Ann Gibbard shares some insights on making your business valuable.
Many business owners believe their business is part of their retirement planning, and that they will be able to sell the business to fund their retirement.
In reality businesses are often worth much less that the owner thinks, and in some cases may not be sellable.
These are the traits that a valuable business may have:
Independence from the owner
A business that can be run without the owner being involved in day-to-day operations is 10 time more valuable that a business that can’t run without its owner. This means having goods systems and processes in place, and a management structure that takes care of the business operations. Strategic direction and owner oversight is generally still required for a SME business.
Scalable / potential for growth
A business that does not have robust systems and processes, or is still run in a very manual way, will struggle to grow. Technology will often improve efficiencies and standardisation. Systems and processes must be able to be repeatable at a larger scale as new customers or products/services are introduced.
Track record of growth
A purchaser or investor will place a higher value on businesses that have consistently increased both sales and profit over time as this is an indicator of future growth.
Predictable or recurring revenue
A business that is always looking for the next sale will not be as attractive as a business that either has recurring revenue (e.g., long term contracts, or subscription-based revenue), or predicable revenue (where you can show potential business growth based on a repeatable formula).
High barriers to entry for competitors
How easy it is for a competitor to do what you do? A company that manages social media or builds websites will have much more competition than a business that requires the development of specialist equipment, or the skills of a specialist person where there is a limited number of specialists. Other barriers might include the cost of equipment needed, a unique product or service that is not easily replicated, exclusive contracts, or regulatory barriers.
To get the most out of the time and money spent on your business asset, you need to look at your business from the eyes of the potential purchaser if you wish to sell, or determine the level of oversite vs the amount of passive income generated if you wish to hold onto the business after retirement.
Ann Gibbard is a Business Success Partner with Oxygen8 Consulting. For help with growing your business or improving its profitability, preparing your business for sale, or for a free Business Diagnostic, contact Ann at ann@oxygen8.co.nz or 021 682 014.