There are plenty of elements that make businesses valuable. But regardless of industry or aims, there are three things that all valuable businesses have in common. Let’s look at these three factors and explain why they’re important for owners and their advisors to acknowledge.
For business owners to maintain control over their future success, business owners must eventually hand control to next-level management. It may seem ironic that owners should give up control to maintain control, but it’s accurate.
Next-level management, by definition, includes managers who can take the business to greater heights than the owner can. They usually come from larger companies and have tangible experience with growing companies. However, they can also come from inside the owner’s company. Regardless of where they come from, owners must be prepared to heap most responsibilities onto the next-level management team if they want to increase the business’s value.
The reason is simple: Buyers want businesses that can run well without the owner. If the owner plays a crucial role in the business’s success, then the business is only as valuable as the owner. The number of owners who want to sell or transfer their businesses to someone else and then end up working for that someone else is infinitesimal. For most owners, building business value is a process by which they can capitalize on their life’s work.
Finding or training next-level management is a must for growing business value. Once the owner leaves – by choice, death or otherwise – the business must be able to run smoothly without them. Advisors should strongly encourage business owners to review their management teams in the context of whether they can run the business without the owner’s input. If they cannot, the owner is at risk. However, it’s also an opportunity for advisors to take the first step in helping owners grow the value of their businesses.
Operating systems that improve the sustainability of cash flow
Valuable businesses have written documentation that shows any potential buyers or successors that the business can continue its profitability whether the owner is there or not. Business owners should treat their documented profitability processes as their company’s value proposition, regardless of when, how or to whom they leave their businesses.
For many lower-middle-market businesses, owners are the movers and shakers. They may be the company’s rainmaker. People might do business with the company based on the owner’s likeability. None of these factors is sustainable for long-term success. Written documentation that anyone can follow and implement – not just the owner – is both sustainable and nimble. It can be duplicated with proven results. This is what makes written documentation a value proposition, more so than the owner’s inborn talents.
Advisors should help business owners document successful processes and keep them up to date. These documented processes increase the business’s value. They also protect the business, the owner and the owner’s family from unexpected events, such as sudden death. (Having a next-level management team makes this much easier to implement, as the managers will take the responsibility of documenting what works and keeping it updated.)
A solid, diversified customer base
We all know not to put our eggs in one basket. This is important for business owners who want to build a valuable business. When a business relies on just a few customers for all of its success, it opens itself to many potentially damaging risks. Primarily, if one of those few customers were to leave, it could greatly harm the company’s profitability in the near term.
In the longer term, a diversified customer base gives owners more leeway to plan for a successful future. It shows potential outside buyers that normal retention churn won’t devastate the company. It shows insiders and key employees that customers are more loyal to the company, rather than the owners. And it directly benefits the company as and after the owner leaves it. Diversity in customer bases gives owners the potential to reach new markets, spurring growth potential.
- To maintain control over their successful futures, business owners must eventually give up control of the business to a next-level management team.
- Documented systems and processes are a company’s value proposition to potential buyers or successors.
- A diverse customer base can benefit owners in both the short and long terms.
If you’d like help evaluating your business or start planning for the future of your ownership, contact us today.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
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