Businesses can be valuable for a myriad of reasons. Some companies thrive on their strong name recognition, others leverage inventory, still, others focus on providing the “white glove service” experience. But regardless of industry, there are three things that all valuable businesses have in common. These three things are simple, important, and can help any business owner maximize their company’s value.
To continue with a company’s future success, business owners must eventually hand control to next-level management. It may seem ironic that owners should give up control to ensure their company’s future, but it’s 100% true.
Next-level management refers to managers who can take the business to greater levels than the owner can alone. These managers can come from larger companies and have a real, tangible experience in growing companies. However, they can also come from inside the company. Regardless, owners must be prepared to transfer most responsibilities to the next-level management team if they want to sustain and increase the company’s value.
Buyers want businesses that can run well without the owner. That’s just a fact. If the owner plays a crucial role in the business’ success, then the business value is forever tied to the owner. And we all know that no owner wants to sell his company, only to be an employee of someone else. For most owners, building business value is a means to an end; a timely, profitable exit. And for that to happen, and the owner can’t be the star of the business.
Finding or training next-level management is a must for growing business value. A business must be able to run smoothly without the owner. Every business owner should ask this question: can my business run without me? If the business cannot, then the owner has work to do.
Operating systems that improve the sustainability of cash flow
Valuable businesses can show any potential buyers or successors that the business can be profitable, and will continue to be profitability, without the owner. Business owners should treat their documented success as their company’s potential future value proposition. Regardless of when the owner leaves, the sustainable cash flow will transfer to the successor.
For many lower-middle-market businesses, owners are the lifeblood of the business. They are the movers and shakers, they are the rainmakers, they are the end-all, be-all, and touch the sale through every step of the process. Often, customers will do business with the company based solely on the owner’s likeability. However, none of these factors is sustainable for long-term success. Written operating systems that can be followed and implemented by anyone within the organization create a sustainable and easily replicated path for success. This is what makes strong operating systems a value maximizer.
These documented processes increase the business’ value. They also protect the business, the owner, and the owner’s family against unexpected events such as incapacitation or sudden death. Leveraging the next-level management team to develop these operating systems is often the easiest way to start. This transfers the responsibility of the owner to management and allows management to take ownership of the development, establishment, and improvement of these systems.
A solid, diversified customer base
Remember the old saying, “don’t put all your eggs in one basket?” The same principle applies to business. When a business relies on just a few customers for its success, it opens itself to many potentially damaging risks. The biggest concern is what happens if the business losses that one big account. It would likely greatly harm the company’s profitability in the short run.
In the longer run, a diversified customer base gives owners more leeway to avoid such pitfalls. A diversified customer base shows potential outside buyers that normal attrition won’t devastate the company. Diversity in customer bases also gives owners and salespeople the potential to reach new markets, spurring potential growth.
• Develop your next-level management team.
• Develop strong written operating systems.
• Develop a diverse customer base.
Being diligent in implementing these three simple ideas will help to grow and retain value.