Business value concerns the probability that a business will remain profitable and continue to grow under new management. Therefore, prospective buyers examine the factors that contribute to the business’ stability and consistency to determine the risks associated with acquiring it.
System-Driven vs Owner-Driven
A company’s dependence upon the entrepreneur for its survival impacts its value to potential investors or buyer whose very real concern for the company’s continuing viability and future prosperity must be addressed.
The Impact on Business Value of an Owner-Driven Company
In an owner-driven business, the owner has the final say on business deals, new hires, approval of marketing materials and promotional items, setting the pricing, innovation initiatives, and employee reviews. In such a scenario and considering all intents and purposes, the owner is the company. Separate the owner from the business and very little value remains.
Investors or buyers view the high dependency of the business on its founder or owner as a risk because the owner will not continue to work with the company after its acquisition. However, if the business sale is a large M&A transaction in which the owner agrees to work as a part of the merged company, owner-dependence may not be such a big issue.
So, a small business owner wanting to sell his or her company should, first and foremost, consider:
- How the new owner will replace him/her?
- What difficulties will the new owner face?
- How can he/she eliminate this weakness from the business?
Related: Does Your Business Have Transferable Value?
The Impact on Business Value of a System-Driven Company
Instead of the owner being the key to a company’s revenue generation, a system-driven business derives its revenue-generating capacity from its infrastructure, systems, and processes. An essential factor to selling a small business at the desired price is to document how the owner runs the business and what every key individual in the company–including the entrepreneur–does to keep it going.
We cannot emphasize enough the value of written documentation explaining the company’s operational systems and processes. The new owner and a different set of employees can learn from that documentation and start running the business smoothly with with little delay.
Documenting how the business runs is essential for small business owners to make their companies exit-ready.
Processes and Systems
As the business grows, it needs a solid support system and efficient business processes to provide consistent, high-quality results on repeatable and repeated basis. Systems ensure the company delivers a precise standard of products and services irrespective of the number of locations or people it employs.
For instance, an international coffee house chain delivers the same quality of beverages and snacks and provides the same level of consumer experience at all the outlets across the globe. Achieving this level of standardization is not an easy task.
Owners need must build the right systems as they build their companies. As the business grows, one cannot run it profitably and efficiently without robust systems in place to organize, document, and manage their teams and the responsibilities associated with different roles.
Robust systems need efficient, predictable, and repeatable processes. As the company grows, processes become more complex and need periodic evaluation and improvement. Setting clear, achievable goals that connect your process initiatives to business value is the crucial first step of effective process improvement.
Before deciding goals, consider these four areas where better business processes will add value.
Better Business Processes That Add Value
Business owners can reduce costs by making processes efficient. Efficiency reduces the number of steps reduces, takes less time to execute, and more easily identifies and eliminates waste of energy, time, and materials. In short, an efficient process reduces the cost of quality.
For example, it’s expensive to task high-paid salespeople to perform the task of inserting orders into the system, because the people responsible for revenue-generation are doing what low-paid employees with less or no knowledge of sales can do. The company can reduce the sales operation cost by streamlining the process.
Moreover, by increasing order entry process’ efficiency, the company can improve the quality of the data on the orders, reduce the cost of quality, reduce errors on product shipments, and expedite shipping times.
Improve Customer Experiences and Increase Revenue
To improve its business value, a company must enhance the processes directly affecting revenue. These include sales, marketing, product development, and pricing. By structuring these processes, the company can analyze the lifecycle of customers, consistently create top-class customer experiences, enhance sales, and retain customers.
Managing sales processes better helps salespeople improve sell-through rates, control pricing and discounts, reduce the cost of customer acquisition, and more deliberately target investment throughout the sales process.
Consistent, robust processes not only improve efficiency, but also achieve repeatable results with fewer operating risks. When processes differ from person to person or shift to shift, it is difficult to find the actual cause of problems.
On the other hand, a predictable, repeatable process rigorously executed helps better define bottlenecks and other problems. The easier it is to identify risks, the more readily management can take corrective action and reduce future risks in the company’s operations.
Company owners who put predictable processes into systems and measure them also know their outputs without constant monitoring. Efficient processes allow them to manage the business without getting involved in every detail of business operation. They can manage their employees more efficiently by monitoring the tasks performed within those systems.
Good processes and systems ensure that the business runs smoothly, such that when one employee is absent, another can follow the documented standard operating procedure and complete that task.
Prioritize and Execute
Business owners need to prioritize and set the extent of process improvement. Small and medium-sized businesses can’t change all processes at once due to limited resources. They must focus on those processes that will generate the most value for them.
Owners should pick processes having high chances of success based on the company’s ability to execute changes. Processes having a disproportionate impact on the top or bottom line of the business could be good.
All processes should be measurable and the metrics to measure them realistic. Choosing the right goals and cost-effectively executing them is essential in process improvement.
Business systems that enhance business value include:
- Human resource management, recruitment, training, and employee retention
- Identification, solicitation, and acquisition of new customers
- Development and improvement of various types of products and services
- Infrastructure, asset, and inventory control systems
- Product and service quality control systems
- Communication with clients, vendors, and employees
- Vendor selection and relationship management
- Business performance reporting
- Sales and marketing systems.
In particular, sales and marketing systems showcase the future profitability of a company. They reflect whether the business is well-organized and provide the new owner with a roadmap to follow for continued prosperity. Focusing on human capital to build a solid sales team helps the company enhance value and solidify its position as a good investment from a buyer’s perspective.
Robust systems and processes instill confidence in the new owner that growth can be achieved with the company predictably and effectively.
If all a business’ systems and processes are in place, thoroughly documented, effective, and running, the new owner can step into the previous owner’s shoes for a smooth transition and manage company operations while being sure of maintaining its previous performance and growing it.