Do you want to get rich quickly?
Very simple: Buy a business for its actual value, and sell it back right away for what the business owner values it.
Many business owners overvalue their own business (after all, isn’t your business the most beautiful baby in the world?). What do you need to pay attention to in order to make sure that you get the valuation you want when the time is ripe?
Looking at your business through the eyes of a buyer
Regardless of whether you want to sell your business (or pass it on to your children) in one or in 100 years, looking at your company through the eyes of a buyer can help you identify your top priorities to develop a stronger business – and ultimately get the valuation that you want.
Based on experience, readings, and many conversations with experts in the business of buying and selling companies, I have identified 10 key points that can derail your company value. There are obviously many more – I selected these 10 because of their considerable impact on business valuation. The goal of this article is to generate self-reflection through two questions:
- On a scale from 1 through 10, how is your company performing on each of these 10 points below?
- Which of these points should be your top priority for improvement?
What defines the value of your business?
“There are two pieces to valuing a business, says Mark Campbell with Scout Valuations, a business valuation firm specializing in mid-sized companies. The first is the cash flow it can generate. The second is the risk associated with generating those cash flows in the future.”
This newsletter is therefore structured in 3 parts:
- Forward-looking (growth potential of your cash flow).
- Backward-looking (past and present cash flow).
- Risk to your cash flow.
10 things that can hurt your business valuation
Lack of healthy growth potential
1. Unclear positioning and lack of differentiation, which makes your long-term growth potential questionable. This is due to a poor understanding of:
- Who your core customer is.
- Which fundamental problem you solve for your core customer.
- What your competitive advantage is in solving this problem – in other words: what makes you special, unique, and better than your competitors in the eyes of your core customer?
2. Lack of focus on your core business (“Whatever the client asks, we deliver”), due to a lack of clarity or discipline on your core purpose. Because these distractions take up considerable management’s attention and energy, they hinder your ability to grow faster and with less pain. In Built to Sell John Warrillow explains: “Don’t generalize; specialize. If you focus on doing one thing well, the quality of your work will improve and you will stand out among your competitors.”
3. Lack of standardization of your product/service offering. If every client receives a tailor-made solution, growing your business generates limited economies of scale. As Warrillow puts it, “as long as you customize your approach to solving client problems, there is no scale to the business and your operations are contingent on people. Since people can come and go every night, your business will not be worth very much.” From a buyer’s perspective, standardizing your solutions makes it easier to train new people when needed, and makes your business much more scaleable.
4. Lack of innovation / new product pipeline to improve your competitive advantage and better solve your core customer’s fundamental problems in the future. “Would you buy a business, even profitable, where you see a limited future [because of the lack of innovation]?” asks business broker of mid-sized companies David Humphrey in Think Like a Buyer.
Poor cash flow
5. Over-commoditization, due to a poor understanding of your profit and cost drivers and of your competitive advantage. This puts your sales price and margin under pressure. As Warrillow puts it: “Businesses that only compete on prices are rarely interesting to buyers.” If the main reason you gain new business is your price level, you have an issue – unless your production / delivery process is structurally less expensive than your competitors.
6. Poor quality cash flow, like:
- Negative and/or slow-growing EBITDA in the last few years.
- Non-recurring revenue streams. The more repeatable your business, the more predictable it is – and the higher its value.
- Slow-paying customers. How can you adjust your business model to have your clients pay sooner in the process, fully or partially? This would help grow your business, but would also help reduce the risk on your cash flow – and hence increase its value.
7. Over-reliance on the business owner with unclear succession plans:
Many business owners think that they are indispensable and get nervous when on vacation – that alone makes a potential buyer very nervous. Build a business that runs without you. Business owners sometimes tell me that they will delegate more once they reach $X in revenue and can hire more/better people. There is always a good, rational-sounding reason to retain control. The reality is: it is never too early to think about how to become more dispensable in your business.
This is even more problematic if only you can reliably generate new business in your company. Here is how this vicious circle goes: every one of your clients loves talking directly to the business owner, which drags you to the epicenter of your operations, which increases the customers’ reliance on you, and so on.
You need to break this cycle and extract yourself from being personally involved in most customer relationships. If your company is larger than $1M and you are still the main salesperson in your business, you need to rethink your role. Warrillow quotes an entrepreneur who successfully grew and sold several businesses: “Your job is to hire salespeople who sell your products and services so you can spend your time selling your company.”
8. Lack of management depth, of competent team and/or high employee turnover.
“When senior management wants to sell and retire, a layer of experienced lieutenants can make a significant impact on the buyer’s perception of value,” writes Humphrey.
9. High customer / supplier concentration.
“Nobody wants to buy a business that relies too heavily on one client. Make sure that no client makes up more than 15% of your revenue,” says Warrillow. If you operate in an environment with only a few customers, “the key is to alleviate that risk as much as possible. If those few customers are all under long-term contracts, a buyer will have more confidence in future cash flows and will likely pay more,” says Campbell.
10. No reliable financial information or accounting system and/or lack of internal financial/operational control.
“The more a buyer trusts your numbers, the more interest they will have in buying your business,” according to Humphrey. Working with a reputable CPA firm helps build this trust.
Every one of these points is fully under your control: you can bring your business to the high valuation that you have in mind. If you put yourself in a buyer’s shoes, what do you see? What do you like, and what don’t you like about your own business? from a buyer’s perspective, what is the #1 thing that the management team should do to make you value this business even more?
As a business growth coach, I work with founders of mid-market companies who are frustrated because their business is not growing the way they want; my passion is to help them identify and remove the growth roadblocks they have been hitting so they can grow faster and with less pain. In some cases they want to boost their growth in order to sell their business – and want to maximize their chances of getting the valuation they have in mind. I would like to learn about your growth roadblocks; contact me to discuss at Xavier@AmbroseGrowth.com.
“My company has lots of potential, but I just feel my employees are not engaged. If I don’t push, nothing seems to happen. I’m working night and day and we’re still missing 40% of our targets. I once dreamed of being a firefighter, I guess that dream has come true. All I do is put out fires, I have no time to focus on my business.”
Sound familiar? CEOs and leadership teams can change this picture, it’s all about accountability. Creating a fierce culture of accountability starts with the CEO and leadership team.
Why is accountability important?
Accountability is about owning a problem. You want employees to behave as if they own the piece of business that they are running. When you are accountable for a specific result, you will do whatever it takes to achieve it – and you would like your team to perform this way as well.
Carlos Brito, the CEO of brewing company AB Inbev, summarizes his views on accountability in these words: “We always compare that to a rental car: you drive a rental car in a different way than your own car. With a rental car someone else will live with the consequences of your driving. With your car, you know that it will be yours the next days, months, and years, and you know that you will be living with the consequences of your driving. Employees who behave like owners are here for the long term, and they will live with the consequences of their decisions – good or bad – and that builds a great company.”
Why am I having accountability issues?
Accountability issues are very common among growing companies. When you founded your company, you were personally accountable for everything. As your company grew you started delegating the responsibilities for some results – e.g. production, customer service, or sales. However, you may not have created the communication channels required to hold your teams accountable. Why would you? You didn’t need any of this yourself, and yet you grew your business successfully. Why would these smart managers need anything different?
For one, your employees are not you. If they were, they would not be working for you: they would start their own business. Second, your company is now more complex than we you started: it has more people involved, and all these people now need to be on the same page. Third, when you started your company with a few employees, you could be on top of each of them and had short communication lines: you knew what everybody was doing, all the time. Now that your company has more employees it is impossible for you to manage them the same way: this would soak up all your time. This is exactly why you need to put a system in place that will achieve what you want (ie create accountability), without you spending all your time on it.
In the book “Creating a Culture of Accountability” Gravitas Impact business coach Mark Green describes ways to increase your team’s accountability. This article outlines five of them
1. Lead by example
Like many aspects related to company culture, accountability starts with you and your leadership team. In order to create a culture of accountability you have to model the behaviors that you want to see in your organization. When it comes to accountability the rule is simple: when you make a commitment as a leader, you have to keep it. If you don’t, why should anyone else be interested in doing so? You can’t complain that employees miss their deadlines if you are occasionally late as well. As a CEO “all eyes and ears within your business are focused on you. What you say and what you do are invisibly and constantly observed, scrutinized and evaluated as your managers and employees are looking for clues as to how they should behave,” explains Mark Green.
Leading by example is not only about you sticking to your commitments, but also about your expectations from your team – and your behavior when your managers don’t meet your expectations. If your team members notice that there are no consequences for missing targets, why would they try their best? Similarly, if you tolerate one of your team members to produce poor results, why would other team members feel pressured to produce quality? When you hold your team to a higher standards, you are sending a strong signal across the organization.
2. Have the right people on the right seat
Without the right people on the right seat, nothing of what you can do will significantly increase accountability. The key question is: would you enthusiastically rehire everybody on your team? I advise my clients to assess employees on two dimensions; performance and adherence to company values. You will find more information on how to use this tool in this article.
Once you have the right people on your team you need to clarify their area of accountability. This is less obvious than it looks. The key question is: Who is accountable for each of the key functions in your company? As Mark Green explains “the exercise often reveals that there isn’t a single individual accountable for each function. When more than one person is “accountable”, nobody is accountable. It is easy to make assumptions that things will get done, but when there is not a designated person to account for a particular result, chances are, it is not going to happen. In this kind of environment, it is also easy to point fingers – Bob thought Mary would handle it, and vice versa. Other times, you’ll discover that a particular role hasn’t been filled by anyone at all; it is just implied that it will somehow be handled. Spoiler alert: it doesn’t!”
3. Clarify priorities
“The main thing is to keep the main thing the main thing,” wrote best-selling author Stephen Covey. “Individuals or organizations with too many priorities have no priorities and risk spinning their wheels and accomplishing nothing of significance,” says Verne Harnish in his book “Scaling Up.” Focus on a small number of priorities that will have the biggest impact on your goals, make sure that everyone on your leadership team is aligned on them – and communicate them broadly.
When employees understand where your organization is going and which role they play in it, they work less selfishly and they tend to make better business decisions on behalf of the company – simply because they can see the impact of their decisions and how they impact overall results.
4. Define clear action plans and metrics
Once you have identified who on the leadership team is accountable for each function and what your top priorities are, the next step is for each of your leaders to answer Mark Green’s key question: “What are the 3 most important results the company expects you deliver in exchange for paying your salary – and how should these results be measured? This step determines the results and metrics for each of your leadership functions. As we all know, you can’t manage what you don’t measure. If you want to increase the speed and quality of a particular service you offer, you should establish specific metrics to gauge those factors and identify metrics and targets for them. You may determine if you reach or surpass a target for three months in a row, you have achieved that objective.” Pick specific metrics, make sure that your leadership team is on the same page and that everybody aims for the clearly defined results – so that the rest of your organization can follow your lead.
Similarly, once you have defined top quarterly priorities, the question becomes: what do you and your team need to do in each of the next 13 weeks in order to achieve priorities? There are only 13 weeks in a quarter – if you do NOT view your quarter as a 13-week race, you will lose weeks and time which you will NOT get back. A weekly plan clarifies what can be expected every week, in order to meet expectations at the end of the quarter. It also makes it much easier for your leadership team to hold people accountable to their own 13-week plan.
5. Establish a metronome-like meeting rhythm
Just as a metronome calls time and sets tempo in a musical performance, so do a small set of consistently executed meetings to hold you and your team accountable, and keep everyone on the same page. The essential regular meetings are:
- Daily huddles (no more than 10 to 15 minutes) to evaluate progress on the very short-term priorities and identify any blocking issues.
- Weekly huddles (no more than 90 minutes) to review the status of the 13-week plan and course-correct if needed.
- Monthly and quarterly meetings to review progress on the priorities, take corrective actions when needed, and identify new priorities for the upcoming quarter.
I often notice that the most impactful meetings to drive accountability are the daily and weekly huddles: they create peer pressure and hence take the heat off your shoulders as the leader. They also improve communication: You won’t need to have the same water-cooler conversation three of four times, as is the case when you rely on chance hallway meetings for communication. And finally they enable collective intelligence to solve problems.
In the end, how much difference do these tools make on accountability? Pretty big, as this example from another Gravitas Impact business coach, Glen Dall, demonstrates in Mark Green’s book “Creating a Culture of Accountability”: “I worked with the CEO of a multi-location dental practice. The CEO had started with one practice that they grew very successfully – and then began expanding. At one point employee turnover rates increased to 200%. The leadership team would plan and set goals, but frequently failed to achieve them. The growth rate was declining. The CEO felt over-extended, frustrated and stressed.”
With the leadership team Glen Dall leveraged these tools to have the right people on the right seat, set priorities and targets, as well as establish a proven system to follow up on them. The result? “After our first 6 months of working together, the CEO told me, “You should be proud of how far you’ve brought the team. I feel that we have accomplished more in the past 6 months than we were able in the last 7 years.” That is the power of accountability.”
As a business growth coach, I work with founders of mid-market companies who are frustrated because their business is not growing the way they want; my passion is to help them identify and remove the growth roadblocks they have been hitting so they can grow faster and with less pain. Often their roadblocks include a lack of accountability: they have no system in place to regularly follow up on their team’s many commitments, or their teams don’t have clear priorities and metrics. I would like to learn about your growth roadblocks; contact me to discuss at Xavier@AmbroseGrowth.com.
What about you? How accountable is your team? How has Covid impacted accountability? Over the past couple of years, how many quarters has your company reached and missed their targets? What were the consequences of hitting targets, and what were the consequences of missing them? Do you have clear metrics and regular meetings in place to follow up on each of your priorities?
Let me know your thoughts in the comments section.