Improve your Business's Value
Business Value Optimisation
Tri Source can assist you in various ways to improve the value of your business before selling it.
To achieve this we focus primary on Fundamental and Sentimental value drivers.
Fundamental Value Drivers:
Techniques used to improve the profitability of the business.
These techniques are extremely well documented in most handbooks dealing with business success. It is however sometimes useful to have an outside look into the business to try and optimise some aspects of the business.
There are so many strategies that can be considered. Relevant factors are however typical of the type of business that is under review.
- Measure and Improve productivity: Sellers would almost without exception indicate that it is possible to increase revenue by using the same space, machines and/or staff. This normally means that the capacity utilisation is un-optimised.
- Reduce and optimise cost: Most businesses tolerate unnecessary expenses for years. The ultimate selling price is usually a multiple of the monthly or annual profitability. Cutting out unnecessary expenses therefore has an attractive multiplying effect on the selling price.
- Improve and optimise Procurement: Procurement excellence can have a major effect on the price as long as no quality and reliability compromises has been made.
- Sales and Marketing: Many older generation business owners do not use and understand new generation marketing methodology such as the internet. Amazing profitability and business valuation improvements can often be achieved in a short period of time.
- Diversification: Adding a new product or service to the basket offered to existing customers or adding more customers.
- Improved Focus: sometimes it is better to take an old, underperforming or struggling product or even bad paying or small customer out of the mix and to increase the focus on the balance of remaining customers and/or products.
- Eliminate non-core activities: The outsourcing of activities such as deliveries or accounting can take a whole lot of activities and responsibilities away.
- Ergonomics: Changing the workplace and product or information flow can also improve the productivity and efficiency.
Sentimental Value Drivers
If profit and tangible assets are the fundamental value determinant, then Risk and Lifestyle considerations could be seen as the sentimental value determinant.
The lower the perceived risk of acquiring a business the higher the Price to Profit ratio (P:E). Reducing the risk profile is therefore an outstanding opportunity to increase the selling price. Many methods exist but the following deal with a number of common options:
- Business Plan: Most buyers have to make a decision if they are interested in acquiring a business after having 2 or 3 meetings with the seller and a quick tour through the facility. Carefully documenting the business, its products and activities, segmenting and quantifying the market, investigating and understanding the competition and clearly defining the goals and targets of the business will go a long way in communicating what it is you are selling. This document is also extremely important if your buyer will require financing.
- Formalising the business: A sole proprietor without any formal books and documentation can at best expect a 10 or 12 month profit multiple. A blue chip company listed on the JSE can sell shares at a multiple of 16 years or 18 years of its bottom line profit. Irrespective of where your business finds itself, it can benefit from the process of going one step up the ladder. This could also make your business a lot more “financing friendly”.
- Annual Financial Statements: Bring the entire business activity to book and make sure there are as few as possible entries that require explanation. This is a process that can take a while but has great benefits. Financial institutions would not finance what they do not see in the annual financial statements.
- Reduce the business dependence on the owner: This “fear Factor” causes many buyers to walk away from a deal or alternatively hedge their risks by reducing the price offered. Make sure every activity carried out by you, the seller, is transferred to a relevant employee. Systems, procedures, training and monitoring are all ongoing strategies to make sure the seller can eventually step aside without affecting the performance of the business. If you cannot transfer responsibilities and functions to staff or managers while you are still the owner it is very unlikely that you can hand over to a buyer when you eventually sell. This may mean that your business is not an asset but an income generating entity while you are there.
- Diversification: The most difficult businesses to sell are those with one product or one customer.
Anchor your customers/clients. This involves the “art” of offering something to your customer/client that will keep him buying from you over and over again. It requires some real innovation and empathy with his needs. This successfully create barriers of entry for potential competitors to erode the revenue and profits of the business.
- Systems and procedures: The proper procedural documentation of all functions in the organisation goes a long way to create peace of mind with buyers. This also helps current owners to proactively think of the roles and responsibilities of each position in the business and to create boundaries which could prevent losses.
- Create a positive trend: The importance of this cannot be expressed enough. Most sellers starts considering selling after sales and profit peaked and there is a clear downturn. Buyers naturally extrapolate figures and doing this on a negative trend is detrimental. The strategy to achieve this is unique for every business but cutting costs, more marketing or sometimes cutting prices could have the desired effect. The longer the positive trend can be extended the better.
The process of buying a business normally starts with the investigation into the profit and income stream that a buyer can earn. It then follows the natural progression of assessing the potential scalability- growth and expansion that may be possible. The final yes or no decision however will ALWAYS be the lifestyle decision.
Some ideas of how the seller can improve the lifestyle that the buyer need to step into could have a major influence on how easy it is to sell and also what price can be earned. In simple terms - Make it attractive.
- Aesthetical improvements: Similar to selling a house: a small investment in paint, tiles, interior decorating, furniture, signage, attractive display room or meeting room may create a completely different ambiance. First impressions are very important and if the buyer is received in a dark and dirty room it is unlikely that they will see themselves operating in this environment. We have lost them before we have started….
- Positioning: Our environment has changed over the years and we often find some very good companies in old and dangerous areas. Although change came gradually for the seller most buyers do not see themselves in such an environment at all, with the result that your business does not receive their due consideration.
- Reduce the dependence on the seller: This same point has been mentioned under Risk Strategies and is now mentioned again under the
- Lifestyle Strategy. No buyer is looking forward to acquiring a business where he is forced to work many hours a day, most days a week and almost never can afford to take a holiday or perhaps not even a day off. This strategy involves the systematic delegation of functions to employees and reducing the dependence of ALL routine activities on the seller.
Once again systems, procedures, training, measuring and monitoring will assist in this process.