7 steps to create a more valuable business
by Peter Fleming Feb 28 2017
I am often asked when is the best time to plan an exit strategy? Answer; either before you start in business or now if you haven’t got one. Your choices could be; to sell to the highest bidder, become the chairman, hand over as a legacy to your children or sell to the staff through a management buyout (MBO). But first and foremost, all shareholders need to agree the end game, the create a plan and start working together to a timescale.
By obtaining clarity and goal congruence, the overriding objective going forward should be building value in your business to allow you to have the freedom of choice to do any of the above.
So what are the steps?
- Financial performance. Have up to date information to hand. Using visual scorecards, KPI’s and performance measurements will not just help you understand on where to focus for improvements and business growth activities, but shows the potential buyers there are good working practices and controls, plus you know what makes your business tick!
- Ensure your business isn’t reliant on any one person, supplier or customer. Your biggest customer should not be more that 18% of your total sales. Always have at least two potential suppliers for products or services and be acutely aware of any one staff member whom the business is totally reliant on, including yourself (Point 7.). As you need to mitigate any future risks
- Tighten up your cash flow management and improve your stock turn. The more money you have tied up in Work in Progress (WIP), debtors or stock, the less the value of the cheque paid to you personally when you sell. As the buyer will have to finance the business working capital
- Systemise processes using technology and secure operating procedures. It will not just become easier to manage the day to day but will free up your time to allow you to, focus on developing your business further.
- Ensure you have highly satisfied customers. Obtain testimonials and have proof of recent customer satisfaction levels. The higher the reputation your business has the stronger the brand. Therefore more buyers will be interested and hence the business value will increase.
- Build a portfolio of reoccurring income. If you offer a service, maintenance, membership or subscription then focus on building these sales channel. Establish auto renewal contracts with direct debit payments with these customers. This will aid not just cash flow management but will drastically enhance the value of your business as the buyer will pay for a multiple of future profitability. The more guaranteed the higher the multiple.
- Step out of the owners trap and manage yourself out of the business. If you’re the one that has the interface with the customer, deals with all the complaints or creates the product or deliverers the service, the value of your business will be heavily discounted by the buyer. As it will be very difficult to transfer the relationship and ownership to someone else.
There is no standard calculation for valuing a business. A rough guide is somewhere between 3 and 5 times your annual net profit if you have had a steady number of years trading. However the more desirable you can make your business through having an attractive and loyal customer base, guaranteed future income streams and can show the growth potential and market share growth the more likely you could achieve an even higher value.
At the end of the day you may not want to sell but wouldn’t it be a great feeling to have the freedom of choice after all those long hours and years of hard graft. Then you would only have to decide on what you will do next!
“What you get by achieving your goals is not as important as what you become by achieving your goals.” Zig Ziglar
If you are looking to review and then grow your business, Business Doctors Cumbria offers a free business health check to help you to establish a clear vision and understand the steps to fulfil your aspirations.