Benchmark Business Group

4 Drivers that Influence Value Realized

March 21, 2017

This month we've discussed the importance of defining the value you want to realize from your business and how to generate a baseline of your business today. In the next two weeks we're going to continue to look at building a business of value from two perspectives: if you're looking to sell your business soon (within two years) and if you're looking to build a business of value to sell or transition later in your life.

 

The good news is that the action steps needed to build a business that attracts more offers and eventually sells for a higher price, are the same ones that you'll want to implement to build a business that is easier to manage and provides you with more money, more time, and more freedom. The lesson to take away is that how you design your business today will determine your experience in managing the business and your experience in selling/transitioning the business in the future.

 

If you haven't already, we recommend that you find out your Value Builder Score today. It's a complimentary assessment that will provide you with a baseline as we discuss the eight key drivers in building a business of value. Today we will cover: Financial Growth, Growth Potential, Recurring Revenue and the Switzerland Structure.

Financial Performance: Estimates the future streams of profit that your business will have if your business continues at it's current rate of growth.
Many business owners have trouble accepting this, but the hard truth is when someone buys your business they do not consider the hours, the sweat equity, or hard times that you've managed to get to where you are today. Instead, their focus is all on the future profit that your business is expected to create. Those future profit streams are exactly what they are expecting to buy, not your history.

Whether you want to sell soon or if you're looking to capitalize on managing the business for a while, the business streams of profits are important. One thing to remember is that when you go to sell your business there will be "add-backs" or items you are expensing today that are added back to the profit as they may not be expenses that the new owner would choose to have such as: charity donations, cars, cell phones, etc. To increase your Financial Performance Score:

  • Understand your books/financial statements
  • Consider outside help in auditing your books
  • Focus on increasing revenues - the time to sell is when your business is planning to grow, not when you're in a rut, or worse, decreasing
Growth Potential: The likelihood that your business will continue to grow in the future.
As a business owner, having the majority of the market share is a great achievement. After all, it means more revenue, more profit, and typically shows you are on top of the game, but buyer's may have a different outlook. They are not going to pay top dollar for a business that has little room to grow. Buyers look for businesses that will give them a good return on their initial investment and will pay top-dollar to buy a company that has a solid growth plan. To increase your growth potential, consider:
  • Cutting down on customization of your products/services to make your business scalable
  • Train your team on cross-selling opportunities
  • Ensure that your "delivery" systems for your product or services is easy to scale and could keep up with growth
  • Always have a 12-month growth strategy in place which can be shared with potential buyers
Recurring Revenue: The amount of automatic annuity based revenue that you collect each month.
A business who has more locked-in, guaranteed income, on a month-to-month basis is more valuable than a business that starts their sales at $0 each month. From the buyer's perspective, if sales start from $0 each month, the risk is high. It can impact when they buy a business as well as how much they will pay for that business. It can take some creative thinking, but creating a recurring revenue business model can drastically help the number and quality of offers you receive for your business. Not to mention, running a business with consistent automatic revenue takes away stress on the sales department and allows for easier cash flow management.
  • Identify how much of your current revenue is automatic or annuity based
  • Brainstorm and look for ways to create recurring revenue 

Tip: This driver can cause some frustration. It's important to remember that it's not the ONLY driver. You can build a business of value that doesn't have recurring revenue, but it's just as important to remember that just because the answer isn't obvious right now doesn't mean it doesn't exist. We challenge you to take time and really discover what could be.

Switzerland Structure:  The dependency your business has on three sectors: Customer, Employees, and Vendors.

Being too dependent on another person or entity is a big risk for anyone who is looking to buy your business. A buyer must consider if they will be able to keep key employees, establish the same relationships that you have with your customers, and get the same deals that you have worked out with your vendors. If a buyer feels that either of these three sectors are at risk, then they will be less willing to invest in your business.

 

If you're not looking to sell your business soon, working on improving your Switzerland Structure is key to protecting yourself against unpleasant surprises. Many times, a business owner can feel almost as if they are being held hostage by a key employee, a big client, or even a vendor. It can lead to making decisions that are not in line with your vision as you try to meet demands and it adds to the overwhelm a small business owner can sometimes experience. To minimize your dependency, consider:

  • Systemizing your business and documenting key functions of employees
  • Ensuring that your recruiting, training and on-boarding system is efficient
  • Identify your revenue streams and top clients
  • Ensure that your lead generation strategy will balance your revenue streams
  • Continually research vendors and opportunities
Don't forget to join us next week as we discuss the remaining four drivers: Monopoly Control, Customer Satisfaction, Valuation Teeter-Totter, and Hub & Spoke.

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