As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).
Today we continue our journey through the exit planning process. Our last blog discussed the importance and method of finding out the value of your business, and today we will build off that concept with step three: increasing the value of your business.
After completing your business valuation, you may have found your business is not worth as much as you hoped. Because of this, selling your business will not generate enough money for you to live comfortably the way you were hoping. Another problem you could be facing is a lack of interested buyers, which could be due to the fact your business doesn’t pose much value to them.
So, how do you solve these problems? The answer lies within value drivers, which do exactly what the name suggests – they drive up value!
It would be a mistake to assume every business, no matter the type, could increase its value by utilizing every value driver possible. After all, each business has characteristics that make it unique. However, there are seven value drivers, according to the BEI, that are common to all industries and can be tailored to match each unique business.
Management Team – One of the most important aspects of any business is its employees. When you think of a management team, you should be thinking of those employees responsible for decision making, monitoring and setting objectives and motivating employees.
So how can this team be a value driver? It’s likely the team members have a variety of talents and skills that have helped the business become what it is today, and have a proven track record of success. Potential buyers are looking for a management team with staying power; in other words, they want these talented individuals to stick with the company to help ensure success. It is also common to assume if a management team can stay in place, the company then has the ability to keep and maintain customer relationships, which keeps the company’s reputation intact. The stronger the management team, the higher the offer from the buyer is likely to be.
Operating Systems – In addition to a great management team, buyers are also interested in what systems and policies are in place to continuously generate revenue from an already established, yet still growing customer base. These systems include, but are not limited to, procedures used to generate revenue and maintain expenses, customer relationship management programs (CRM) and means of distribution. Having these systems properly established and documented show the buyer the business can continue to be profitable after sale. Think from the buyer’s perspective; as a buyer, you want to be sure the business will grow and continue forward with new ownership and that it will not fall apart when the previous owner exits.
Customer Base – We’ve touched on the customer base in the previous points, but this value driver deserves its own emphasis. Buyers are looking for a business that has an established customer base that won’t be going anywhere soon. According to the BEI, it is a great practice to have a diverse customer base in which no single client accounts for more than 10% of total sales. This adds protection if a customer(s) is lost. When buyers are willing to shell out large amounts of money, they want to make sure they are getting what they’re paying for.
Facility Appearance – Although not a huge factor for most businesses, it is still important to keep in mind some buyers are very, shall we say, picky? Some buyers have a tendency to be more reserved with their spending if the physical appearance of the business or its equipment isn’t very appealing to the eye. A clean and organized office promotes the idea that the business is also well organized. Superficial improvements, both interior and exterior, can improve the marketability of your business.
Growth Strategy – It is important to have a realistic growth strategy in place. By realistic, we mean a growth strategy that fits your business, not an elaborate plan that is not attainable. Keep your growth strategy ambitious, but also attainable. This strategy can show potential buyers specific reasons why cash flow and the business will continue to grow after it has been purchased. The growth strategy should be based on factors such as market plans, industry dynamics and demand based on demographics, to name a few. The growth strategy helps the buyer understand your business, and where it will go in the future.
Financial Controls – Financial goals are not only an important part of how a business is managed; they also help to safeguard a company’s assets and support any claims of the company’s profitability. A buyer will not spend a large amount of money on a company without first knowing what the company’s cash flow has looked like; they need to have confidence in the company. Giving buyers confidence can lead to a much higher valued sale.
Cash Flow – To piggy back off the last driver, not only do we want financial controls in place, but we want to make sure the cash flow is All of the value drivers in some shape or form contribute to a stable and predictable cash flow, so it is important to focus on all of the value drivers to operate their business more efficiently. Buyers look for companies with a solid cash flow they can increase after purchasing, and are willing to pay top dollar for these companies.
What a buyer decides to pay for your business is dependent on many factors. However, to increase that number and get top dollar for your company, it will be beneficial to follow these seven value drivers down the road of exit planning success. Following these seven value drivers can lead to a competitive advantage over other businesses that will give your business the upper hand when it comes time for buyers to decide which business they would like to purchase.