Driving Value Realized
This month we've been focusing on how to build a business of value. A business that gives you more time, more money and more freedom in day-to-day operations is a business that will sell for a premium when the time comes. Last week we looked at the first four drivers that will help you increase the value of your business: Financial Growth, Growth Potential, Recurring Revenue and the Switzerland Structure. This week we'll take a look at the remaining four drivers which are: Monopoly Control, Customer Satisfaction, Valuation Teeter-Totter, and Hub & Spoke.
Monopoly Control: There is a clear and distinct difference between your products/services and your competition.
If your business is easy to replicate then a buyer will either create it on their own, or acquire a business to gain your customer list or reputation. They will not pay premium prices if the business is easy to copy. The more that you can create a business that has a clear and distinct difference, that is preferable to your customers, the more someone will be willing to pay for the business. On a day-to-day basis, running a business that has a monopoly control is preferable. You're able to compete using a brand strategy which allows you to avoid competing on price alone. This increases your financial performance, cash flow, and, of course, your growth potential.
To increase your Monopoly Control consider:
- Define your niche in the marketplace
- Understand why customers come to you instead of someone else
- Identify the attributes and qualities of your business that give you a defendable market position
- Create marketing messages that differentiate your business from the competition
Customer Satisfaction: How likely it is that your customers repeat business with you and refer you to others.
If you can show a strong indicator that your customers will not only repeat business with your company, but will also bring in new customers, the value of your business rises. Think about it from the buyer's perspective. It reassures them that the future predictions you've made about growth are more likely to be accurate, but it also means that the lead generation is cheaper as your customers bring in leads.
The Net Promoter Score is a well-known indicator that yes, your clients will repeat purchasing and that they're likely to recommend your business to others. If you're going to sell your business, having the Net Promoter Score survey allows you to put a tangible indicator in front of a buyer. If you're not looking to sell your business now, having clients take the Net Promoter Score survey is a great way to get feedback.
To grow your Customer Satisfaction Score, consider:
- Establishing a schedule for sending out Net Promoter surveys. This can be done at certain times of the year or even with certain milestones in the life-cycle of the customer.
- Schedule time to sort through the feedback by focusing on the lowest scores to figure out what changes need to be made in your business to increase these scores.
Valuation Teeter Totter: How well cash flows through your business.
When someone purchases your business they have to write not one, but two checks. One check is the check you take home. You obviously want this check to be as big as possible. The second check the buyer writes is for working capital or the cash flow needed to keep the business operational. The second check will have a definite impact on the amount of your check. If your business has a good cash flow with solid deals established for how your customers pay and how you pay vendors, the second check can be much smaller. The new owner won't need a lot of cash to keep the business going on a day-to-day operating basis. The business will naturally generate the cash based on its structure, which means they can afford to pay you more for the business.
Obviously, having sufficient cash flow will make running the business, even if you're not ready to sell, much easier. Often in a small business, there is too much leeway on accounts receivable and not enough consideration to establishing desirable deals with vendors.
To increase your valuation teeter-totter, consider:
- Restructuring your payment plans with your clients to generate cash flow up front, or reduce the gap between providing a product/service and receiving payment
- Working with your vendors to pay bills in a manner that is more friendly to your cash flow
Hub & Spoke: The ability of your business to thrive without you for at least 3 months.
If your business cannot thrive without you for at least 3 months, the buyer is going to have to step in and fill your shoes, or hire someone else to do it. In some ways, the buyer will be purchasing a job on top of the business, or using profits to hire your replacement. If the business can thrive without you, the buyer will see the purchase as a better investment. On a day-to-day basis, the ability of your business to thrive without you is key to you, or a new owner having more time and more flexibility.
To grow your Hub & Spoke score consider:
- Increasing your days out of the office to test how the business does without you
- Create a list of items that relies on you to be completed. This is now your Stop Doing list.
- Begin to train employees and document systems for each item on your Stop Doing list.
- Look for ways to introduce your clients to your team to ensure that they are ready to work with them.
Value Realized isn't just a saying at Benchmark Business Group. It's a reality that we help small business owners achieve every day, both in our business coaching and our business brokerage services. For the most part, business owners consistently want three things:
- More Time
- More Profit
- More Freedom
And of course, when the time comes to transition out of your business it's:
- More Options
- More Offers
- More Profit
This can be achieved by:
- Defining what value realized means to you
- Having a clear baseline of where your business is today
- Improving the 8 drivers that influence the value of your business