Steve Coveys second habit is “Begin with the end in mind” – this means every…
The Internal Factors of Your Business That Affect Its Value
PART 1 – INTERNAL FACTORS
What are the key things you can focus on to ensure your business is valuable, attractive and saleable?
- Is the size of your business ‘right’ for your industry and market in order to maximise sale value?
Simply put, “Size does matter.” There is much research that supports the fact that businesses with a turnover of $5 million or more nearly always sell at higher multiples than their smaller counterparts. Whilst I am not in favour of growth for growth’s sake, designing your business to grow to at least this level of turnover will maximise value.
This might include making acquisitions (of complementary businesses/opportunities), opening in other states or looking for baby boomer business owners ‘desperate’ to exit and retire. Interestingly, the research clearly shows that the top two outcomes for a successful exit by baby boomers are not about dollars; rather they want assurance the business will continue after their exit (legacy) and that you will look after their staff.
2. Business model.
- Are you and all your team clear on your business model?
- Does every aspect of your business match the business model?
Is your business boutique or scale and even more importantly is every aspect of your business: customer service; online presence; the people you employ; your pricing strategy; your office location/fit-out; and your marketing materials all aligned with your model?
I met a financial adviser just last week who told me he looked after high net wealth individual clients, was extremely good at what he did and as a result charged a premium. He then gave me a business card on very flimsy paper that looked like it had been printed as cheaply as possible.
- Is your revenue easy or hard?
- Do you have annuity style income based on long-term contracts or do you have to continually make new sales?
Recurring revenue is worth more. Do you have clients on long-term retainers, extended contracts or some type of residual income trail? Businesses which need to make sales continually, every day, week and month are far less valuable than a business with long-term guaranteed and/or recurring income.
4. Sales and marketing.
- Are your sales driven by a system/marketing machine or is it based on a key salesperson’s skill and networks?
Your business needs to be able to generate new business, leads, enquiry and ultimately sales without relying on either you or a key person’s skill and sales ability. All businesses need a sales and marketing machine that runs independently.
- Is your business systemised and documented?
Save yourself time, effort and money; not only are systemised businesses far simpler to run, far less stressful and generally far less risky but they are also more valuable. The chance of them performing well is higher and the level of specialised skill to run them is reduced by systems. Lower risk is always more valuable.
- Are your employees engaged, motivated and incentivised to perform and work with you to maximise business value?
Do you have an employee incentive plan whereby employees are rewarded based on performance; either a profit share based plan or ideally an employee share ownership plan (ESOP). This substantially reduces one of the key risks for buyers; that is, that your employees will exit when you do! It also provides a strong incentive for performance from your people; their financial well-being (at least a part of it) is closely matched to yours as the owner. The better the business performs, the more profitable it is; your employees are better off. Getting employees to think and act like business owners can make a substantial difference.
7. Corporate governance and compliance.
- Do you have risk management and compliance completely handled?
Often ignored by business owners as either something large businesses need to worry about or simply too hard and far too boring, but this area (particularly when we look shortly at attracting the right type of buyers), can add considerable value and again reduces risk. Often, we see deals fall over at due diligence stage; when the buyer really investigates the substance behind the business. Those with poorly prepared accounts, badly documented processes and little or no governance structures often fail to meet this hurdle.
8. Owner dependence.
- How reliant is the business upon you?
- What would happen if you didn’t go into the office or factory or shop for six weeks?
The business must be able to run independently of your involvement. You must be able to leave for two months on a holiday to Europe, and without your contact with the office the business must maintain, continue and even improve its performance whilst you’re away.
Some of the items above will help to reduce the dependence upon you (or your family).
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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