As a CPA, I have always been intrigued by what drives business value a lot and some worth very little. How can two businesses appear to be equally profitable but the values are so different? I have invested my entire career toward helping growth minded business owners and have learned allot along the way. I have represented business owners through acquisitions of target companies as well as helping some of them maximize their business value before the sale of their business. On both sides of the transaction, understanding what drives business value has been important. As the buyer, you want to make sure you are not overpaying for a company and as a seller, the goal is to maximize the selling price. Even when not looking to sell in the immediate future, running a business as if you were grooming it for sale will ensure it is running optimally.
A high business value is often directly correlated with a business that produces consistent, above average profits. I am sure you are thinking “Thanks Captain Obvious, who doesn’t know that?” That takes us to the next, even more important question. Exactly how does it make an above average consistent profit? Michael Gerber, the best-selling author of the book The E-Myth says it best “No one wants to buy your job, they want to buy a business that works.” So what exactly does that mean? Well, a business run by well-designed processes with a great team serving great customers that produces a profit is more valuable than a business that is largely dependent on the tactical involvement of the owner to make the same amount of profit.
So how exactly do you do that? It starts with assessing where you are as a company versus what you want it to be. This comes from a well-crafted vision, solid core values and a strategic plan that everyone knows and is inspired by. Keep the plan simple and concise. It has to be easy for people understand. Another important element of the strategic plan is that it results in carrying out the Company’s vision while making the business owner’s tactical role in the company less and less relevant over time. That means building an organization where everyone’s roles and accountabilities are clearly defined, including the metrics by which their performance is measured. This all must be tied to the strategy that feeds the vision. Along with a strong people strategy, there must be well-designed processes for functions such as operations, marketing & sales, finance, the customer service experience, training & development.
This often requires regular investment in new technology to ensure your business remains cutting edge.
The business owner should regularly look at the role they are playing in the organization. I guarantee the owner will never totally work themselves out of a job! As a matter of fact, by consistently focusing on this, the business owner will see the Company grow, requiring a higher level of strategic involvement by the owner and new roles they will fill as new roles his team will fill.
With this type of mindset, the business owner is able to manage the business based on results and metrics that are directly tied to the Company’s vision. This allows the owner to spend time thinking about the next level of the company, working with key people within the organization on what’s working well and what isn’t. Essentially the owner has built a company that can be run by most anyone (and often from anywhere) who has effective leadership skills, even those who may not have technical experience specific to the Company’s industry.
How does all of this result in a higher value? For starters, you have built a business that can be run and led by a larger pool of people. That itself increases value. The larger the buying pool, the higher the value. You have also built a company that is process-oriented and has a solid workforce in place that help reduce the stress of uncertainty placed on the Company. An organized company leads to a healthy culture with opportunities for advancement which leads to reduced turnover and higher morale. This also leads to satisfied customers who receive a consistent, quality product as well as good customer service. All of this contributes to higher business value. Essentially, the stronger the company, the lower the amount of risk a potential buyer has to assume to get his required rate of return.
I am not making any false illusions that this is easy to do. Quite the contrary, the execution is challenging. I have been working with an executive leadership coach myself for about 6 years now. He has communicated something that really resonated with me when he says “Don’t mistake the map for the terrain.” The two are very different. When looking at a map it seems pretty simple. You start at Point A (where you are today) and you want to get to Point B (fulfill your vision). The terrain however is much different while on your journey following the map. The terrain often includes obstacles to overcome, hills to climb over, bad weather, packs of wolves looking to hunt you, rivers to cross. You get the idea. While the terrain can be difficult it doesn’t mean you are on the wrong path. Most will quit when it gets hard.
Stay the course and focus on building a business that works without your tactical involvement and whatever you do, don’t quit. Keep going until your vision is fulfilled and you most certainly will have built a business that is profitable and has maximum value. If you’re looking for help with a valuation of your business or increasing your business value reach out to our team today.