At ActionCOACH our definition of a successful business is a commercial, profitable enterprise, that works without the business owner. If the business can't work without the business owner, it's broke. You don't own a business, you own a job. And... no one wants to buy a job or at least not pay a lot for it.
The main advantage of having the business being able to work without you doing the "technical" work in the business, is that you are now increasing the value of the business and at the same time making it more attractive to a potential buyer in the future.
In our previous post we discussed how the importance of the business owner not selling as a way to increase the value of the business. In this post well focus on another area to increase the value of your business.
You already know that your company’s revenue and profits
play a big role in how much your business is worth. Do you also know the role cash flow plays in your valuation?
Cash vs. Profits
Cash flow is different than profits in that it measures the
cash coming in and out of your business rather than an accounting
interpretation of your profit and loss. For example, if you charge $10,000 upfront
for a service that takes you three months to deliver, you recognize $3,333 of
revenue per month on your profit and loss statement for each of the three
months it takes you to deliver the work.
But since you charged upfront, you get all $10,000 of cash
on the day your customer decides to buy. This positive cash flow cycle improves
your company’s valuation because when it comes time to sell your business, the
buyer will have to write two checks: one to you, the owner, and a second to
your company to fund its working capital – the cash your company needs to fund
its immediate obligations like payroll, rent, etc.
The trick is that both checks are drawn from the same bank
account. Therefore, the less the acquirer has to inject into your business to
fund its working capital, the more money it has to pay you for your company.
The inverse is also true.
If your company is a cash suck, an acquirer is going to
calculate that she needs to inject a lot of working capital into your business
on closing day, which will deplete her resources and lessen the check she
writes to you.
How To Improve Your
Cash Flow
There are many ways to improve your cash flow – and
therefore, the value of your business. One often overlooked tactic is to spend
less on the machines your company needs to operate.
In the restaurant business, for example, there is an often repeated
truism that it takes three bankruptcies at a single location before any restaurant
can make money. The first owner of the restaurant walks in and – with all of
the typical optimism of a new entrepreneur – pays cash for a brand new
commercial kitchen complete with fancy stove, commercial grade walk-in coolers,
etc., as well as all new dishware, pots and pans, thus depleting his cash
reserves before opening night. Within a year, the restaurant owner runs out of
cash and declares bankruptcy.
Then along comes a second entrepreneur who decides to set up
her restaurant at the same location and buys all of the shiny new equipment
from owner number one’s creditors for 70 cents on the dollar, figuring she has
made a wonderful deal. But the outlay of cash is still too great and she too is
out of business within a year.
It’s not until the third owner comes along that the location
actually survives. He saves his cash by buying all of the equipment off the
second owner for 10 cents on the dollar.
The moral of the story is: find a way to reduce the cash you
spend on equipment, however you can. Can you buy your gear used on sites like
eBay? Can you share a very expensive piece of machinery with another
non-competitive business? Can you rent instead of buying? In Jacksonville a great place to find used and new restaurant is www.a1restsupply.com.
Profits are an important factor in your company’s value but
so too is the cash your company generates.
We call this phenomenon The
Valuation Teeter Totter and it is one of the eight key drivers of the value
of your company. Curious to see how you’re performing on all eight drivers? Get
your Sellability Score here: www.actioncoachsellabilityscore.com
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