A Methodical Way to Increase the Value of Your Business – As Part of An Exit Plan
Let’s face it, when you reach the point of your career as a business owner and it becomes time to start planning your exit, you will ultimately want to exit your business by either selling it to company insiders, family, or to a third party, for the highest possible price, in the most tax-efficient manner and on your terms.
A key focus within the exit planning process is addressing the ten critical areas that affect the value of your company. There are other areas to address that impact the marketability and strength of your business, but let's discuss ten areas that should be considered to make your company more valuable.
- Growth of Revenue and Profit – Buyers looking to fuel their top-line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your industry overall. We encourage owners to increase these efforts years before the sale if they are not ahead of the industry average. This often requires looking at your business more strategically and putting things into place to make increase growth. A few resources include an E.O.S. system as discussed in the book “Traction.” There are even coaches available to help you implement an E.O.S system. Our firm also has several tools and resources to help you with the “Growth Focus.”
- A Differentiated Business – Potential buyers purchase what they cannot easily replicate on their own. This means companies with a unique product or service that is difficult for a competitor to duplicate are more valuable than a company that sells the same commodity in their industry. When you truly are differentiated, you have a greater ability to dominate and achieve business growth as a result. A great book as a resource is “Blue Ocean Strategy.” If you need a Blue Ocean Consultant, feel free to email me to request a referral.
- Reoccurring Revenue – “The Subscription Method” – This is an area that immediately attracts a potential buyer, especially private equity. The more revenue you have from automatically recurring contracts or subscriptions the more valuable your business will be to a buyer. The greatest example of this is Amazon Prime, iTunes or iTunes radio, and Netflix. Even if subscriptions are not the norm in your industry, if you can find some form of recurring revenue it will make your company much more valuable than those of your competitors.
By the way, a close friend of mine, who works for a major elevator service company and is charged with seeking out other elevator service companies to buy, mentioned to me that one of the important things they look at with a prospective company is the integrity and strength of their service contracts. In other words, how binding are they (which determines the likelihood of reoccurring revenue)?
- Your Company’s Growth Potential – When a buyer looks at a company for a potential purchase, they will examine your company's growth potential. What does the future look like for revenue? How much potential is there for revenue growth? There are several avenues you can explore to improve these areas which include identifying other markets to enter. Are there other products or services you can develop and/or introduce? Another potential growth tactic is offering products or services that exist in your current lineup that you can “cross-sell” to existing customers.
- Maximizing Customer Satisfaction – Having highly satisfied customers is key to making your company more valuable. It is important to focus on your service operations to make this happen. Highly satisfied customers increase the likelihood of repeat purchases, word of mouth growth, and brand loyalty and recognition. A good place to start is to determine how satisfied your customers are. You approach this by applying metrics to assign an overall customer satisfaction score. The most common approach for this is the “Net Promoter Score.” An example of this is when a customer calls into a company and the recording asks if they would like to take a survey at the end of the call. You can implement a Net Promoter Score by actively surveying your customer base. After you determine an overall score you set goals to raise that score.
- Your Company’s Scalability – The scalability of your company refers to the ability to grow without being hampered by its structure or available resources when faced with increased production. Make sure your company’s operations are up to date with the latest technology and systems to maximize its scalability.
- Your Ability to Generate Cash – As John Warwillow of the Value Builder System describes – "When a buyer purchases your company, they essentially write two checks, one check to you for the purchase of your business, the other check to fund the company’s working capital. The smaller the requirement to write that check to fund working capital the better, meaning the more valuable your company is to the buyer." Your company’s ability to generate cash quickly is important. There are several areas to identify including your accounts receivable, controlling overhead, etc.
- Your Company’s Ability to Run Without You – How smoothly does your company operate when you aren’t there? Do you find yourself having to be there to assure service execution without fires starting or having to troubleshoot issues?
- Revenue Concentration – How concentrated is a company’s revenue? This means a substantial amount of revenue is generated by a few customers or clients. The more concentrated the revenue is, the riskier an acquisition becomes for the buyer. It is important to diversify your customer base as much as possible.
- How Reliable is Your Workforce – If you have key employees that are critical for your company’s operation after the sale, the buyer usually wants the confidence that they will remain at the company after the purchase. There are a number of things that can be implemented to make that happen such as “stay bonuses” and “production bonuses” that are backed by written agreements. The other area to consider is training your workforce and increasing their skills. This makes your company more valuable as well as improves the operations. In California, there is something called ETP (Employment Training Panel), a program that provides funding to employers to assist in upgrading the skills of their workers through training. If you are a California employer, there is a consultant that can assist you in applying for this program as well as implementing it. You can email me and I will pass that resource on to you.
Preparing your company for you successful exit takes time. You can utilize an assessment tool/s to determine where you’re at for the “sellability” of your business. After an assessment has been completed, you should then begin to have a written exit plan developed with a detailed list of action items.
Here is a very useful tool to help assess your business’s readiness for a successful exit. https://www.exitmap.com/zellerkern/
If you would like more information on developing an exit plan, feel free to email me at firstname.lastname@example.org.