Business Advice: 1 Hidden Thing That Drives Your Company’s Value

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 

How to increase the value of your business by 71%

How much did your home increase in value last year?  Depending on where you live, it may have gone up by 5 - 10% or more.

How much did your stock portfolio increase over the last 12 months? By way of a benchmark, The Dow Jones Industrial Average has increased by around 13% in the last year. Did your portfolio do as well? 

Now consider what portion of your wealth is tied to the stock or housing market, and compare that to the equity you have tied up in your business. 

If you’re like most owners, the majority of your wealth is tied up in your company. Increasing the value of your largest asset can have a much faster impact on your overall financial picture than a bump in the stock market or the value of your home.

Let us introduce you to a statistically proven way to increase the value of your company by as much as 71%.  Through an analysis of 6,955 businesses, we’ve discovered that companies that achieve a Sellability Score of 80+ out of a possible 100 receive offers to buy their business that are 71% higher than what the average company receives.

How long would it take your stock portfolio or home to go up by 71%? Years – maybe even decades. Get your Sellability Score now and you will be able to track your overall score along with your performance on the eight key drivers of Sellability. Like a pilot working his instrument panel, you can quickly zero in on which of the eight drivers is dragging down your value the most and then take corrective action.

Your overall Sellability Score is derived from your performance on the eight attributes that drive the value of your company:

1.  1.     Financial Performance: your history of producing revenue and profit combined with the professionalism of your record keeping.
2.  2.     Growth Potential: your likelihood to grow your business in the future and at what rate.
3.  3.     The Switzerland Structure: how dependent your business is on any one employee, customer or supplier.
4.  4.     The Valuation Teeter Totter: whether your business is a cash suck or a cash spigot.
5.  5.     The Hierarchy of Recurring Revenue: the proportion and quality of automatic, annuity-based revenue you collect each month.
6.  6.     The Monopoly Control: how well differentiated your business is from competitors in your industry.
7.  7.      Customer Satisfaction: the likelihood that your customers will re-purchase and also refer you.
8.  8.      Hub & Spoke: how your business would perform if you were unexpectedly unable to work for a period of three months.

To find out how you’re performing on the eight key drivers of Sellability and start your journey to increasing the value of your largest asset, get your free Sellability Score now: www.actioncoachsellabilityscore.com

6 Little Things that Make a Big Difference to the Value of Your Company

With the Sochi Olympic Games taking place this month, it is interesting to reflect back on some of the big events of the 2010 Olympic Games in Vancouver.

In the Men’s Downhill race at Whistler, for example, the winning time of 1:54:31 was posted by Didier Défago of Switzerland. The time among medalists was the closest in Olympic history, and while Mario Scheiber of Austria posted a time of 1:54:52 – just two tenths of a second slower than Défago – he finished out of the medals in fourth place.

In ski racing, one fifth of a second can be lost in the tiniest of miscalculations.  And when it comes to selling your business, markets can be equally cruel. Get everything right, and you can successfully sell your business for a premium. Misjudge a couple of minor details and a buyer can walk, leaving you with nothing.

Here is a list of six little details to get right before you put your business on the market:

1.    Find your lease. If you rent space, you may be required to notify your landlord if you intend to sell your company. Read through the fine print and ensure you’re not scrambling at the last minute to seek permission from your landlord to sell.

2.    Professionalize your books. Consider having audited financial statements prepared to give a buyer confidence in your bookkeeping.

3.    Stop using your company as an ATM.  Many business owners run trips and other perks through their business, but if you’re planning to sell, these treats will artificially depress your earnings, which will reduce the value of your company in the eyes of a buyer by much more than the value of the perks.

4.    Protect your gross margin. Oftentimes, when leading up to being listed for sale, companies grow by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.

5.     Include a "survivor clause".  If you’re lucky enough to have formal contracts with your customers, make sure your customer contracts include a “survivor clause” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business. Have a lawyer paper the language to ensure it has teeth in your jurisdiction.

6.    Get your Sellability Score. Take 13 minutes to answer the Sellability questionnaire now. You’ll see how you performed on the eight key drivers of sellability and you can identify any gaps you need to fill before taking your business to market.

Like competing in the Olympics, selling a business can be an all-or-nothing affair. Get it right and you will walk away a winner. Fumble your preparation, and you could end up out of the medals.

Will your business be more valuable this time next year?

For many, January is a time of rebirth and resolutions. It’s a month to reflect on last year’s achievements and to set goals for the year ahead.

Some people will set personal goals like losing weight or quitting a nasty habit, and most company owners will set business goals that focus on hitting certain revenue or profit milestones.

But if your goal is to own a more valuable business in 2014, you may want to make one of the following New Year’s resolutions:

• Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.
• Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow. Resolve to document one system a month and by the end of the year you’ll own a more sellable company.
• Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.

• Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.
• Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.
• Find your lease (and any other key contracts). When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord. Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company.
• Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.
• Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.
• Get your Sellability Score. All goals start with a benchmark of where you’re at today, and by understanding your company’s Sellability Score, you can pinpoint how you’re doing now and which areas of your business are dragging down your company’s value. 

A lot of company owners will set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

The Hierarchy of Recurring Revenue - How to make your company irresistible to potential buyers and give you the lifestyle you want now

One of the biggest factors in determining the value of your company is the extent to which a potential buyer can see where your sales will come from in the future. If you’re in a business that starts from scratch each month, the value of your company will be lower than if you can demonstrate the source or sources of your future revenue.

A recurring revenue stream acts like a powerful pair of binoculars for you – and your potential buyer – to see months or years into the future. Creating an annuity stream is the best way to increase the desirability and value of your company. 

I learned this lesson early in my career in media sales.  When I first started, I would get any sale I could to hit my monthly target.  However, each month I found myself having to resell each of these customers over again.  That took a lot of time and energy.  To resolve this, I set a goal to sell long term contracts.  Once I started this I would be going into each month now at 70-80% of my budget  This allowed me more time to start focusing on larger business who could spend more for longer periods of time.  This made my life a bit less stressful and was able to begin to enjoy my life with my family.

The secret to increasing your profitability and value of your business is to focus on increasing your average number of transactions and your average dollar sale for each customer.  In other words, how do I get them to come back sooner for more money.

The surer your future revenue is, the higher the value the market will place on your business. Here is the hierarchy of recurring revenue presented from least to most valuable in the eyes of an acquirer.  See what strategy fits your business model best and see how you can implement it right away.

No. 6: Consumables (e.g., shampoo, toothpaste)

These are disposable items that customers purchase regularly, but they have no particular motivation to repurchase from one seller or to be brand loyal.

No. 5: Sunk-money consumables (e.g., razor blades)

This is where the customer first makes an investment in a platform. For example, once you buy a razor you have a vested interest in buying compatible blades.

No. 4: Renewable subscriptions (e.g., magazines)

Typically, subscriptions are paid for in advance, creating a positive cash-flow cycle.

No. 3: Sunk-money renewable subscriptions (e.g., the Bloomberg Terminal)

Traders and money managers swear by their Bloomberg Terminal; and they have to first buy or lease the terminal in order to subscribe to Bloomberg’s financial information.

No. 2: Automatic-renewal subscriptions (e.g., document storage)

When you store documents with Iron Mountain, you are automatically charged a fee each month as long as you continue to use the service.

No. 1: Contracts (e.g., wireless phones)

As much as we may despise being tied to them, wireless companies have mastered the art of recurring revenue. Many give customers free phones if they lock into a two or three-year contract.

When you put your business up for sale, you’re selling the future, not just the present. So if you don’t have a recurring revenue stream, consider how best to create one, given your type of business. It will increase the predictability of your revenue, the value of your business, and the interest of potential acquirers as they look to the future.

Even if you are not ready to sell your business now, by implementing these strategies now you can begin to enjoy the fruits of your labor now as you begin to position yourself for the future.

See how valuable your business is not by getting your own Sellability Score, and see how you compare on the eight key drivers of valuability and thus sellability, by taking our 13-minute survey here at www.actioncooachsellabilityscore.com

The Self-Employed See-Saw by Brad Sugars

This week I wanted to share with you something from Brad Sugars founder of ActionCOACH.

As a self-employed person, your business life will feel just like a seesaw. While it’s often true that the self-employed can make more per hour than they ever could as employees, the challenge comes down to how many hours are actually used in the background, working ON the business and how many hours are spent in the foreground, working IN it?

When you’re self-employed, you’ll spend half your life chasing the work, doing marketing, sales, and administration.  It’s a lot of work, especially when all of the production and planning has to come from you… In fact, you’ll have so much work to do that every day will be a conveyor belt of non-stop activity… you’ll feel like you never get anything “done” because there’s always so much to do.

So why do we call this a see-saw? Doing the day-to-day work is one side of the seesaw and sales and marketing is the other and if you’re self-employed, one side must be up while the other is down… and vice versa.

Does this sound familiar? Chase the work, do the work, chase the work, do the work, chase the work, do the work… and so on. If it does, you know what it’s like to be self-employed.

It’s this seesaw that stops a self-employed entrepreneur from ever really getting ahead. It’s simple, you may not have a “job” but you’re still in a situation where there’s no real leverage. You still need to do the work or it won’t get done.

It’s this seesaw that gets self-employed people to make one of two decisions. To either give it up and go back and get a job, or to take the plunge and jump in the deep end of business and make the decision to grow, to move up the ladder.

This means becoming a business owner who creates systems and hires employees to do the work IN the business while the owner works ON it.

If you are interested in learning more from Brad. Check out his free monthly webinars at