The most valuable businesses are those that can operate at least semi-autonomously, without expensive personnel at the helm. It’s these types of organizations that demonstrate a healthy, stable growth pattern that is not only attractive to the businesses owner, but makes that business more valuable when the time comes to sell.
It’s important to keep in mind that while selling your business may not be in your immediate plans, transfer of ownership is inevitable. Whether you’re retiring, choose to sell to a competitor, embark on franchising or any other potentiality, you want to make your business more attractive to potential buyers.
When your business is attractive to potential buyers, it means it holds tremendous value – something every business owner strives for. But what, exactly, makes your business more attractive to these future buyers?
Hint: It isn’t the size of your inventory.
The most valuable asset to any business is its intellectual capital
Business owners make the mistake of placing greater worth on their tangible assets than they should. While a company’s products are a piece of the puzzle, it’s the intellectual capital that truly affects its value.
Intellectual property is the foundation from which your entire business is built. It’s the working parts behind the products that make everything possible, such as organizational systems, employees and more. It’s the methods put into place that have made your business a profitable organization.
It’s your commercial goodwill.
When your commercial goodwill is high, your business holds more value
The benefits a buyer receives when he acquires your business is your commercial goodwill. This includes your brand, your relationships with your clients, your workforce, industry know-how, and benefits and features associated with your company.
Buyers hold great value on this goodwill, in large part because they realize that this is the area where the most growth opportunities exist.
Breaking down your business
Potential buyers look at two areas when valuating your business:
1. Discretionary earnings
2. How long those earnings will sustain following new ownership
When your business is on solid footing, there is a greater certainty that those discretionary earnings will hold steady following a change in ownership. As a result, investors will be more confident in their return on investment, which in turn increases your company’s worth.
That’s why it’s important to increase your company’s commercial goodwill. By doing so, you increase the likelihood that your discretionary earnings will continue their trajectory even following a change in ownership.
But this requires turning your company into a self-sustaining entity that can succeed without regard for its leadership.
How to turn your company into a turnkey operation
There are four stages every company goes through before becoming a self-sustaining turnkey operation:
1. An owner-driven business
2. A people-driven business
3. A system-driven business
4. A culture-driven business
By going through each stage, a business matures from a needy toddler to an independent adult. Once the fourth and final stage is reached, your business will likely double (if not triple) in value.
1. Owner-driven business
While used metaphorically, there is some truth to the saying that running a business is like parenting your child. When your business is born, all the way through its early years, it requires (or, rather, demands) your attention. It wouldn’t survive with you.
This is a necessary step in any growth process. It’s also extremely early on in a company’s maturity, making it far from an ideal time to sell. The company’s most valuable asset is you, the owner. Without you in the equation, there’d be no company.
2. People-driven business
When you first start your business, there are likely very few key players involved, aside from yourself. But as your company grows, you’ll begin to take on integral partners who not only help grow your company, but who become the driving force of business.
An important step every business owner must take in order to increase his company’s value is relinquish some of the reigns of the intellectual property and spread it among other key players. This increases the likelihood that your company could survive if you, for some reason, were no longer there.
Yet in this second stage, the intellectual property is still confined to a small number of people, which has an adverse effect on the company’s goodwill. While stage 2 is a step in the right direction, your company is still not capable of withstanding the loss of one of your key team members.
3. System-driven Business
A well-established system set into place is of tremendous value to any business (and future buyer). These systems allow for you and your key team members to step away without fear that your company will collapse.
That means that although some faces may change, and titles may go away, your company can turn to its established system to sustain itself.
4. Culture-driven Business
The fourth and final stage in the maturity of your business is known as a culture-driven business. For some it may seem like the Holy Grail, but it is achievable. This is when not only are systems put into place, but there exists an invested team of people looking to improve upon these systems.
A business that isn’t growing is dying. That’s the belief of the culture-driven business. At the end of each day, the company as a whole is somehow improved because of the work performed by its team members.
Any business that’s achieved this level will be able to endure any change of ownership without fear of collapse It is this type of business that will enjoy the best possible value assessment.
Even if selling isn’t in your future, making your business independent should be
Creating a turnkey organization should be the goal of any business owner. This is a sign of truth growth and maturity. Much like parenting, it can be hard to let your “child” go, but there’s a great sense of pride and accomplishment when you see the business you created stand on its own two feet.
By setting your goal on reaching a culture-driven business, not only are you helping your company mature, but you’re also helping to double its value. When the time to sell inevitably comes, you’ll be glad you committed the effort.