Subject: Revenue, expenses and profit aren't the only means to increase the value of your business.
Minutes to Read: 3 - 4
Ask most business owners how to increase the value of their business and they'll tell you, correctly, "By increasing profit.' This of course can be done with higher revenue, lower expenses, or a combination of both. Because most small businesses run lean in my experience, I happen to like the revenue method. But to add perspective to the point, a client once reminded me, 'Top line vanity, bottom line sanity.'
While earning higher profit is the surest way to increase your business valuation, (and long term it is the only result that matters), profit is not the only road to increase business value short term.
Surprised? Let's look at what drives business value.
When a buyer considers acquiring your business, they are looking for three qualities:
- Operating profit,
- Security of these profits, and
- Transferability of business operation methods.
The first quality, operating profit, is the most conventional and important measure of value. Of course a buyer wants to acquire a profitable business. But experienced buyers will also pay close attention to attribute #2, security of the profits.
Security of profits has several important measures; they usually boil down to present and projected health of the market segment the business is in (e.g., security services would be 'hot' and print news media would be 'cold'), the concentration and outlook of company customers, and health of balance sheet-assets to liabilities plus owner equity.
The third quality, transferability of business operation methods, is less obvious and often unmanaged. But it is among the most important methods to improve business value in the short term even if it is lacking in most small businesses.
Preparing and documenting key operating methods (business processes) is an important step in planning your business exit. This is the reason franchises are so prominent and successful overall; they have documented the business model and processes in such detail that a new owner can accomplish in weeks what a start up business owner would take years to accomplish, while eliminating most failures.
But you might be surprised to learn that by improving your operation methods, you will also improve your profits and the security of these profits.
During our first year in business, we purchased a powerful software application to use for marketing and prospecting only. It worked well. We were small enough, I reasoned, and we gave such personalized service that we didn't need client services application software to run our business too.
I was wrong. On more than one occasion our follow up slipped through the cracks of a paper system, usually where a note became buried on my desk. Something else happened too. I found myself spending time chasing prospects for my client companies that really had no commitment to the buying process. Once we documented what that process was in our project tracking system, we zeroed in on better candidates, and it freed me to spend more time on services our clients want and value.
Take a closer look at your business operation methods. Your best opportunities to improve them will come from your present weakness. If you need sales to raise the value of your business, develop an operating method for selling. We've done it, and it works. Refine your prospecting methods, or how you pay key sales personnel. Perhaps improving your project quoting method would free you to spend more time selling instead of quoting.
Most businesses have low hanging fruit in this area. Some great ideas can be prepared in 90 days and cost little or no money to put in use.
By improving the transferability of operation methods, you will make your business more appealing to buyers. And in doing so you are likely to improve profit and reduce the perceived risk to profit in the buyer's eyes, and they will reward you with better terms.
