When I was in business school, we spent a lot of time thinking about strategy. I learned to analyze an industry using Porter’s 5 forces. We talked about Judo tactics in business. I really enjoyed the classes.
I’m a small business owner now. I own an adult day and home care business. From an industry perspective it has a lot going for it. The biggest is that we operate in the midst of a massive demographic wave. Our niche is solving care problems for the broad middle class. No other industry is doing this affordably and with high quality. On the downside, there is a ton of competition. It’s fragmented. Adult day is typically reliant on government payments. I can go on.
Much of this doesn’t really matter for strategy and industry analysis. I own the business. I can’t easily quit and find a day job if I suddenly think the characteristics of my industry stink. I can pivot and move in a different direction. Over time, I can change, but not immediately.
I’ve been thinking about Skylark’s strategy over the last couple of years. We survived a Medicaid freeze several years ago. The strategy became simple: survive and diversify away from Government payments. We invested in more modern sales and marketing programs. We are growing in ways that we were not before the freeze.
I also have diversified my learning. For a long time, I spent most of my time trying to understand our little world of adult day services. I’ve read some great business books. I started looking at some different blogs and observing companies in completely different spaces.
One company I learned about was Navix Consulting. They specialize in exit planning for the small business owner. I also read a book called Buy, Then Build by Walter Diebel. Neither offers a unique service, but they were the ones that introduced the concepts to me.
There are two implications for strategy. First, plan for the exit. The CEO/Owner ensures that the company is in a position to be sold for a good price. The company must be structured properly so that a buyer can take over without undue risk to their investment after the closing.
Buy, Then Build is a book about acquisition entrepreneurship. The main thesis is that starting a company from scratch is a risky endeavor with a high failure rate. An acquisition greatly diminishes the risks of entrepreneurship assuming a fair valuation at purchase. This book opened to me an entirely new avenue to growing Skylark. In addition to organic growth, acquisitions fuel growth.
At some point, my business is going to be in someone else’s hands. I’ll either sell it, pass it on to the next generation, close it down, or get hit by a bus (or something else equally unsavory). Failure is not an option. My wife, my kids, and my employees, and my customers depend on me. (An important question for this conversation: could my wife step in as the owner if I’m suddenly incapacitated?)
That really means that the business has to be in a position to sell or have someone else assume its leadership at any time. No matter what, I need to get the company in selling shape. First, I’m building the organization. There are not many multi-site adult day centers in the nation. It’s a challenge to be an operator and build the structure and capabilities that are required. We are determined to build a private pay business. There are very few adult day centers who successfully attract a significant private pay clientele. We need a great leadership team and repeatable business operations.
But, it’s not just about growing the organization. I need to grow the business in a what that increases value. What is it worth? Can I sell it for what I need to sell it for? Can I sell it for more than what I have in the company?
This is where understanding valuation is important. First, it’s all based on cash. The valuation for most small businesses are based on the documented (tax returns) from the last 3 or more years. The projections don’t mean much if the recent past isn’t very good. It’s based on Seller’s Discretionary Earnings (SDE). While there is a pretty definite equation for determining SDE, the main idea is that businesses sell for a multiple of all the cash including the owner’s compensation that is available to a new owner.
I had a wake-up call when I did a rough valuation of Skylark: upon a sale, it won’t fund my retirement, pay for college, or fund future investments. With a rough sense of Skylark’s current valuation, we can pivot our strategy in order to increase future value. Some investments increase value; some don’t. The Skylark Mission is very important to us, so the investments answer to the mission.
For Skylark, we will meet our Mission while increasing the economic value of the company by:
- Building cash flow and an adequate cash capitalization. This means we will be efficient and increase productivity. We’ll need to learn to manage our line of credit effectively and maintain adequate cash balances.
- We need to grow. Smaller companies receive a valuation approximately 2-3.5 times their SDE. As revenues and profitability increase, valuation multiples expand. I don’t know that we’ll go for breakneck growth, but it would also be good to have the resources that come with a bigger budget. When you’re smaller, sometimes the solution is: who needs sleep; we’ll get it done tonight.
What else? This really is the beginning of my thoughts on business strategy. What more should I consider? How have you developed strategy? How do you increase value while staying honest to the mission?
Ned Morgens 