A business valuation is not about what a company is worth in the current owner's hands, it's about the company's transferable value. It's about the probability that the business will sustain its profitability and continue to grow with a new owner at the helm. Therefore, the factors that contribute to the company's stability and consistency will be examined by prospective buyers to determine the risks associated with taking over the business.
A strong brand — which is an intangible asset and an element of goodwill — is a desirable attribute to have in the business-for-sale marketplace. Documented systems is also a factor that contributes to saleability. Both make the list of the top ten value drivers that increase the sale price of a business.
System Driven Vs. Founder Driven
If you are a small business owner, it would be worth your while to have a game plan for how you would package your business for sale. Depending on the size of your firm, you may need a few things in place in order to sell the company. The first and probably the most important thing you need to do is describe how a new owner would be able to replace you, the current owner. Most potential buyers would be averse to purchasing a business if the owner's shoes are too big to fill or if the owner's hands would be too difficult to unravel from the operation. An enterprise with infrastructure guiding its revenue-generating capacity is much more appealing than one with a singular person holding the key to the revenue engine.
Therefore, documenting how the business runs and how you do what you do is a key factor in getting your business sold for the best price possible. As the E-myth explains, the owner should be free to work "on" the business instead of "in" the business. So, documenting how the business runs without over-involvement by the owner is important.
Systems and Procedures
To show that a business’ revenue-generating capacity has a good chance to stay up and running under new ownership, it is important to have systems running the business and an experienced staff running those systems. Documentation of standard policies, employee records, procedures and controls demonstrate that the business can be maintained profitably after the sale. Business systems include the computerized and manual procedures used in the business to generate its revenue and control expenses. It outlines the methods used to track how customers are identified and how products or services are delivered. The following are examples of business systems that enhance business value.
- Personnel recruitment, training and retention
- Human resource management (an employee manual)
- New customer identification, solicitation and acquisition
- Product or service development and improvement
- Inventory and fixed asset control
- Product or service quality control
- Customer, vendor and employee communication
- Selection and maintenance of vendor relationships
- Business performance reports for management
Staff, Sales and Marketing Systems
Once systems are documented and a detailed policies and procedures manual is in place, the next thing to focus on is sales. If there is no sales strategy in place that includes a process for how to train and get sales staff up to speed, the company may be perceived as risky to prospective buyers. This is why it is important to think about properly presenting future profitability; it's all about "show me the money."
An articulated marketing plan is a sign of an organized business and provides a road map for a new owner to follow. Focus on human capital — people are such a crucial aspect of selling and marketing. A solid sales team and a documented hiring and training system will solidify the ongoing performance of existing and future sales staff. A trained sales team is a tool that a buyer can count on to help in transition and to ultimately increase sales in the future.
A marketing plan that defines and describes how to reach your customers instills confidence that growth can be achieved in an effective, predictable manner under new ownership. The efficiency with which you attract customers will increase the purchase price paid for your business.
Some points to consider in developing your marketing plan that would be important to prospective buyers:
- Understand the return on investment (ROI) of specific marketing efforts. This is a powerful tool to achieve growth and conquer competitors. ROI marketing is particularly powerful for small- and mid-sized businesses that can't afford to waste money. It can increase your business "moat". What is your marketing/advertising ROI per campaign? Where can you get the biggest bang for your buck (print, TV, radio, email, newsletters, webinars, seminars, trade shows or online)?
- Document your sales process and its effectiveness.
- Develop marketing systems that improve sustainability of profits and margins.
- Solidify and diversify customer base — know who your customers are. Define your target market.
- Analyze and outline other marketing opportunities that could effectively grow the customer base.
- Know the marketing methodologies of your competitors.
- Keep marketing performance reports available for analysis. Can management measure and evaluate marketing efforts to verify their contributions to the bottom line? Marketing strategies are key to increasing profits and honing margins.
- Maintain a marketing calendar that keeps track of budgeting and staffing needs for promotions and events. It also crystallizes focus on the value in each campaign, builds consistency and aids in preventing marketing lapses that cause the 'feast and famine' effect that many businesses experience.
- Estimate your target acquisition cost per customer.
- Understand the marketing budget necessary to achieve goals. Which tactics will best realize these goals?
- Monitor the marketing-to-sales ratio to make sure it is in-line with industry norms. Many companies spend too much on advertising without knowing how effective it is and many advertising dollars are wasted.
The Importance of Brand
After all systems have been documented so a new owner can step into your shoes and transition smoothly into operating the company, with the knowledge that the sales engine will continue to rev, the next step would be to think, "branding." A unique brand identity that distinguishes your business from your competitors is the route to success for all companies. The better the brand position you have in the marketplace, the lower the risk of taking over the business. This translates to higher value. The following quote is a powerful representation of the value of brand.
"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you." — John Stuart, Chairman of Quaker (ca. 1900)
How is your business perceived by your target market? What unique attributes do customers and prospects associate with your business? Is your business name trademarked? Are your logos or other intellectual property protected? These all represent your brand and are valuable. As a matter of fact, McDonald’s brand does not appear on the company’s balance sheet, even though it is estimated to account for about 70 percent of the firm’s stock market value.
Just as your product or service needs intrinsic value in order to sell it to the end user, your business needs distinct attributes in order to sell it in the business-for-sale marketplace. Look at your company as a product you want to sell. How would you describe that product in an advertisement?
Learn more about the Ten Value Drivers That Increase Sale Price of a Business.