How To Multiply The Value Of Your Business

Streamline your operations

First, when a person buys a business, they’re buying a machine designed to produce cash flow. To produce this cash flow, obviously, there are products or services involved, but the more efficiently the machine can produce cash without intervention from the actual owner, the more valuable the business will be. If the business can be seamlessly handed over to a new owner without any impact on the actual business, it’s significantly more valuable than a company that needs constant babysitting from the CEO. In order to maximize the value of the business and make things run as efficiently as possible (or just maximize the value of your current business), keep reading.

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Specialize, don’t generalize

Figure out the most profitable piece of your business, and drop everything else. This will allow you to focus specifically on the processes making you the most money and allow you to make them as efficient as possible. In the book Built to Sell, the example given is of a man who owns a marketing firm that does every kind of marketing imaginable. When dealing with clients, he gets pushed around because he’s willing to do anything to make them happy. Then, he switches his focus and focuses specifically on creating logos - the most profitable part of his business. By doing this, he’s able to focus on getting extremely good at creating logos, and people are willing to pay much more for a firm that specializes. By hiring specialists, he’s able to attract the best talent possible, which sets him apart in his industry. In addition, he made his operations more efficient and increased his profitability significantly.

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Say no to customers

When you do choose to specialize your product offerings, you’ll likely continue to get offers for jobs that your business no longer does. This can be extremely tempting, and the ability to resist the urge to take the easy money will pay huge dividends in the long run. Plus, when you do turn down a job and explain that you no longer do that kind of work and now specialize in a very specific offering - you’ll get referrals from these potential customers who now view you as a specialist and inherently a higher quality provider of that service.

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Own your processes

First, you need to ensure that your processes are well-documented and repeatable. The most important operational component to turning your company into a valuable asset you can sell is having a business that can transfer ownership easily. In order to do this, you need to create well-documented, easily repeatable processes that bring in consistent cash flow. 

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Once you’ve specialized based on your core competency and chosen to work only with customers that want exactly what you have to offer, you can focus on selling your specialized, commoditized process. If you’re going to focus only on creating logos - create a 5 step logo creation process that guarantees the customer is satisfied and differentiates you from others in the industry. Follow this same process with every customer until you’ve got it polished, and all of a sudden, you’ve got a product rather than a service because you’re not adjusting your product offering for every customer. When you’re selling a consistent product rather than a service that varies significantly from customer to customer, you’ve built something that’s MUCH easier for a salesperson to sell.

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Diversify your customers

Don’t let a single customer make up more than 15% of your revenue. This makes your business more stable, which makes it exponentially more valuable to a potential buyer. If a person is buying a business where a single customer makes up 50% of the revenue, they would have to worry about you, the owner, having a personal relationship with that customer that could become fragmented when you walk away. If this happens, and they lose the customer, the business decreases in value by 50% overnight - this risk will be priced in when buyers are evaluating the business.

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Build a sales engine that can work without you

To create the most salable asset possible, you need to build a machine that can continue functioning without you in it. In order to do that, remember the following steps.

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Detach yourself from the business

You can’t be synonymous with the business. If you are, you’ll never be able to sell it. If you’re providing a service and customers are paying to work with you rather than paying to work with your company, there’s very little that a customer can purchase after you walk away. So make sure that your business can work without you. Do yourself a favor and take a 2-week vacation - choose a manager to put in charge and tell them you’re not gonna have cell reception for the entire trip. Then, let them sail the ship and see what happens. This experiment will reveal more about the strength and salability of your business than anything else because if things fall apart without you there, you know you’ve got work to do.

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Additionally, make sure you’re not the face of the business. This can be hard. Assuming you’re the founder, you may be the person that people are expecting to work with. This makes the business itself less valuable to potential buyers. To determine if this is going to be a problem, ask customers why they chose your company. If they say, “because I LOVE working with you,” that’s a red flag. If they say, “because the product/service that your company produces is the best,” that’s a green flag. Hopefully, when you ask this question, the answer is related to the business itself, not to you. 

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Hire multiple salespeople

Salespeople are often competitive, so if you planning on hiring one salesperson, hire two instead and make them compete against one another. The friendly competition will push them to sell more and be better at their jobs, as well as introduce a level of excitement to the job that will make them happier and more satisfied with the work that they’re doing.

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Additionally, this is where it’s incredibly important to have a streamlined, consistent process that allows you to deliver a high-quality, commoditized product or service every single time. If you own a full-service marketing firm that offers a wide variety of services that vary from customer to customer, that’s exponentially more difficult to sell for an external salesperson than a 5-step logo creation process that’s the same every single time. By streamlining your processes, you’ve set up your salespeople to succeed, and if your salespeople are succeeding, your entire business is likely thriving. 

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Additionally, having customer-facing salespeople will help detach you from the business because you’re not the one greeting every customer. For this reason, hiring customer-facing salespeople is another important step to detaching yourself from the business and creating the path for the business to transfer to a new owner seamlessly.

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Create recurring revenue streams

SaaS companies with recurring revenue models sell for a 6X multiple on average, compared to a 3X multiple for SaaS companies that only do one-time sales. That’s massive. You can literally double the value of your business by implementing a recurring revenue model. Why? Consistency is king when it comes to investing, and if an investor knows they can purchase a business and bring in cash flow every month without lifting a finger, that’s automatically a WAY more valuable asset.

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Be strategic to make your business more valuable

Beyond operational changes that you can implement to make your business more valuable, there are certain legal decisions you can make to ensure that the business's selling process goes as smoothly as possible.

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Don’t give equity to employees

Giving equity to ANYONE makes selling the business significantly harder because everyone with equity gets a say when it comes to selling the company. Implementing an employee stock ownership plan (ESOP) may sound like a great way to motivate employees, but there are other ways to get employees invested in your company that won’t make it impossible to sell.

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Instead of giving stock, implement a bonus program for performance and increase the incentives over a long-term timeline. Give additional bonuses for hitting 3 and 5-year revenue targets, and hold a percentage of the bonus that will become available in multiple years to incentivize people to stay with the company. These things will make employees care about the strength of the business without you tying your hands behind your back when you want to sell.

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Prepare at least two years of financial statements that reflect the standardization of the business

After you implement the changes discussed above (streamlining your processes, standardizing your product/service, removing yourself from the business), operate and grow the business in this manner for at least two years. By streamlining your processes, you’ll likely grow your sales significantly as well as improve your profit margins because you’re only focusing on the most profitable parts of the business. Upon doing this, spend two years creating clean financial statements that reflect these changes and accurately depict the company's current state. After cutting out customers who aren’t looking for the service you now specialize in, your business will likely take a revenue hit, and you may need to scale back your operations in the short term. You don’t want to make these changes and then immediately try and sell the business because a buyer will see a shrinking company rather than a business that just made operational changes that will increase the business's value exponentially in the long run.

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Hire a business broker

Find a broker where you’re neither their largest nor their smallest client, and make sure they’re experts in the industry that you operate in. Brokers are worth the investment because they can help you find strategic buyers rather than just those hoping to buy your business for the cash flow it produces. A strategic buyer is better because someone hoping to buy a business due to the fact that it compliments their current business will be willing to pay much more for it. For example, if you provide specialized logo design services, an individual working at a screen printing company who has access to a huge pool of potential customers and wants to expand into creating logos will be willing to pay much more for your company than someone who sees the profits you’re producing and wants to add your company to their portfolio.

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Create an optimistic three-year plan for the business

Imagine you have a blank check to grow your business; the sky is the limit. Write out a detailed plan for the business that goes far beyond the organization's current state. Even if your business is small and local, with a blank check, you could expand throughout the entire country, open up shops in every major city in the US and increase your earnings by 10X in the next three years. Put this plan together, and investors will pay for your vision and the business you’ve already built, increasing the company's value even more.

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