How do you create value in your business?

In the previous post, I stated that the reason for writing one-year and three-year business plans is to create value, to increase the value of your business each year.

The question then becomes, “What creates value?”  Why would a strategic or financial buyer pay more for your company?

Creating value comes down to some very simple and quantifiable characteristics of your business.

• Sales and Marketing
  • Do you have a clear, demonstrable, and repeatable system that drives sales?
  • What’s your unique selling proposition?
  • Are your markets and your customers clearly defined and identified?
  • Is your customer base diversified or concentrated?
  • Do your Mission, Vision, and Value demonstrate that you know what you are and what you are not?
• Adjusted EBITDA 
  • Do you have your expenses under control?
  • Do you know exactly what expenses the owners are taking out of the business that can and should be added back to EBITDA before considering the value or multiple?
  • Have your earnings improved year-over-year for the last three years?  If not, do you know and can you articulate why?
• Human resources
  • Do you have clear and specific hiring practices to ensure that the people you hire are the best to fill your positions?This includes job descriptions, evaluations for specific talents and characteristics for each position, and tools and metrics to identify the best and separate the rest.To paraphrase Jim Collins from his book Good to Great, your personnel practices are intended to get the right people on the bus, and the wrong people off the bus.
  • Do you know how you educate your workforce, promoting the best and terminating the rest?
• Financial systems
  • Do you have and use the basic financial reports? This includes the Income Statement, Balance Sheet, and Statement of Cash Flows.
  • Are your reports accurate?  Are your financial records auditable?
  • Do you know the basic financial ratios for your business and your industry?
  • Do you have clear checks and balances in your financial systems?
• Succession plan
  • Is your presence critical to the ongoing operations of the business?  Are you the most valuable asset of your company?If so, you may never be able to sell your company – and if you can, you won’t get a premium.  Just look at what happened to the market value of Apple, Inc. when Steve Jobs announced he was taking an undefined medical leave of absence:  they suffered a 6.5% loss at the start of business the following day.
  • Is your management team ready for you to leave?  Can you leave your business for a week, a month, two months, and have it run as well with you gone as with you in the corner office?If not, you won’t get the highest multiple.  Most acquisitions fail because the tailing management team isn’t capable of running the business going forward.  Smart buyers know this.
• Exit plan
  • If you know how much you need to move on, you have a target.  If you don’t know, you’ll never know when it’s time, or whether any offer is worth taking.
  • When you know your exit plan, you know what you want to achieve.  Are you willing to stay in for two or three years for an earn-out?  Do you know what you want – cash out, owner finance, create an ESOP?

This is far from an exhaustive list of what creates value.  Every industry has different metrics.  If you don’t know yours, I recommend you do some research!

And all of it is your effort to increase the overall value of your business.

What are your thoughts about creating value in your business?