How do you score on these 3 Value Drivers?
One of the ‘secrets’ to long term business success is to build your business as if you’re going to sell it…whether you actually intend to sell it or not. This shift in mindset – looking at your business as an asset that you can and should be improving – helps you prioritize and focus on what’s important in the big picture.
I had the chance last week to meet with several business owners and the topic was how to identify and optimize the key value drivers for your business. Obviously revenue and profitability are important, but when you start looking at your business through the eyes of a potential buyer there are a few things that really jump out as critical priorities. In fact, getting these key things wrong doesn’t just reduce the value of your business…it makes it unsellable…and even worse something you probably wouldn’t want to keep for the long term!
Here are the 3 most important value drivers you should be thinking about now…whether you eventually plan to sell or not.
Management / Leadership
The most important value driver starts at the top and is really what makes everything else possible. Put yourself in the shoes of a potential buyer for your business and think about which of these scenarios is more true for your business:
Scenario A: Business owner is the key to success. Not only does the owner work long hours (required to keep everything running), but the owner also has all of the key relationships (sales, vendors, partners, etc.) and makes all of the key decisions in running the business. Remove the owner and there’s not much left of this business.
Scenario B: Business owner has a strong leadership team and is removed from day to day operations and sales success. The business owner works as much as they want and tends to focus on big picture strategy ideas. They can take significant time off and still be assured of making money and keeping the doors open. Remove the owner from this business and it’s still viable.
Obviously those are 2 extreme examples, but in my experience most business owners are much closer to scenario A than they are scenario B. Creating a team, processes and structure that takes you (the business owner) out of the equation isn’t easy, but it is the key to value – whether you intend to sell or not.
Where are you in your business – closer to A or to B?
This one is a bit trickier and falls into shades of grey rather than a simple black and white answer. One one end of the spectrum, your business will be worth a ton if you have a completely unique product (that the market is willing to pay a premium for). You have a high barrier to entry (patent, really expensive process, special skills, etc.) or you’re significant market leader.
On the other end of the spectrum you offer a commodity product or service that’s exactly like everyone else. Examples – you’re one of 25 plumbers in your area…or you sell picture frames, hardware, or technology stuff just like what’s at all the big stores.
The good news is that even with a commodity, you can still develop a unique offering by focusing on things like customer service, details, positioning, intangibles, extras, etc. Want an example? How about milk? Go to any grocery store in the US and you’ll find a few different brands of milk and for the most part they are indistinguishable – and competing only on price.
Compare that to Shatto Milk – a local Missouri dairy farmer who totally reinvented the Milk category (at least regionally in Kansas City). I wrote about what made Shatto the Small Business of the year a while back, but the essence of it is they adopted a different approach (fresh, local, fun) for a commodity and people have really responded. If you haven’t tried their award winning chocolate milk you are missing out!
On a scale from 1 to 10 are you closer to a commodity (1) or unique (10)?
A buyer will be looking for how systematized your business is. Having clear documented systems is critical for long term success.
A well thought out and documented process (part of your system) lets you quickly hire someone and get them up to speed. A system will force you (and your team) to be consistent – and buyers (and customers) are looking for consistency.
The reason McDonalds franchises are so valuable and why people jump through hoops and pay a premium to purchase them is because they are proven money making machines. Hire low cost, untrained workers, put them into the system, open the doors and start making money.
It’s unlikely you’re going to get to the level of systemization of a McDonalds (or that you’d want to), but there are a lot of things in your business that have to be done every day that should be running as a repeatable, documented system right now.
How do you score?
Take a couple of minutes and score your business on a scale from 1 to 10 across the 3 drivers mentioned above – Management, Uniqueness and Systems. If you’re scoring 24 to 30, then you’re in great shape and it’s likely your business is worth a lot (and enjoyable to own). If you’re scoring between 16 and 24, then you’ve got some work to do but you’re doing many things right. However if you’re scoring 15 or less…your business is pretty painful and not worth much – even if you have strong revenues and profits.
If you’d like to improve your score or see how you stand across other key drivers – give us a call, that’s what we help business owners do.
What are your thoughts on these key drivers? What do you think is important that we didn’t talk about (I can think of several). Share your thoughts in the comments below, I’d love to hear them.
Photo by Clearly Ambiguous