The old saying, “an ounce of prevention is worth a pound of cure,” most definitely applies to any business owner that believes he or she will someday want to sell his or her business. The bottom line is that every business owner has to transition out of ownership at some point. In a recent Inc. article, “Four Mistakes That Could Lower Your Business’s Value and Weaken Its Salability,” author Bob House explores 4 mistakes that could spell trouble for business owners looking to sell.
No doubt House explores some excellent points in his article, such as that you should always have what he calls, “a selling mindset.” The reason this mindset is potentially invaluable for a business owner is that when operating in this way, sellers are essentially forced to stay on their toes.
Or as House writes, “a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential.” Having a “selling mindset” means that business owners have no choice but to perform periodic reality checks and access the strengths and weaknesses of their businesses.
Mistake #1 Poor Record Keeping
For House, poor record-keeping tops the list of big mistakes that business owners need to address. As House points out, both potential buyers and brokers will want to examine your books for the last few years. The odds are excellent that before anyone buys your business, they will look very closely at every aspect of your financials, ranging from your sales history to your operating costs.
Mistake #2 Failure to Innovate
The next potential mistake that business owners need to avoid is a failure to innovate. House notes that a lack of tech-savviness could make your business less attractive to prospective buyers. The simple fact is that virtually every business is now impacted in some way by its online presence, whether it is the quality of that presence or lack of it altogether.
For House, a failure to maintain an active online presence could be associated with a failure to innovate. Even if your company is innovative, if you do not maintain a coherent and robust online presence, this could portray your company in a negative light.
Mistake #3 Unstable Workforce
House also feels that having an unstable workforce could spell trouble for your business’s value and negatively impact its salability. Most prospective buyers will not be very eager to buy a business that they know has a lot of employee turnover. In general, new business owners crave stability. Attracting and keeping great employees could make all the difference when it comes time to sell your business.
Mistake #4 Delayed Investments
The final factor that House notes as a potential issue for those looking to sell their business is delaying investments and improvements. House states that it is important for owners to continue to invest even if they know they are going to sell. Investing in your business can help it expand, grow and showcase its potential future growth.
Another excellent way to prevent making mistakes that could interfere with your ability to sell your business is to begin working with a business broker. A top-notch broker knows what mistakes you should avoid. This experience will not only save you countless headaches but also help you preserve the value of your business.Read More
The first key in determining business value, is to have your accountant take a look at your accounting procedures and make recommendations on how to improve them. He or she may also help in preparing financial projections for the coming year(s). Getting your company’s financial house in order is very important in establishing the value of your firm.
The second key is to review the reputation, image, and marketing materials of your company. Certainly, the quality of your product or service is paramount, but how your firm presents itself to customers, clients, suppliers, etc. – and the outside world – is also very important. The appearance of your facilities and customer services – beginning with how people are treated on the telephone or in the waiting/reception area – are the kind of first impressions that are critical in dealing with your customers or clients. Don’t forget about the company’s Web site; in many cases, it is the initial introduction to your company. Now may also be the time to update your marketing materials. The image of a company can help create a happy workforce, improve customer service, and impress those that you deal with – all of which can increase the value.
A third key is to get rid of outdated inventory – sell off any extra assets such as unused or outmoded equipment. The proceeds can be used in the business. If there are any assets that should not be included in the value of the company, such as personal vehicles or real estate, you might want to separate them from the assets of the company. This is especially important if you are considering placing the company on the market. A prospective purchaser expects everything they see to be included in the sale. If a portrait of your grandfather is your personal property, delete it from any list of company furniture, fixtures, and equipment; and if the business is for sale, remove it entirely.
Another important key is to resolve any pending items. For example, if the company has a trademark on any of the important products, and the paperwork for registering is sitting on someone’s desk, now is the time to complete the filing. Trademarks, patents, copyrights, etc., can be very valuable, but only if they have been properly recorded and/or filed.
Contracts, agreements, leases, franchise agreements, and the like should be reviewed. If they need to be extended, take the appropriate action. A contract with a customer has value and if it is scheduled to expire soon, why not get it renewed now? The same is true for leases. Favorable leases for a long period of time can be a valuable asset. Do your key employees have employee agreements?
The key factors outlined above not only build value, but they also increase the bottom line. If you are considering selling your company at some point, these key issues will come back many-fold in the selling price. A professional business intermediary can help with other factors that can influence the value of the business.
One other hidden benefit of building the value of your company is that you never know when the Fortune 500 Company will come “knocking at your door” with an offer that you can’t refuse. At that point, it’s probably too late to work on some of the issues mentioned above.Read More
Have you ever wondered what determines the value of your business? Here’s a real life story as told by the Founder of The Value Builder System™, on a few of the key drivers that have an impact on the value of your business:
Perhaps you’ve heard an industry rule of thumb and assumed that your company will be worth about the same as a similar size company in your industry. However, when we take a look at the data provided by The Value Builder System™, we’ve found there are eight factors that drive the value of your business, and they are all potentially more important than the industry you’re in.
Not convinced? Let’s look at Jill Nelson, who recently sold a majority interest in her $11 million telephone answering service, Ruby Receptionists, for $38.8 million.
That’s a lot of money for answering the phone on behalf of independent lawyers, contractors, and plumbers across America.
To give you a sense of how high that valuation is, let’s look at some comparison data. At Value Builder, we’ve worked with more than 30,000 businesses in the last five years. Our clients start by completing their Value Builder questionnaire, which covers 35 questions that allow us to place an estimate of value on a company. The average value for companies starting with us is 3.6 times pre-tax profit and those who graduate our program with a Value Builder Score of 80+ (out of a possible 100) are getting an average of 6.3 times pre-tax profit.
When we isolate the administrative support industry that Ruby Receptionists operates in, the average multiple offered for these companies over the last five years is just 1.8 times pre-tax profit.
Nelson, by contrast, sold the majority interest in Ruby Receptionists for more than 3 times revenue.
There were three factors that made Nelson’s business much more valuable than her industry peers, and they are the same things you can focus on to drive up the value of your company:
- Cultivate Your Point Of Differentiation
Acquirers do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude they can simply set up shop as a competitor and win most of your price-sensitive customers away by offering a temporary discount.
In the case of Ruby Receptionists, Nelson invested heavily in a technology that ensured that no matter when a client received a phone call, her technology would route that call to an available receptionist. Nelson’s competitors were mostly low-tech mom and pop businesses who often missed calls when there was a sudden surge of callers. Nelson’s technology could handle client surges because of the unique routing technology she had built that transferred calls efficiently across her network of receptionists.
Nelson’s acquirer, a private equity company called Updata Partners, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in.
- Recurring Revenue
Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.
In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts—perfect for making a buyer confident that her company has staying power.
- Customer Diversification
In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers will balk if any one of your customers represents more than 15% of your revenue.
At the time of the acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could lose a client or two each month without skipping a beat, which is ideal for reassuring a hesitant buyer that your company’s revenue stream is bulletproof.
Nelson built a valuable company in a relatively unexciting, low-tech industry, proving that how you run your business is more important than the industry you’re in.
If you are interested in learning how sellable your business is the Value Builder System™, survey can be found here on our website.Read More
Will this be the year you seriously drive up the value of your company?
If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.
If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).
If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.
Breedlove & Associates Sells for 6X Revenue
In 1992 Stephanie Breedlove started a payroll company to make it easier for parents to pay their nannies on a recurring basis. It began small and Breedlove self-funded her growth, which averaged 20% per year.
By 2012, Breedlove & Associates had hit $9 million in annual sales when Breedlove accepted an offer from Care.com of $55 million for her business—representing an astronomical multiple of more than six times Breedlove’s revenue.
Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.
Not sure how to create recurring revenue? Here are four models to consider:
Products That Run Out
If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.
If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.
If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.
Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.
If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.
You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.Read More
Are you stuck trying to figure out how to create some recurring revenue for your business? Here’s how one business owner quadrupled the value of their business in three moves.
You know those automatic sales will make your business more valuable and predictable, but the secret to transforming your company is to think less about what’s in it for you and more about coming up with a reason for customers to agree to a monthly bill.
Take a look at the transformation of Laura Steward’s company, Guardian Angel. Steward had gotten her IT consulting firm up to $400,000 in revenue when she called in a valuation consultant to help her put a price on her business. Steward was disappointed to learn her company was worth less than fifty percent of one year’s sales because she had no recurring revenue and what sales she did have were dependent on her personally.
Steward set about to transform her business into a more valuable company and made three big moves:
- Angel Watch
The first thing Steward did was to design a monthly program called Angel Watch, which offered her business clients ongoing protection from technology problems. Steward offered her Angel Watch customers ongoing remote monitoring of their networks, pre-emptive virus protection and staff on call if there was ever a problem.
Steward approached her clients with a calculation of what they had spent with her firm over the most recent 12-month period, including the cost of her customer’s downtime. She made the case that by signing up for Angel Watch, they would save money when taking into consideration both the hard costs of her firm’s time and the soft costs associated with downtime.
90% of her customers switched from hourly billing to the Angel Watch program.
- Doubling Rates
Next Steward doubled her personal consulting rates. That way, when one of the customers who decided not to opt into Angel Watch called her firm, they were quoted one rate for a technician’s time or twice the price to have Steward herself. Not surprisingly, most customers opted for the cheaper option and others chose to re-consider their decision not to sign up for Angel Watch.
- Survivor Clause
Steward also credits a small legal manoeuvre for further driving up the value of her business. She included a “survivor clause” in her Angel Watch contracts, which stipulated that the obligations of the agreement would “survive” a change of ownership of her company.
Steward went on to successfully sell her business at a price that was more than four times the original valuation she had received just two years prior to launching Angel Watch.
- Strongest Growth in businesses selling that are valued at $5M-$5M
- Buyers market for businesses valued under $1M, over the $1M mark is a Seller’s market
In order to get top dollar for your business, it is necessary to prepare for the sale well in advance. In short, a tremendous amount of strategy and preparation goes into a successful sale. The amount you ultimately receive for your business is directly tied to how well you prepare.
At the top of the list of making sure that your business is attractive to potential buyers is to make certain your business is as well positioned in the market as possible. Of course, this is often easier stated than done. Here are some of the best ways to make sure your business is optimally positioned.
Tip One – Start Positioning Your Business Well in Advance
Selling your business isn’t something you should just do one day. You should start positioning your business at least one year before the closing.
Quite often, experts say business owners should always operate as though a sale is on the horizon. This makes a great deal of sense on one hand. If you ever experience an unexpected turn of events and need to sell, then you will certainly be ready. Another reason that this advice is solid is due to the fact that operating as though a sale is on the horizon helps you make certain that your business is running as effectively and efficiently as possible. This also helps with your short and long term decision making.
Tip Two – Always Think About Growth
Another way to ensure optimal position in the market is to always stay focused on growth. Asking yourself what steps you can take to grow your business in both the short term and the long term is a prudent move. You should always know what it takes to launch a new growth stage. As unusual as it sounds businesses can even foster growth by acquisition if well planned. This can show faster results than organic growth helping to foster new markets, add needed employee talent, and decrease the impact of fixed costs.
Tip Three – Customers, Lots of Customers/Clients
You don’t want a prospective buyer to see that you have only one or two key customers or clients. Understandably, this situation should make a buyer quite nervous. It comes across as extreme vulnerability. Having many varied customers or clients is a step in the right direction. Make sure to have an understanding of your customer concentration percentage. As a general rule your business should not have any one customer with over 15% of your total revenue.
Tip Four – Be Ready for Due Diligence
Whatever you do, don’t overlook due diligence. Neglecting or waiting to prepare for the buyer’s due diligence stage until the eleventh hour is quite risky. Have all of your financial, legal and operations documents ready to go. A failure to properly handle due diligence could derail a deal or even reduce the amount you receive. One of the easiest items that will have the most impact on value is the readiness and accuracy of your financials. Invest the time and money to have a professional account/CPA keep your records accurate and up to date.
Tip Five – Understand Your Business’s Strengths and Weaknesses
Every business has strengths and weaknesses. Don’t attempt to hide your weaknesses or overplay your strengths. Be transparent! There is no such thing as a perfect business! Many times a weakness can be turned into a positive in the buyers eyes. As an example, if your marketing efforts have not been consistent yet you have a nice growth curve, imagine a buyer proficient in marketing and what he/she could do to affect future growth.
A business broker is an expert at handling investors and even writing a business plan that you can hand to potential buyers.
Think about boosting your market position while simultaneously increasing the odds that you receive top dollar for your sale. Instead of rushing, take the time to prepare and work with a business broker to achieve the best market position and sale price possible. Planning leads to increase value and a much smoother transaction.Read More
Thinking Vs. Doing: A Consistent Dilemma for business owners.
The train conductor vs. the thinker
Your role as a CEO/Business owner can be divided into two buckets: one for managing and the other for thinking.
The managing bucket is where, metaphorically speaking, you ensure the trains all run on time. In this role, you’re establishing goals for your employees and holding them accountable for achieving their targets. You’re making sure your products and services are of a high quality and that your biggest customers are happy.
When you’re wearing your manager hat, you’re scouring your company looking for small enhancements every day. This obsession with continuous improvement is what big companies call “six-sigma thinking,” but you probably just think of it as building a great company.
The other bucket is reserved for thinking and it’s where you create the future of your company. In this visionary time, you get to design new products, imagine new ways of serving customers, or contemplate where you could take your business in the years ahead.
Your visionary hours are spent dreaming and imaging what your business could be, instead of worrying about what it is today.
The most valuable companies
The question is, how much of your time should you devote to each role? If your goal is to create a more valuable business—one that someone might like to buy one day—data reveals that you should start gradually increasing the time you spend on thinking and hire someone else to do the managing.
For example, after analyzing more than 20,000 businesses who have received their Value Builder Score, it has been discovered that companies of owners who know each of their customers by first name (i.e., managers) trade at just 2.9 times their pre-tax profit, whereas the companies of owners who do not know their customers’ first names (i.e., thinkers) trade at closer to 5 times pre-tax profit.
Further, companies that would suffer if their owners were unable to come to work for three months, receive significantly lower offers when compared to companies that would not feel the absence of the owner for a month or two.
Finally, in a recent survey of merger and acquisition (M&A) professionals, they were asked who they like to see an owner hire if they can only afford one “C-level” executive. The M&A professionals overwhelmingly identified a general manager/second-in-command as the most important role a founder can fill ahead of a chief revenue, marketing or financial officer.
In short, the owners of the most valuable businesses have found managers to ensure the trains run on time while they spend an increasing amount of their energy thinking about what’s next for their business.
To take the 13 minute Value Builder survey and find out your Value Builder Score Click here.Read More
The team at Valuebuilder.com recently analyzed the latest data from users of The Value Builder System™ and the findings present an interesting snapshot of the current value of privately held businesses. Below are some of the highlights:
The Business Liquidity Index (BLI) has dropped to its lowest point on record
Each quarter, we measure the proportion of business owners that received an offer to buy their business and express the proportion as an index, 100 being the average. The BLI slipped from 90.9 to 81.8 for the quarter ending March 31, 2016, showing that, compared to the previous quarter, a smaller proportion of business owners had received an offer to buy their business.
Average offer multiple slipped to 3.55 times pre-tax profit
Moving in lockstep with the BLI, the average offer the users of The Value Builder System received in the last quarter dropped from 3.64 times the pre-tax profit in Q4 of 2015 to 3.55 in Q1, 2016. When we isolate larger companies with at least ten million in annual revenue, the average offer multiple goes up to more than 5 times pre-tax profit. The BLI and average offer multiple usually move in the same direction, since very active markets tend to drive up offer multiples and when less offers are made, multiples go down.
Our latest analysis includes data from more than 20,000 users of The Value Builder System from around the world. Of the business owners surveyed, 96% had revenue (annual turnover) of less than $20,000,000, while 4% had revenue in excess of $20,000,000. Findings are considered statistically accurate +/-0.81%, 19 times out of 20.
The latest data shows a slight softening trend in the market for privately held businesses. Therefore, if you’re planning to sell your business in the next few quarters, we recommend you do everything possible to maximize its value, focusing on the eight factors business buyers care about most.
Have you set a goal for your company this year?
If you’re like most business owners, you’re striving for an increase in your annual sales. It’s natural to want your company to be bigger because that’s what everyone around us seems to celebrate. Magazines profile the fastest growing companies, industry associations celebrate their largest members, and bigger seems to be better in the eyes of just about every business pundit with a microphone. But growth can come at a steep price and can even detract from your ability to build your personal wealth.
The Alternative to Growth at All Costs
The alternative to focusing on sales growth as your primary objective is to focus on the value of your equity within your company. Growth will have a positive impact on your company’s value, but your growth rate is only one of the eight drivers that impact what your company is worth. As you build your business, you will be faced with many forks in the road where growth may come at the expense of both your company’s value, and your personal wealth. For example:
- You may have to dilute your personal stake in the company by taking on outside capital. Depending on the return your investors are looking for, and the performance of your company after you take on outside investors, your smaller slice of the larger pie may be worth less than a larger slice of a smaller pie.
- Cross selling your largest customer more products and services may be a relatively easy way to grow your top line, but if they already represent more than 15% of your sales, the extra revenue may dilute the value of your company because acquirers discount companies with too much customer concentration.
- Giving lazy customers 90 days to pay may keep them buying, but those charitable payment terms may detract from the value of your business because an acquirer will have to fund your working capital.
- You could choose to invest your sales and marketing resources into winning a big, one-time project that would boost your sales but this may not boost the value of your business, which may be more positively impacted by a smaller amount of recurring revenue.
Growth is important and how big your company can get is one of the eight drivers of your company’s value. But growth is only one of eight factors—to learn about the other seven, get your Value Builder Score.Read More