3 Ways To Make Your Company More Valuable Than Your Industry Peers

Have you ever wondered what determines 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:

1. 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.

2. 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.

3. 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.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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Why every business owner needs an exit plan

For most business owners, leaving their business is likely to be the biggest transaction of their lifetimes—and the one that will have the biggest impact on their financial and emotional future. Yet more than 80% of owners have no written plan and nearly half have done no planning at all, according to the Exit Planning Institute. Why? Too often, it’s because they don’t know where or how to start.

Addressing this issue is important, particularly on the front end, while there’s still time to plan. It can save time and money in the long run, and help insure you get the maximum value for the company you worked so hard to create. Remember: some 75% of businesses that are for sale never sell. Those aren’t great odds. Exit planning can help.

Many confuse exit planning with succession planning, but they’re not the same. Succession planning is the process of identifying successors, and providing training and experience to successfully transition leadership and/or management within a business. Exit planning—which includes the critical element of succession planning—is a much more comprehensive analysis of all the factors that impact owners, their businesses and, just as importantly, their families.

Though exit planning is complicated, its goals are simple: to maximize the value of the business at the time of exit, minimize the owner’s tax liability, and simultaneously help the owner achieve their personal, family and financial goals. The process starts by identifying the owner’s goals and objectives in the areas of business value, personal and financial resources, life after the sale or other transaction, family considerations, and many others. It also includes contingencies for the four D’s: death, divorce, disability and departure.

Anyone who has ever been involved with helping someone sell a business, value a business or finance a business has had the experience of looking at a company and realizing that it’s not ready to be sold. Perhaps there are issues with the concentration of customers, or a lack of leadership to take over, or sloppy or no financials. There are also other factors that greatly impact a company’s value and its salability.

It’s particularly important for business owners to focus on exit planning now, because the competition for quality businesses is going to get tougher.

It’s estimated that in the next 15 years, $10 trillion will transfer from one generation to another. The vast majority of that wealth is in the 12 million businesses owned by baby boomers, of which more than 70% will change hands.

So, it’s a lot like the guy who stops while a bear is chasing him to put on his tennis shoes and hears his friend say, “You can’t outrun the bear,” to which he responds, “I don’t have to; I only have to outrun you.” Those who focus on their exit strategy will be better prepared when the time is right.

A well-designed and implemented exit plan is a powerful personal planning tool as well as a business planning tool. Done correctly it enables owners to accomplish many, if not all, of the following:

  • Create strategic options from which to choose
  • Preserve family unity and accord
  • Minimize or eliminate capital gains and other taxes
  • Maximize company value in good times and bad
  • Allow for retirement
  • Control how and when they exit

The process of exit planning is a multidisciplinary one that includes the business owner, their accountant, financial planner and attorney/estate planner at a minimum. It should also include an insurance professional, a mergers and acquisition specialist, or other business intermediary who can help sell and value the business. In this process, someone must be the lead advisor or team captain to make sure that there’s an adhered-to timetable.

Successful owner-executed exit plans can be done this way, particularly when one or more of the players has a good deal of exit planning experience. It’s important that the team collectively has expertise in many areas such as business valuation, corporate finance, estate and gift tax planning, life and disability insurance planning, and overall good business skills. And it’s vitally important that the lead advisor takes the responsibility for the “client deliverable.” This prepared report is then the plan for what needs to be done, when it needs to done and who is responsible.

There are many reasons to have an exit plan. Some are financial and some are emotional, which have a great impact on the business owner’s family. But in the end, it’s all about controlling one’s destiny and not being controlled by it. It’s about knowing what your business is truly worth and what a potential buyer sees as potential issues. It’s about having the peace of mind that the process as it affects the family is collaborative and not corrosive. We all know families where false hopes or half-truths destroyed the family unit. Most importantly, it’s about controlling something that will inevitably happen.

Remember, everyone is going to exit his or her business—it’s just a matter of how and when. So, don’t be like most business owners who spend more time on their family vacation than on exit planning. Know your future and plan for it.

This article was written by Camm Morton – franchisee VR Mergers and Acquisitions in Baton Rouge, LA.

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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One Way To Decide When To Sell

How do you know the right time to sell your company? One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a big chunk of your liquid assets to get your business going.

You’re all in.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain’t got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

Peach New Media 

David Will is the founder of Peach New Media, which he started back in 2000 as a reseller of web conferencing. In the early days, Will changed his business strategy frequently, trying to find an idea with legs. After a number of pivots, he landed on selling learning management software to associations.

The business grew nicely and by 2015 Peach New Media had 40 employees and then received an attractive acquisition offer from a large private equity company. Will was conflicted. He loved his business and treasured the team he had built. At the same time, the acquirer was offering him a life-changing check.

In the end, Will realized that he had become somewhat more conservative as his business had grown and the potential acquirer was willing to make a big bet on integrating Peach New Media into another one of its acquisitions. Will realized he had reached a point where his appetite for risk in his own business was lower than his potential acquirer’s. Will decided to sell.

When To Sell

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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The Surprising Secret To A Big Exit

We get to see a lot of company founders who are contemplating an exit. Some of our customers get lucky early in life, but in the vast majority of examples where a founder is getting a seven- or eight-figure offer, it is not their first rodeo. In fact, most owners have had multiple failures and modest successes before their first big exit.

One of the most compelling reasons to consider selling your business is to give yourself a clean canvass for designing your next business. You can take all of the lessons you’ve learned building your current company and apply them to a new idea.

What would you do with a clean slate?

Michelle Romanow partnered with two friends from her engineering class and together they founded Evandale Caviar in their early 20s. The trio’s idea was to sell caviar to high-end restaurants around the world.

The partners built a fishery and had just started to get the business off the ground by the summer of 2008 when the luxury restaurant industry started to wobble. By fall of that year, high-end restaurants around the world were suffering, and by the end of 2008, the industry was on its knees.

Evandale Caviar failed.

The partners licked their wounds and came together to start a new business, a deal-of-the-day website called Buytopia. They had learned from their Evandale experience and were building a good little business—call it a single, to use a baseball analogy—when the partners started to tinker with a third idea.

From nothing to $25 million in 12 months

Romanow saw big companies wasting millions of dollars printing paper coupons and reasoned that there must be a more efficient way to distribute them. They dreamt up a mobile app that would notify the shoppers in a grocery store of special offers and let them snap a picture of their grocery receipt and receive money back on the products being promoted. The SnapSaves business model was to charge the company advertising its offers through the app.

Romanow and her partners poured more than $100,000 a month of Buytopia cash into SnapSaves, and within six months they had a product they could take to market. They launched SnapSaves in August 2013 and the company was a quick hit with consumers and advertisers. Within a year, the founders were entertaining venture capital investment offers with an implied valuation of around $25 million for their young company.

That’s when Groupon called and said they wanted to buy SnapSaves outright. The partners haggled with Groupon and got them to double their offer in the process. Less than a year after launching SnapSaves, they agreed to be acquired by Groupon.

Third time’s a charm

A casual observer of the SnapSaves story would likely chalk it up to luck: a couple of friends leave school, start a business and become an overnight success. That’s a convenient story, but it’s not true.

SnapSaves would never have happened without the lessons the partners learned from Evandale. And therein lies the secret to many successful entrepreneurs: they got their first few businesses out of the way early in their working lives to make the time, room and capital for a true success.

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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Do You Really Know the Value of Your Company?

It is common for executives at companies to undergo an annual physical.  Likewise, these same executives will likely examine their own investments at least once a year, if not more often.  However, rather perplexingly, these same capable and responsible executives never consider giving their company an annual physical unless required to do so by rule or regulations.

Most Business Owners Don’t Know

Recently, a leading CPA firm undertook a study that was quite revealing.  In particular, this study concluded that a whopping 65% of business owners don’t know the value of their company and 75% of the surveyed business owners had their net worth tied up in their businesses.  Phrased another way, 75% of business owners don’t know how much they are worth!  Perhaps most striking of all was the fact that a full 85% of business owners have no exit strategy whatsoever.

Having Recurrent Valuations is a Must

Business owners should know what their businesses are worth at least on an annual basis.  Situations, both personal as well as in the economy at large, can change very rapidly.  A failure to have a valuation leaves one exposed if issues suddenly arise involving estate planning or divorce or even partnership issues.  These are just two examples of potential problems.

It is also vital to understand how your business compares to last year and previous years; after all, valuations should be increasing not decreasing.  A valuation can also help you understand how your business compares to other businesses.  Perhaps most importantly, an annual valuation can help you spot and fix problems.

“Buy, Sell or Get Out of the Way”

If you don’t know your valuation, then you truly don’t know where you are headed.  As former Chrysler CEO, Lee Iacocca once stated, “Buy, sell or get out of the way.”

Standing still isn’t an option.  You need to know your valuation in order to take full advantage of opportunities.  You may feel that an acquisition isn’t the right move at the moment, but that doesn’t mean you shouldn’t be ready!  Having a current valuation means you’re ready to go if opportunity does, in fact, knock!

You never know when a potential acquirer may enter the picture.  Imagine missing out on a tremendous opportunity because you didn’t have a valuation in place.  Often hot offers and hot opportunities depend on speed.  The time it takes to get a valuation could mean that the opportunity is no longer available.  An accurate annual valuation of your business provides a valuable option whether you choose to exercise it or not.

Copyright: Business Brokerage Press, Inc.

GaudiLab/BigStock.com


Business Transactions Continue on a Sizzling Pace!

BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported today that the number of annual small business transactions continue to ascend to new highs during the 1st quarter of 2017!

graoh

Noted statistics from the report are:

  • Average revenue for businesses sold increased by 8.4% over same period in 2016.
  • Average Net Income reported by businesses sold increased by 6.6% over same period in 2016.
  • Average sales price for transactions reported increased by 7.7% over same period in 2016.
  • Total number of transactions increased by 29% over same period in 2016
  • The Dallas / Fort Worth metro area reported the 9th highest number of transactions out of the top 67 markets in the US.

The breakdown of business transactions by broad categories are as follows:

  • Service 36%
  • Retail – Other 29%
  • Retail – Restaurant 22%
  • Manufacturing 4%
  • Other 8%

 

The top 5 individual categories for total transactions are as follows:

  • Restaurants
  • Health/Medical/Dental
  • Convenience Store
  • Dry Cleaning / Laundry
  • Beauty Related

 

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

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6 Tips for Creating Company Value

By David Coit, VERTESS | April 12, 2017

What drives the value of a business? This is a primary concern for most business owners, whether they’re looking to sell in the short-term or position their company for future success.

Here are six tips for creating company value.

 

  1. Create A Company Succession Plan

Most companies do not have a formal company succession plan. Company succession planning differs from personal or family succession planning, as it focuses on forming the next generation team of key managers and employees in a company.

A company succession plan creates value by:

  • helping to ensure the survival and future growth of the company in the event of unforeseen changes in personnel;
  • preserving harmony and reduces the chance of repeating mistakes as business owners and senior managers pass-down company specific knowledge;
  • maintaining the legacy of owner’s desires, vision, and cultural goals through company-wide assimilation of the owner’s knowledge; and
  • providing a framework for best practices as next generation managers bubble-up their ideas for improvement based on hands-on observations.

Company succession planning does not have to be complicated but should include mentoring, employee engagement, open communication, and fairness. Senior managers should not feel as though the company’s plans include replacing existing managers. Instead, company succession planning should be viewed as a process of grooming all employees to take the company to a higher level of performance and growth.

 

  1. Don’t Forget Qualitative Factors

Quantitative factors such as changes in revenues, gross and net margins, operating cost, etc. are easy to identify and therefore easy for owners to focus their attention on. However, companies with above-average valuations excel in both quantitative and qualitative factors. Don’t overlook areas like:

  • planning
  • leadership
  • sales management
  • marketing management
  • people management
  • operations management
  • financial management
  • legal management

 

  1. Take a Retirement Account Perspective

I’ve run into numerous business owners who say things like, “I’ll worry about the value of my company when I start thinking about an exit strategy.” That’s like waiting until you’re 65 to check the value of your retirement accounts!

Company value creation is an ongoing process, which includes:

  • creating or expand recurring revenue streams,
  • increasing expected future revenue growth rate,
  • increasing returns on existing assets,
  • discontinuing poor performing activities,
  • reducing non-cash excess working capital,
  • creating or expand barriers to entry,
  • reducing company specific risk

A value growth professional can help you think about your business as an investor as well as an owner.

 

  1. Protect Existing Value

For most companies, 75% of company value is in its intangibles. Some of those intangibles are trade secrets, intellectual property, proprietary methods and/or software, customer relationships, etc. Business owners should identify key value drivers, then takes steps to protect those key value drivers, which will protect company value.

Most business owners limit their actions to protect company value to obtaining hazard insurance, worker’s compensation insurance, and liability insurance. There are other ways to protect company value, including:

  • Obtaining patent protect
  • Requiring employees sign intellectual property assignment agreements
  • Requiring employees sign non-disclosure and non-compete agreements
  • Executing buy-sell agreements will all company owners
  • Acquiring life insurance to support buy-sell agreements
  • Purchasing business interruption insurance
  • Monitoring and taking actions to limit the loss of brand reputation

 

  1. Create Customer Value

The traditional notion of customer value, where benefits minus cost equal customer value, may seem simple but can be much more complicated in practice. Customer benefits and cost can be both direct and indirect, as can be customer value. Moreover, the right set of customer benefits can create barriers to entry and/or competitive advantages.

Many business owners argue that customer value is created by providing consumers with the lowest price, highest quality, and best service. Unfortunately, those three factors are often at odds with one another. Instead, consider adopting a customer-centric approach, taking into account factors like:

  • The value drivers of your customers and would-be customers
  • What customers feel about your product or service offering/delivery
  • The cultural landscape of your target customers
  • Your customers’ value proposition determinants
  • How you can create a value-added experience for your customers
  • When to create value through a collaboration with customers
  • Measurements of customer value creation include increasing customer acquisition, satisfaction, retention, and add-on selling. Additionally, companies that can enhance their customer’s perception of the value of their products or services are likely to enjoy higher margins.

 

  1. Plan Ahead

Business owners who don’t plan often find that they spend most of their time putting out fires. Planning allows company owners and managers an opportunity to set proactive goals and objectives for the intermediate future, as well as identify solutions for key business issues. A great starting point for long-term planning is to conduct analyses around issues like:

Why your company is relevant to existing and future customers

  • Current market trends in your industry
  • Why customers buy from you or don’t
  • Current competitors and their competitive advantages
  • Your company’s competitive advantages and weaknesses
  • How you can build or reinforce barriers to competitors
  • Existing bench strength to ensure your company has the right talent to achieved desired results

The list above is far from exhaustive, but can serve as a guide for future initiatives.

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


A Deeper Look at Seller Financing

bigstock-164372315Buying a business requires a good deal of capital or lender resources. The bottom line is that a large percentage of buyers don’t have the necessary capital or lender resources to pay cash and that is where seller financing comes into play. The fact is that seller financing is quite common. In this article, we will take a deeper look at some of the key points to remember.

Is Seller Financing a Good Idea?

Many buyers feel that a seller’s reluctance to provide seller financing is a “red flag.” The notion is that if a business is truly as good as the seller claims it to be, then providing financing shouldn’t be a “scary” proposition. The truth is that this notion does carry some weight in reality. The primary reason that many sellers are reluctant to provide seller financing is that they are concerned that the buyer will be unsuccessful. This, of course, means that if the buyer fails to make payments, that the seller could be forced to take the business back or even forfeit the balance of the note.

However, it is important for sellers to look at the facts. Sellers who sell for all cash receive approximately 70% of the asking price; however, sellers receive approximately 86% of the asking price when they offer terms!

Seller Financing has a Range of Benefits

Here are a few of the most important benefits associated with seller financing: the seller receives a considerably higher price, sellers can get a much higher interest rate from a buyer than they can receive from a financial institution, the interest on a seller-financed deal will add significantly to the actual selling price, there are tax benefits to seller financing versus an all-cash sale and, finally, financing the sale serves as a vote of confidence in the buyer.

Clearly there are no guarantees that the buyer will be successful in operating the business. Yet, it is key that sellers remember that in most situations the buyers are putting a large percentage of their personal wealth into the purchase of the business. In other words, in most situations, the buyer is heavily invested even if financing is involved.

Business brokers excel in helping buyers and sellers discover creative ways to finance the sale of a business. Your broker can recommend a range of payment options and plans that can, in the end, often make the difference between a successful sale and failure.

Copyright: Business Brokerage Press, Inc.

echoevg/BigStock.com


6 Reasons Your Business Won’t Sell for What You Want

By Axial | February 1, 2017

There are many reasons a business might achieve less than its desired price upon sale, the most fundamental of which is that a buyer does not assign the business the same value as the seller.

Here are some common company characteristics that cause buyers to downgrade value — and ways to address them in advance of a sale.

  1. Your business is disproportionately dependent.

A business should not be overwhelmingly dependent on any one customer, employee, or supplier.

If a key employee quits unexpectedly, a supplier goes out of business, or a customer leaves for a competitor, will your revenue dip by a meaningful amount? According to a recent webinar held by John Warrillow, author of a www.builttosell.com, no more than 10-15% of revenue should be coming from one person or source.

  1. You don’t have a plan for growth.

Buyers look for companies with a foreseeable path for growth. As a seller, you should be proactive in identifying where growth opportunities exist and how a new owner might take advantage of them.

You might present the potential buyer with a list of businesses you have considered as potential acquisition targets, or provide details around new geographic markets or customer segments. Be sure to demonstrate what resources are in place to support increased demand, should the new owner choose to pursue any of these strategies.

“You want to present a buyer with a map to growth, not simply say, well, here’s where we’ve gotten and now it’s up to you,” says Giff Constable, a former investment banker and current VP of Product at Axial. “These growth areas should be defendable both in terms of proof points to back your ideas up as well as the company’s ability to actually execute on them.”

Warrillow’s research shows that mid-sized businesses that have plans in place to meet a substantial, overnight increase in demand could get up to 4.5x on earnings (vs. 3.7x for the average business).

  1. Your company is strapped for cash flow.

The more cash you generate in excess of your working capital requirements, the more your company will be worth.

“When a buyer buys your business, he writes two checks — one to you, as the owner, and one for working capital. If they have to inject a lot of working capital into your company, their appetite to write a big check to you is going to be less,” says Warrillow.

The two main ways to increase cash flow are to accelerate accounts receivable and to extend accounts payable. To achieve the first, incent your customers to pay early by offering discounts for paying within a certain period of time. It’s also wise to accommodate as many methods of payment as possible (credit cards, wire transfers, etc.) to offer flexibility to your customers.

While delaying payments made to suppliers or vendors can be a bit trickier, negotiating terms to extend payment deadlines, or opting for annual versus more regular payments (and spreading out those annual contracts) can help you keep more cash on hand.

For companies in industries where the cost of working capital is characteristically high, such as manufacturing and retail/consumer products, think about creative ways to bring more cash into the business, such as charging for ongoing customer service, membership programs, and rewards.

  1. You don’t have recurring revenue.

We’ve all seen the headlines for tech companies fetching high multiples. Particularly for companies with subscription-based revenue models, buyers have been known to pay lofty premiums for the advantage of being able to lock in predictable future revenue.

A subscription, or recurring revenue model, has long been a widely-accepted strategy for companies which have repeat customers and products or services that are consumed over time (for example media and software).

For companies outside of this sphere (e.g., seasonal businesses or companies who have to maintain a high inventory, such as retailers or manufacturers), creating predictable, recurring revenue may not be as obvious. That doesn’t mean, however, that it can’t be achieved.

One great example of a more traditional business with a recurring revenue model is Michelin Tires. Instead of selling tires, Michelin employs a per-mile payment model, which is more effective at establishing loyal long-term customers.

  1. You are in a commoditized business.

The less differentiated your business is, the less attractive it will be to a buyer. Warrillow says that companies should focus on building a “deep and wide competitive moat” — i.e., high barriers that disable other market entrants from gaining share of business from you.

One of the unavoidable side effects of being a highly commoditized business is having to compete on price. The less pricing authority you have, the less money you can make. The less money you make, the less you have to invest into growing the business.

Warrillow’s research shows that companies that focus on creating this level of authority in their market can increase their multiple by a full turn over the average small to mid-sized business.

  1. The business can’t succeed without you.

If you’re exiting the business, expect a buyer to spend less time with you and much more digging into the competencies of your team. A company that expects to get top dollar must prove that operations can not only be sustained, but flourish, under the new owner. Since there’s likely a learning curve before a new chief operator can reach the same level of effectiveness as the exited owner, the support of the existing team is paramount to a successful transition.

Here are few questions to expect from buyers:

  • What proportion of your customers did you personally have to sell in order to convert them into customers?Is their satisfaction and relationship with your company dependent on that personal relationship? If the answer is “a majority” and “yes”, then it’s time to separate yourself from your customer base and move those relationships onto other members of your team.
  • How often do employees come to you with issues within the business? Are they coming for your ideas or for your approval on their own ideas they’ve devised to solve the problem? The former could signal that you don’t have the right people in place to make confident decisions about the business.
  • How often do you take vacation and for how long?Does performance take a dip in your absence? If you find you either can never take vacation, or have to work throughout your time off to keep things afloat, you may need to identify what pieces of the business are faltering and why and put corrections in place.

This article provided courtesy of Axial  –  www.axial.net

 

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

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The Anatomy of a Successful Exit

Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.

Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer.

To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. At The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.

What did Breedlove do right? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.

Sell Less Stuff to More People

When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.

Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.

Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.

Strive for 50%+ Net Promoter Score

One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.

The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.

Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.

When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.

This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.

Create Recurring Revenue Streams

The third thing that made Breedlove’s company attractive was recurring revenue.

Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.

By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.

Reduce Reliance on Customers, Employees and Suppliers

Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.

Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.

Find an Acquirer You Can Help Grow

By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.

In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.

At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.

In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.

Would you like to find out how well positioned your business is to be sold?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report complete with your score on the eight key drivers of Value Builder. Take the test now:

Sellability Score