I get this question all the time….“I’m considering selling my business can you tell how much my it’s worth?” After we talk awhile about the business’ current valuation I usually then hear “what can I do to increase the value of my business?” This second question assumes there are simple things that can be done to enhance business value, akin to the concept of new paint in the living room increasing the value of a home.
The usual perspectives on increasing business value suggest that the process takes time and energy, that there are no quick hits. Go to Google and ask “how to increase the value of my business?’ and you’ll find links to articles with the usual bromides: grow revenue faster, improve operating margins, accelerate cash flow cycle, strengthen management team, etc. These are all good ideas, indeed every business owner should be thinking about these things every day, not just when they are ready to sell their business. But, if you wait until you decide to sell your business to do those things, you’ve probably waited to late.
Yet most business owners I work with want to know what they can do to increase the value of their business now, like this year. Let’s say you know that a buyer for your business is going to contact you in six months, what can you do TODAY to increase the value of your business within those next six months? You’ll probably be surprised to learn it’s nothing you actually have to DO in your business, but it’s everything about how you THINK about your business.
#1 Clarify Your Unique Selling Proposition (USP)
Think proactively about how to position your product or service. Most business owners just open the doors, start doing what they are doing, and let the results happen. If a business owner is able to retain me, the first thing I ask them is what makes them unique. Most business owners respond with lame answers like “we have great customer service,” “we have the best ingredients,” “we are the best price.” But as we discuss USP in more depth, they admit that those responses are not unique, nor do they get to the heart of why a customer should buy, much less be loyal to, their product or service.
So how does a small business owner get a handle on their USP? I encourage my clients to first look at the good USPs that they already know. Let’s try this exercise; I won’t need to tell you the company but you will instantly know what they do and how they do it, it’s embedded in their USP: “melts in your mouth, not in your hand,” “when it absolutely positively has to get there overnight,” “fresh hot pizza delivered to your door in 30 minutes or less, or it’s free.”
Yes, yes, I know these are all mega-billion dollar companies, but the same principle applies if you are running a small manufacturing company. You need to describe in one sentence (or less) what your customer can expect when they buy your product or service.
A compelling USP speaks volumes when a prospective buyer is interested in your business. Spend time on this now and it will increase the value of your business now.
#2 Articulate Your Business Model
Learn how to say how you make money, your business model. When I ask a business owner to describe his/her business model I usually hear something like: “I have a 3,000 square foot building, we’ve been in business since 1993, I have trouble keeping good employees it’s hard to get good help any more, but things would be OK if the bank would expand my working capital line, blah blah blah.”
Simply said, most business owners don’t understand the concept of a “business model.” But when you are in a discussion with a prospective buyer for your business, you can (really) increase the value of your business on the spot if you succinctly express how you make money. On the other hand, if you bore the potential buyer with your response, you might lose the deal before you get started. By the way, that happens …. a lot.
I have a client right now who expresses his business model this way: “we have a 35% cost of goods sold, so every dollar of revenue is 65 cents of gross profit. I run the business so that our operating expenses are never more than 40% of total revenue, which allows me to pocket 25 cents profit on every dollar of revenue. For every 5% growth in revenue, I can reduce my cost of goods sold by 1 percent without increasing my overhead, so it makes sense for me to spend about 1 percent per year in incremental marketing for new growth.”
Here’s the good news, your business has a business model, and you probably know what it is, though you’ve likely never had to express it. But, if you are interested in selling your business, you will need to describe to a prospective buyer how you make money, i.e., your business model.
BONUS TIP: Get started now!
You now have a head start with two things you can do to increase the value of your business now. When that buyer comes in the door and you are able confidently describe your USP and your business model, I guarantee you’ll be adding value to your business because you simply took the time to THINK ABOUT your business differently.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- Does the Entrepreneur Know More Than the Corporate Titan? - April 17, 2017