“Daddy, I know how we get money.” Said my 3 year old son in his very deep voice.
“How?” I asked.
“We go to the ATM” he said.
Well my son was right. Prior to everything being cards and phones it was important to have cash and I would get my cash at an ATM at my bank. Often this was on the way to a family dinner and clearly my son was watching and absorbing.
The ATM is really a lot like a small business. You use a process to obtain money. Also like your business – think about how disappointing it is when the ATM does not work? Again, consistency creates comfort with an ATM and reduces risk (aren’t those two the same thing) with your business. The more profits or money with the least risk increases small business value.
How can you turn your business into a reliable ATM and increase your business value?
Hire great people and train them and grow them.
Work on your systems. “A great system is when ordinary people get extraordinary results every time.”
Develop tracking systems for key metrics and things like collections that are important but easy to ignore.
The less your business needs you the more valuable it is.
Implement how you can make your company more “Sticky.” Sticky means your customers stick around. Repeating work like taxes, integrations simplifying things for your clients but creating hassles to move (think about how you bank may have done this to you?) Service contracts so you are the first call, etc.
Investigate the profitability of your different products and services. Sell more of the high margin ones.
Develop a marketing and sales system that is independent of any one person. Which would you rather own? A fast food restaurant with no customer alliance to staff or a restaurant where everyone comes because of a wonderful Maître D’?
Ways to make your business run consistently like a quality ATM are endless. Change and technology make sure this is a job that is never complete. But, when you build your business to run like an ATM you will have more fun running it and you will increase business value.
I’m a JD, CPA and Certified Valuation Analyst, and I know that valuation is an art. To find out more about professional valuation services for your business, contact me to learn more.
Business owners often feel it is not worth making changes once they have decided to exit. “After all, I’m just selling it.” But time and time again those owners who prepare for a sale sell their business faster and obtain a higher price.
While each business is unique, these approaches apply to every business.
A. Be highly profitable.
High profitability will increase your business value more than any other one thing you can do. Cash flow, largely a reflection of profitability, is half of any valuation equation. In addition, high profitability is viewed to reduce risk. So, high profitability improves both sides of the valuation equation. Here are some things you can do to increase profitability.
Reduce expenses. Almost every business can cut expenses 10% by looking closely at expenses and weeding out the redundant or unnecessary costs such as software subscriptions that are no longer needed. This is also a time to critically review staffing and identify employees who consistently underperform or do not have a full workload.
Sell more high margin products and services. Most businesses have a range of profitability across their products and services. Prepare a gross margin, or contribution analysis and to the extent possible and then focus on selling more of the high margin products.
Grow, if profitability can be maintained. Growth can be expensive. Do not grow at the expense of profitability if you expect to take your business to market in the next three years.
Do not over-invest in capital items like a new warehouse, large major machinery, etc. that will lower profits and take a long time to absorb if you are within five years of going to market. However, continue making normal periodic equipment investments like trucks.
Refinance debt to lower rates if they can be obtained.
Keep your company lean. Remember, the last two or three years and the current period through your closing date are going to determine your business exit or succession value. During this period focus on profits.
B. Reduce risk
The other half of the valuation equation is the multiplier or discount rate which is an adjustment that factors in business risk. Reduce business risk to increase your business exit value wherever possible. Examples are:
Contracts: Obtain long term contracts instead of working with no contracts. Obtain service contracts when possible. Develop backlog and bid waterfalls to estimate (and later show) potential work.
Liability Insurance: If you have a professional practice make sure you have professional liability insurance.
Legal Resolutions: Resolve lawsuits that are not covered by insurance if possible before beginning the sales process.
Safety Ratings: Maintain a good safety rating in dangerous industries.
Balance Sheet: Build a strong balance sheet. Strong balance sheets demonstrate long term profitability and the ability to overcome short term difficulties.
Joint Venture Options: If you have a preferred buyer, try to joint venture or otherwise work for them. Knowing you, assuming things go well, reduces risk at least to that buyer.
Training: Develop other salespeople besides yourself. In fact, develop systems and train people to solve problems to reduce reliance on yourself.
C. Become Expendable
In most small businesses, the loss of the owner is the biggest risk because every major decision leads to the owner. Therefore, when you sell your business much of the decision making and intellectual property leaves with you. A prospective buyer will view this as a serious liability.
Start training your staff now to make decisions and share the day-to-day responsibilities. Granted, this process is challenging and in some cases may mean additional training for current employees and/or hiring a higher caliber staff. Work towards being able to take a two week vacation and not call in.
This effort will not only reduce risk but also create increased business value. Of course, if you don’t have to work so hard, you might now want to sell at all.
D. Lock in Key Players
As you develop systems, train key people, and start taking time off, the risk of losing of key people increases. Create a “golden handcuff” plan to keep your key people now and through a transition. If you have a high year end bonus culture you can pay
Conclusion:
If you are considering an exit plan, you need to make sure you get it right. The area is complex and many things from tax laws to negotiating strategies are not always intuitive. Don’t learn on yourself.
The book, “The Art of Business Valuation, Accurately Valuing a Small Business” has over 75 of its 400 pages covering many aspects of small business market sales including working with business brokers, increasing sales value, descriptions of a well-run sales process, due diligence including a checklist and guidance on SBA loans. If you are selling a business with revenues under $10 million, you need this book on your desk. The book published by Wiley is available through your favorite bookseller. More information can be found at www.theartofbusinessvaluation.com
Finally the author, Greg Caruso, JD, CPA, CVA, is always available to assist with exit planning, brokerage, and to prepare or review business valuations with an emphasis on increasing value and likely transaction values and terms.
