The Business Owners’ Special Series (B.O.S.S.) No. 34
The most astute business owner is not the one who is inventing the newest product or the latest technology. Neither is it the one who is developing the most terrific marketing idea. It is certainly not the one who is actively engaged in running the business operations every day, ensuring the business always runs flawlessly. No, it is none of these. The most astute business owner is the one who is laser-focused on these two items at all times:
- Business value and value growth.
- Exit-readiness. A business that has not been made exit-ready in advance of a sale will sell for a deeply discounted price.
Let’s look at how astute business owners focus on these two critical areas.
How to Focus on Value
The single most important number a business owner should know will never appear on the profit and loss statement, balance sheet or anywhere in the general ledger. While traditional financial statements can provide valuable insight into business operations, they will never tell you this: the current value of your business.
There are several things a business owner should know and understand about their business value:
- What is my business’ current value?
- Given its current size, what is its highest potential value?
- What is the gap between its current value and its potential value?
- How do I close that gap, and move the value from its current level to its highest potential level?
You need to know how businesses in your industry are valued, and you also need to know the range of values. The following is an example. You may hear financial advisors say, “Businesses in your industry sell for 8 times earnings.” However, that is only partially true. While the majority may sell for 8 times earnings, some businesses may sell for as little as 4 times earnings, while others sell for 12 times earnings. That is the range that you need to know, and it is determined based on recent transactions in your industry.
Once you know the range of potential value, the critical question is this: is your business value closer to 4, 8 or 12 times earnings? It depends on the quality of business and the effectiveness of the operations as determined by a buyer’s perception of your business. It is challenging, but you will need to see your business from a new perspective. You must see your business through the eyes of a buyer and look critically at all functional operations as a buyer would examine them. Where will they see the risk? Where will they see the ability to improve the effectiveness of business operations? The next section will explore how to begin that process.
How to Be Exit-Ready at All Times
Making your business exit-ready is simple in concept, but the execution is challenging. It takes a very systematic and thorough approach. We call our approach Value Acceleration. The concept is to examine all functional areas of your business as if you were going to buy it. As a buyer, you look for flaws and risks. You also seek overlooked value enhancement opportunities that you can implement immediately after the acquisition. In doing so, consider the following:
- Will your management team impress a buyer? This goes beyond whether they’re capable of running the business without your involvement. The management team may be impressive on paper, but if their timeline to retirement is like that of the seller, the buyer will discount their value as the current management team may not continue to work for the buyer.
- Will your customers impress a buyer? That depends. Do you have too much concentration in one customer, or in one industry? Over-concentration represents risk.
- Will your suppliers impress a buyer? Are you over-dependent on a single supplier, or a single country of origin?
Buyers do not run away from risks; however, they will reduce their price based on the risks they find. Examine your customers, your products, your employees and your processes. Do an analysis of each major functional and operational area. Document your findings. When you document your operational strengths, you are defending value. When you document weaknesses in your business, you are unearthing value enhancement opportunities. Document specific improvements made to your business, as it will further defend a higher value than you have today.
Exiting Your Business is a Process, Not an Event
You should be aware of the following realities:
- If you do not have a Value Acceleration plan that you act on every day, then you are letting your business value stagnate: your business’ value will grow far more slowly, if at all.
- If an offer to buy your business arrived today, it would be far less than the highest potential price. You can change that. Unsolicited offers you receive should be at the highest potential value based on implementation of your Value Acceleration strategy. Furthermore, knowing your business’ value will prevent you from wasting time on subpar offers and bottom fishers.
- If sudden and detrimental changes happen to your health, your industry or the economy, and you were forced to sell your business today, you would sell your business for a huge discount. That may be devastating to you and your loved one’s financial future. Taking specific actions now to build value and perpetually be exit ready will go a long way to avoiding catastrophic financial results in such a situation.
Be the astute business owner who understands their business’ current value and the potential range of values. Become the business owner who has a Value Acceleration plan in place to reach the highest potential value and executes on that plan every single day. Be that business owner who ascertains that their business is always exit-ready on a continual basis — and at the highest potential price. Your exit planning is a process, not an event. Know your value. Know the highest potential value. The value of your business depends on it.