The Ugly Truth: Your Business May Not Be As Pretty As You Think

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Running a business isn’t just about making money; it’s about unlocking what truly matters to you. Think about it — everyone’s definition of value is unique. For most business owners, it boils down to craving three things: more time, more profit, and more freedom. And when the moment arrives to exit your business, it becomes about having more options, more offers, and more profit.

So how do you achieve this? To create a business of value, you first need to understand what drives that value. John Warrilow, author of the best-selling book, “Built to Sell”, describes 8 key value drivers that have been proven to influence the value of a business when it’s time to sell. In a study of over 30k companies, those that excelled in these areas went on to sell their business at a 71% premium compared to those that did not.

If you haven’t been focused on these areas, the great thing is, the steps you take to turn your business into a magnet for offers and a high-selling prospect are the very same ones that make your daily management a breeze. It’s like hitting two birds with one stone — building a business that not only brings in more money but also gives you extra time and the freedom to enjoy it.

So What Drives Your Company’s Value?

There are 8 key areas to focus on when you’re looking to drive your business’ value: Financial Performance, Growth Potential, Switzerland Structure, Valuation Teeter Totter, Recurring Revenue, Monopoly Control, Customer Satisfaction, and Hub & Spoke. The advisors at Final Ascent have put together a brief summary of each below and we have even included some tips on how to increase your company’s value in every area.

Financial Performance:

Your track record of making money and turning a profit, coupled with the way you keep things organized

When selling your business, buyers are focused on future profits, not the history of your hard work. Whether you plan to sell soon or manage for a while, the crucial factor is the business’ ongoing profit streams. Keep in mind that certain expenses today may be added back during the sale, like charity donations or personal items, as the new owner might have different preferences.

Advice from an Advisor:

“I’d recommend taking charge of your financials — understand your books to make informed decisions. Consider bringing in external expertise to audit your records and ensure accuracy. Focus your efforts on revenue growth. The best moment to sell is when your business is on a growth trajectory. This not only enhances financial performance but also makes your business more attractive to potential buyers.” -Scott Shea, M&A Advisor at Final Ascent

Growth Potential

Your potential for future business growth and the rate at which that may occur.

As a business owner, capturing a big chunk of the market is a fantastic accomplishment. It brings in more cash, more profit — a sign you’re rocking the business world. But here’s the twist: buyers see it differently. They’re not shelling out big bucks for a business that’s hit its limit. Buyers crave businesses with room to soar. They’re ready to invest top-dollar in a company with a robust growth plan, one that promises a solid return on their investment.

Advice from an Advisor:

“I always recommend keeping a 12-month growth strategy ready to share with potential buyers, showcasing the forward momentum of your business. You also want to empower your team with the skill of cross-selling to amplify opportunities and diversify revenue streams. You can streamline your business by simplifying your products & services for enhanced scalability and efficiency. And be sure your delivery systems are not just smooth but primed to handle growth, setting the stage for a thriving & expanding business” -Steve Conwell, CEO & Exit Advisor at Final Ascent

Switzerland Structure

The extent to which your business relies on a single employee, customer, or supplier.

Over-relying on one person or entity poses a significant risk for potential buyers. They need assurance that key employees, customer relationships, and vendor deals can be maintained. If any of these aspects are perceived as a threat, buyers may hesitate to invest. Even if you’re not planning to sell soon, strengthening your Switzerland Structure is crucial to safeguard against unexpected challenges. Feeling hostage to a key employee, major client, or vendor can lead to decisions that deviate from your vision and add to the overwhelm business owners often face.

Advice from an Advisor:

“In order to fortify any business, owners need to maintain a balanced lead generation strategy that fosters diverse revenue streams. But they also need to diversify their customer base strategically, making sure no single customer accounts for more than 15% of their revenue. When it comes to employees, you can optimize efficiency by documenting key employee functions & enhancing recruiting, training, & onboarding processes. Don’t forget to always be actively exploring new vendors & suppliers to reduce reliance on any single source. All of this just promotes a robust and adaptable business model buyers are interested in.” -Chelsea Craig, Client Support Manager at Final Ascent

Valuation Teeter Totter

How smoothly cash moves within your business.

When someone buys your business, they’re cutting not one, but two checks. The first check is what goes into your pocket, and of course, you want that one to be as hefty as possible. The second check is for the working capital or cash flow to keep the business running. The size of this second check directly impacts the first one.

If your business has a smooth cash flow, well-established payment terms with customers and vendors, the buyer’s second check can be smaller. With lower daily operational cash needs, they can offer you a better deal. Sufficient cash flow not only makes running your business smoother but also makes it more appealing to potential buyers.

Advice from an Advisor:

“To enhance cash flow business owners should be collaborating with their vendors to align bill payments with their cash flow needs. They can revamp payment plans to secure upfront cash flow from clients, which will create a more robust financial foundation. And they also need to shorten the time between delivering their products or services and receiving their full payment. This will help them maintain a more fluid cash flow cycle for their business.” -Chase Kenner, CFP, VP of Market Strategy at Final Ascent

Recurring Revenue

The percentage and caliber of recurring, annuity-driven revenue you gather monthly.

A business with reliable monthly income is more valuable than one that starts from zero each month. For buyers, a steady stream of income reduces risk and makes the business more appealing. Developing a recurring revenue model not only boosts the value of your business but also eases stress on sales, making operations and cash flow smoother.

Advice from an Advisor:

“I’d suggest diving into understanding your customers — explore their purchase habits. You can discover untapped opportunities by identifying other products or services they might buy from you. Take a look at other products that customers purchase just before or after buying from you. This will open up possibilities for cross-selling. Lean on your team to brainstorm & look for ways to create recurring revenue streams.” -Scott Shea, M&A Advisor at Final Ascent

Monopoly Control

The extent to which your business stands out from competitors in your industry.

If your business can be easily replicated, a buyer might just start their own or acquire a similar one for the customer base or reputation. They won’t shell out top dollar for something they could easily copy. Creating a business with a unique and valuable difference that customers prefer makes it more attractive and valuable.

Running a business with a distinct edge feels great day-to-day. Having a bit of monopoly control lets you compete with a solid brand strategy, avoiding the price competition trap. This not only boosts your financial performance and cash flow but also opens up exciting growth possibilities.

Advice from an Advisor:

“Business owners need to be taking strategic steps to enhance their monopoly control in the market. First, they should clearly define their niche & understand why customers choose them over their competitors. They can identify the unique attributes that give the business a defendable position. Then, they can craft compelling marketing messages that sets the business apart from that same competition. This will reinforce the company’s distinct market position.” -Mark Halma, M&A Advisor at Final Ascent

Customer Satisfaction

How likely it is that your customers will make repeat purchases and recommend your business to others.

Boosting your business value is about more than just repeat customers — it’s about creating a fan base that brings in new business. From a buyer’s perspective, this not only supports your growth predictions but also makes lead generation cost-effective.

Ever heard of the Net Promoter Score? It’s a key indicator measuring customer loyalty and their likelihood to recommend your business. Whether you’re selling or just seeking feedback, having clients take the Net Promoter Score survey gives you valuable insights for the road ahead.

Advice from an Advisor:

“You have to implement a structured approach to boosting your client satisfaction. Set up a regular schedule for sending out Net Promoter surveys — consider specific times of the year or key milestones in your customer’s lifecycle. You also need to dedicate time to analyze that feedback, and focus on addressing lower scores first. By identifying areas for improvement, you not only enhance customer satisfaction but also increase the chances of repeat business and referrals.” -Chelsea Craig, Client Support Manager at Final Ascent

Hub & Spoke

How well your business would fare in the event of an unexpected inability for you to work for a three-month period.

If your business relies heavily on your presence for at least three months, a buyer might find themselves stepping into your shoes or hiring someone new. Essentially, they’d be purchasing both the business and a job, or using profits to cover the cost of hiring a replacement. On the flip side, if your business can flourish independently, a buyer sees it as a smarter investment. Day-to-day, your business’s capacity to thrive without you is the key to gaining more time and flexibility for yourself or a new owner.

Advice from an Advisor:

“Reducing owner dependency in your business involves taking intentional steps. Increase the days you’re out of the office to gauge the business’s performance without your direct involvement. Create a ‘Stop Doing’ list, to identify tasks dependent on you, and start training employees while documenting systems for each item on the list. Facilitate client introductions to your team, making sure they are well-prepared to work together. This strategic approach improves business resilience & grants you freedom and flexibility.” -Jude David, JD, DCL, MBA, VP of Mergers & Acquisitions

How Does Your Business Score?

Take a moment to evaluate your business against the 8 key drivers of value and consider the areas that might benefit from improvement. We all know the old adage, “If something’s not broken, don’t fix it”, but the value of your company can always be enhanced.

At Final Ascent, our advisors can assess your business across these crucial areas, providing a tailored growth plan and assisting in preparing your business for sale. If selling is on your horizon, Final Ascent stands out by not only helping you sell but also by maximizing your company’s value and showcasing these improvements to our exclusive buyer database.

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