profitable business.
• Poorly designed operational workflows which become overly complicated. Over time, cycle times increase for design and engineering, production, and customer delivery.  Management needs to ask: “How does the operational floor look and how efficient do operations appear?” Sometimes the answer is obvious, as when it appears disorganized, it is disorganized. Think in terms of Five-S and LEAN practices: Sort, Set in Order, Shine, Standardize & Sustain.  “Are there good measurements in place and daily reporting?”  Some very simple process improvements can have a dynamic effect on productivity.
• Procurement practices are not carefully managed.  It is too easy for controllable costs to increase when business is very profitable. Material costs, production services, and administration expenses can easily increase without close monitoring. Packaging materials, including boxes, labeling, print materials, and marketing services are areas where costs incrementally increase each year without meaningful oversight. As a result, this is usually an area of simple and quick savings.
• Logistical costs and product movement costs are not closely managed.  Product movement costs can become disproportionately high in relation to product costs, because of a shift in volumes or a customer accommodation.  And suddenly a product line is no longer profitable. But management continues to assume the product is making money, if even on the margin. Instead, the marginally profitable product line that was helping to support higher production volume is losing money.
• A lack of benchmarking to peer groups or to historical performance. Production costs components and administrative costs get out of sync with key drivers to profitability. Companies lose sight of gross margins and overhead in relation to sales. 
• Cost accounting and product cost analysis are frequently a lower priority.  But for many businesses it easy to lose track of cost to product and an increasing variance against original targets.  Sometimes the answer is that costs have gone up and it is time for a price increase.  Do not be shy, customers will push back but ultimately know you need to be profitable to continue as a supplier.
• Temporary labor and over-time are used to control headcount but turn out to be a higher overall cost.  There are frequently opportunities to better manage over-time and to negotiate better rates on temporary labor. Also, it is important to have a standard operating procedure in place of when to convert temporary employees to permanent.
• In-house versus outsourcing and third-party logistics. High growth sales and marketing companies frequently try to quickly build their own infrastructure which results in higher than standard production costs and a high cost distribution network.  Can the company really be best in class in all aspects of its business?  It is an important analysis and sometimes biased when performed in-house.  With the dramatic shifts in business models, it may be more profitable to never touch the product and make a third party accountable. Instead, be expert in design, marketing, costing, sourcing, and customer management.
• Recognizing the need to decrease workforce or close facilities may be the only way to rescue the company.  It is hard to resize the business after so much effort was expended to build it up. Management never wants to do lay-offs or implement a Reduction in Force (RIF). They never want to close store locations or warehouse facilities.  A successful business requires an ongoing 360-degree view of finance and operations and a willingness to quickly sort out issues that, left unresolved, may lead to failure.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com.