Top tips to add value to your business and sell it for more money

What you do today will dictate what happens tomorrow. Business owners who focus on working on the business, as opposed to working in the business, tend to reap the rewards long term in the form of added value to the business, which ultimately allows the business to be sold for more.

 

It is a well-known fact that a business with a track record of growth, further potential for growth, and a strong base to leverage its potential (including quality people) is frequently sought after by buyers, and thus tends sell for more with less headaches [2,3].

 

In this article I wanted to share with you some important tips on how to add value to your business, grooming it to become sale ready. The decision to sell a business is a major moment in every business owners’ life, and one that in truth all business owners should have been preparing for from the day they entered the business. This may seem counter intuitive, thinking about exiting when you have only just started or acquired the business, but hear me out…

Business owners should focus on making themselves replaceable

 

Contrary to what often happens in the real world, business owners with eyes on exiting should avoid taking their foot off the accelerator and should instead put the foot down. A focus on making themselves replaceable, combined with revenue growth, profit improvement and expense control forms the basis for every successful business exit [2].

Before we kick off with the tips, let us discuss why people buy a business in the first place. Knowing the why will help you understand why the concept of ‘value adding’ is so powerful and can have such a huge leverage effect on the outcome of the eventual sale of the business.

Why do people buy a business?

 

We live in incredibly turbulent times. Not only are we grappling with a worldwide pandemic that looks to be with us for years to come, but, we also live in an age of rapid non-stop technological change. Consumers, customers, clients – call them what you want – have got access to more data, more information and more knowledge than ever before. They are savvy in their purchasing decisions and often turn up at the business’ door armed with knowledge about a product or service that can rival that of the best salesperson in the business. Combine this with the ever-increasing pressure of competition and regulations, and you have a business landscape that makes the whole idea of starting from scratch simply quite unappealing to many.

Buying a business is a great risk reduction strategy, especially for those who do not have the inclination of spending years going through the start-up lifecycle [2].

The common reasons people buy a business include [1,2,3,4]:

• Bypass the start-up stage – minimise risks.
• Buy a job.
• Buy something that can be built upon, then sold later for a profit.
• Increase market share through an acquisition.
• Increase profits.
• Achieve economies of scale.
• Acquire IP.
• Acquire products, staff, equipment.
• Capitalise on a poor performing business – buy, improve, sell for a gain.
• Ongoing dividends – usually derived from a managed business.

There are more reasons, but the above are the more common ones [2]. When examined further, we can narrow down the list to 4 key themes that drive the reason why people buy a business:

Let us define these reasons to make them a bit clearer to understand:

• Risk Minimisation: risks across several domains can be reduced when buying a business, including start-up risks, competitive threats, people risk, IP risks and many more.
• Competitive Advantage: when an existing business acquires another business, certain competitive advantages can be gained, including IP, people and more.
• Profit on Future Exit: many buy a business with the end goal of reselling that business, or, with the goal of consolidating that business with another, such that at a future date they make a financial gain.
• Making Money: ok so this is obvious, but making money is another primary reason for buying a business. The money in this sense is regular money in the form of a wage or dividends, or cashflow to fund another business venture or activity.

Adding value to your business simply makes sense

“Selling a company at a premium requires selling the vision and future – using the past to demonstrate management’s credibility and the business’ ability to perform.” [4]

Sale grooming (sale readiness) is a process that aims to give you the choice to sell on your terms, when you are ready [2]. Working on the business to improve value is one of the most critical activities savvy business can perform, in preparation for an eventual exit. In fact, this process of value improvement forces you (the business owner) to remove yourself from the ‘doing a job’ role to one that puts you in the strategic leader’s seat. Why is this important? Because working in the business (doing a job) tends to reduce your focus on value creation activities and makes it (often) harder to take you out of the equation [2,3].

Put simply, the more you work on your business, the better your business will become, and thereby it will most likely be easier to sell and you will achieve greater value for it.

“The ideal business for a buyer is one with a strong track record of growth, further potential and a strong platform to leverage its potential, including quality people.” [2]

In fact, according to research conducted by Uphill & McMillan, 7/10 venture capitalists rate the quality of management (of a business) as equally or more important than the product in assessing a business’s likely success potential [2]. A 2016 paper by Gompers et al. backs up this statement [5]. They go deeper however; their analysis concludes with a detailed ranking of numerous business factors that lead to a successful investment, with the top factors being:

• Management and the overall team
• Timing
• Technology
• Business Model

So, when we talk about value adding, there is ample empirical and real-world evidence of why it simply makes sense to continuously focus on building inherent value into your business [2,4,5].

On a side note – It is interesting to read about the timing factor as outlined by Gompers et al [5]. As with many things in life, timing (in this case timing your exit), is just as critical as tidying your business up in preparation for the exit. What is even more interesting is that in their article they also discuss the importance of luck, and how at times lady luck can smile upon us as business owners (although I do not prescribe to or support the practice of ‘She’ll be right mate’ in business..). Truth be told we cannot control luck. We can however to some extent control timing – in the sense of selling a business – timing the sale can make a huge impact on the outcome.

As an example, I owned a successful medical recruitment agency in the late 2000’s. For many reasons, mainly critical legislative changes directed at the industry, the business became unviable in its form and I decided to go in a different direction. Unfortunately for me this happened at the peak for the GFC, and thus the sale of that business was poorly timed. Had I tried selling before the GFC, or a few years later, things would have been very different.

Tops tips to adding value to your business

As you make your way through the list below, it is important that I point out something crucial:

“Business improvement does not have to mean huge, radical, earth shattering changes.” [2]

Rather, small, incremental changes continuously applied over a period can be just as effective as huge, one off transformation actions [2,4]. This is actually a concept known as ‘Kaizen’, which was first practiced in Japanese businesses that were influenced by American business and quality teachers after WWII, and then popularised by Toyota as part of ‘The Toyota Way’. Kaizen is commonly practiced as part of lean manufacturing and refers to continuous improvement that involves everyone in an organisation. You can read more about Kaizen here.

Now, this all might seem like big business speak, but the importance of this cannot be understated. Imagine if you made just a 10% improvement across every facet of your business. Imagine the results if everything worked just 10% better. The net effect of small improvements combined lead to large compounding effects over time, allowing the business to leapfrog competition and become a market leader [2].

Let us now look at the top tips for adding value to any business:

Add value by the hour – make your team more effective and productive, getting more value out of every hour they put in. This is an overall holistic concept, but one that you can use to devise a suite of tactics to help achieve this overall goal.

Differentiate yourself from your competition – this is a deep one and has far too many layers to deeply explore in the one article. Competitive differentiation activities include (but certainly not limited to):

• Provide a better customer experience.
• Provide better products/services.
• Improve your price – value proposition.
• Develop a unique culture.
• Develop new IP that can be commercialised.

Create barriers to entry – make it harder for others to enter the market space you are playing in. Examples of such activities include:

• Establish market share.
• Build intellectual property.
• Develop customer service excellence.
• Form strategic partnerships.
• Use contracts to secure customers.

Tidy up your business – both in a literal sense (as in, tidy your workshop for example) and in a strategic sense. For example:

• Operations – how you manage and operate your business affects the overall result. As such, focus on operational improvements that can help you generate greater revenue, greater profits, while delivering improved quality of work life for staff and a better experience for customers [2, 4].
• Do what you do – but do it better!
• Document all process.
• Address processes that are ineffective or outdated.
• Make sure products/services sold/manufactured etc. are still relevant and correctly priced.
• Ensure you have the right suppliers in place.

 

• Sales and Marketing – a lot can be done here, including:
• Brand management – ensure your brand is correctly positioned and well represented in the marketplace.
• Spend management – analysing and then reallocating marketing funds can be a quick way to achieve growth and cut excess costs.
• Database management – ensuring your databases are all up to date and correct.
• Develop and implementing strategic and tactical plans.

 

• Human Resources – people are everything in a business:
• You have the right people in place.
• Your people are doing the right jobs.
• Your management layer is adequately addressed.
• Poor performers are tended to.
• Future recruitment needs have been forecast and planned for.
• Your culture reflects the values of you and your business.

 

• Legals – make sure you have everything in order:
• Contracts are up to date, whether they be with customers or suppliers for example.
• Employees on right awards etc.
• Share structure is accurate.
• IP protection is in place where relevant.
• Any litigations are finalised.
• Ownership of assets is clearly documented.
• Compliance and licencing are all up to date.

 

• Accounts – clean books are always preferred:
• Profitability can be shown.
• Accounting standards are used and adhered to.
• Taxation is clean and up to date.

 

• Information – – having information on all aspects of the business demonstrates due care and thought.

Advisors – make sure that well before you exit, preferably at least 2 years before you wish to exit, you surround yourself with advisors who can take you through a program of sale readiness, and who can then help you throughout the whole sales process.

Document everything – the more documents you have around your business and how it operates, the more confidence you will instil in prospective buyers, and thereby the more value they see in your business.

Showcase the future – as we have seen, one of the reasons people buy businesses is to profit from a future sale. Keeping this in mind, it is important that you are able to show prospective buyers of your business what a future state for that business may look like [2,4]. How do you do this? By developing a business strategy that covers the key facets of every business, including its people, sales and marketing, operations, technology, and financials. Such strategies may have multiple layers, with specific elements discussing future growth opportunities (such as entering a new market or selling a new product line), and transformation opportunities (such as developing some new technology or improving the business with some new system).

 

The not-so-secret secret to value adding success

“The fight is won or lost far away from witnesses – behind the lines, in the gym and out there on the road, long before I dance under those lights.” Muhammad Ali

 

Talk is cheap. Talk is easy. Action, on the other hand, is invaluable. Without taking action, without starting to think about your exit years before you actually decide to exit your business, you will at best achieve a mediocre result that you are only so-so happy about [2].

If you want to exit your business on your terms, when you want, then you MUST TAKE ACTION NOW.

This article has been written by Peter Spinda.

Peter is one of the co-founders of MyMalekso. He specialises in small to medium business, strategy, digital transformation and organisational redesign. He holds an MBA majoring in Digital Transformation and is currently completing his PhD.

References

• Hanson, B. D., 2016. Price and Business Salability. New Hampshire Business Review, Issue September 16-29, p. 31.
• Keivin Uphill, A. M., 2007. Buying and Selling a Business for Wealth. 2nd ed. s.l.:THOROGOOD.
• Mitchell, B., 2019. The Business of Selling a Business. Business West, Issue October 14, pp. 33, 52.
• Ortman, J., 2010. Selling your business at a premium. Employee Benefit Advisor, Issue May, pp. 60-61.
• Paul A.Gompers, W. S. N. I. A., 2020. How do venture capitalists make decisions?. Journal of Financial Economics, 135(1), pp. 169-190.