This week let's focus on building business value in your business.
While many businesses and practices may be profitable, they may not be valuable. Value, and value creation, is ultimately the bigger prize for most business owners. It can be the greater wealth creator for most business owners.
How do you build and document business value?
The answer to this question lies in creating a business which is attractive to buyers. What makes your business attractive to buyers?
Start by focussing on these questions now rather than waiting until to need to sell or retire, or even worse, your executors need to sell the business after you've gone!
So regardless of whether you're planning to sell now or later, start documenting and building what makes your business valuable. Look at your business from a buyer's perspective and start building value.
Creating and Building Business Value
Here are 5 steps to creating and building business value. Building value requires time, focus, and careful planning. Indeed, it requires you to always ask the question "will this make the business more or less valuable?"
Some of the more successful entrepreneurs (perhaps a word that's lost its favour in recent times), build businesses to sell.
1. Get Organised - Document
Ultimately value arises from the tangible and intangible assets created by a business.
While intangible assets are often difficult to document, the tangible assets should be documented and readily available for assessment. Asset registers, lists of contracts (including customer contracts), supplier arrangements, and all tangible assets should be document and appropriately filed.
For the intangible assets, the key drive of value here is the net income stream of the business. Financial records and financial statements should document the income streams of the business. While accounting reports form once component of the supporting evidence in a business sale (and evidence of value) the other components can include:
- business plans
- procedures and operational policies
- technology and systems
- staff training and development
2. Build Your Customer Base and your relationship with customers
Value is a function of the certainty of income. This is derived from your relationship with customers and the goodwill customers have towards the business.
One of the most effective ways to increase the value of your business is to build or broaden your customer base and deepen your relationship with existing customers.
This may involve approaching a wider market, including an on-line component, adding complementary products or services, or simply marketing.
In regard to existing customers and clients, you may need to better understand their needs and wants.
Ultimately a business buyer is looking to buy businesses with a solid and reliable customer base.
3. Build your market offer – Brand or Value proposition
For some businesses, the brand is what creates value. For others, it is the value proposition it offers its customers.
What is your offer to the market? What makes it valued by the market?
Develop a strategy which builds this value in the longer term and, more importantly, makes it sustainable.
4. Develop your team
Transferability of business to a new owner is often a function of your team – staff and management.
The better skilled staff and team are, the more valuable a business will be.
At one end of the spectrum, a business with no staff and just the owner(s), will have limited or no value. These businesses are simply the sweat equity of the owner(s), and unlikely to be transferable to a new owner or business buyer.
Conversely, a business with a well skilled and broad workforce, will be highly valued and very transferable to a new owner or business buyer.
5. Develop, Maintain and Improve Your Physical Assets
All buyers will inspect the business. The better maintained and the better the quality of the physical assets of the business, the better received the business will be.
Buyers will look for assets that are in good order and ready for use/relevant to the income generation of the business.
Start building your business value now. Conduct a business review to assess what drives your business value and how to improve it?
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