Having a valuable business could position you to do the things you want in both your personal and professional life, from taking advantage of the perks of owning a successful business now to planning for your eventual retirement and cementing your legacy. But how can you begin to increase your business’ value?
Many valuable small and mid-sized businesses include three common traits, regardless of their industry, geography, or unique elements. Let’s look at what makes a business valuable in the first place, the three common traits valuable businesses have, and some suggestions for how you can install or enhance those in your own business.
What makes a business valuable?
A business’ value boils down very simply to the amount someone else is willing to pay for ownership.
It’s important to state this up front because thinking about everything that goes into building business value can be overwhelming. Grounding yourself in the simple fact that your business is only as valuable as a potential buyer says can help you take a clear-eyed approach to:
- What’s important to you
- How your business can help you achieve financial security
- How to leverage your business to benefit you both now and when you eventually retire
Building business value is much like preparing a house for sale. Some buyers might be looking for French doors and bay windows while others may want a sleeker, more modern design. Despite these different preferences, all buyers will want a house with a strong foundation, sturdy walls, and an impenetrable roof.
Building your business’ value begins by making sure your business has the metaphorical strong foundation, sturdy walls, and impenetrable roof all buyers want, even if you don’t plan to sell for years or decades from now. From there, you can then focus on the details to find the right buyer who will pay you the right price.
Following are the three traits many buyers look for when determining business value.
1. Next-level management
Next-level management is the foundation of a valuable business. These are the people who make sure everything isn’t dependent on you, in addition to strengthening and developing the business in new ways.
Remember that if your business can only function when you are running it, there isn’t much value to a potential buyer after you leave. In other words, if you are the foundation of your business, you are stuck in place supporting the business, even if you’d rather pick up roots and move on at some point.
A next-level management team takes on foundational responsibilities, which could give you more flexibility and time to do the things you actually want to do in your business.
Next-level managers can come from inside or outside of your organization. No matter where they come from, identifying, training, and retaining next-level managers is crucial to growing the value of your business.
Your advisor team can help you identify, train, and retain next-level managers. Installing this element in your business is the first step toward building long-term business value. It also comes with the added benefit of strengthening your business while you run it. This, in turn, could allow you to evolve your role from “doing what I have to do” to “getting to do more of what I want to do.”
2. Scalable systems: operational & financial
Scalable systems are the sturdy “walls” that hold your business together. Buyers who can offer top dollar for businesses generally like turnkey businesses. Qualified buyers will want to know how things work, where the money is generated, and how to expand both of those beyond your current footprint.
Creating scalable systems, both for operations and finances, within your company is a powerful way to position your company as a valuable business to potential buyers. After all, the less work a potential buyer has to do to install these systems, the more time and capital they’ll have thanks to your foresight.
Like installing next-level management teams, creating scalable systems offers benefits while you’re running the business as well. From increased efficiency to easier data accessibility, having a codified, written process for your systems should make it easier for you to run your business, too.
Even better, once you take the first step of installing a next-level management team, you may find that they can install scalable systems for you. So, if the idea of codifying systems isn’t something you’re particularly interested in, or you currently use systems that only you and a select few might understand, empower your next-level management team to install scalable, understandable systems that improve company operations and ensure consistency.
3. Diverse customer base
A diverse customer base is the “impenetrable roof” of your business that buyers seek. That’s because a diverse customer base can insulate your company if or when clients are lost to attrition.
Businesses that don’t rely on one large customer for survival are considered more valuable to potential buyers. This is especially true if your company has loyal customers.
Customer loyalty is without a doubt a good thing. But is the customer’s loyalty to the company or to you personally? If your business relies on one outsized customer for survival, a change in ownership could cause that loyal customer to leave when you do. If your customer only works with your company because they like you personally, the company risks losing the biggest customer when you retire or leave – which can impact your eventual exit plan. That’s a lot of pressure on you!
This does not mean that you need to avoid serving a niche customer base or should become a generalist. However, within any niche you choose, aim to diversify your customer base so that losing a few customers occasionally won’t destroy your business.
Additionally, this may require your business to evolve beyond its core and expand your offerings to new audiences. The good news is that you can position your business to successfully diversify the customer base with help from your next-level management team and your scalable systems.
Remember, your next-level managers may bring relationships with them, they may develop new relationships with prospects, and they may even develop new products and services for your company to offer to brand-new prospects.
Your scalable systems could increase internal efficiencies, giving you more time and money to pursue different customer bases as well.
Bonus: Marketing and deal team
Installing the above three traits in your business is a good way to begin building your business’ value. Once you’ve taken these steps and begin to approach your eventual business exit in earnest, working with experienced professionals to market your business and leverage its strengths could help make all the work worthwhile.
Having a strong business may not be enough to attract buyers, per se. You also need professionals to get the word out and close the eventual deal, whether you end up selling to an outside buyer or an insider.
As with the above three traits, your advisor team can help you find the right M&A professional/business broker to market your business to prospective buyers and close the deal when you’re ready.
One last note to consider: avoid putting your business on the market before you and the business are ready for a sale. Doing so can taint the marketplace, hurting your business value in the long term. Your advisor team can help prepare your business for the marketplace by properly strengthening your business now to be ready for your inevitable exit from the business.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.
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