This year, you should look at your business as an asset that grows in value—just like your house and your retirement funds. This is easy to say, of course, but it takes a real commitment to focus on the right things. You see, that’s where the value is created. It’s not in doing the technical work of the business, day in and day out.
When I value businesses, whenever possible I compare the business to its competitors. You would understand that two businesses each earning $100,000 a year might have very different fundamental characteristics. One business might be on its way to $1 million a year, and the other business might be headed toward financial ruin. One business is a superior business in relation to its industry peers, and the other one is inferior. The question is, where does your business fit? And what constitutes a superior business?
First of all, a superior business has a robust financial reporting system. This means that the business is measuring and monitoring the most important keys to its success—things like gross margin, customer conversion ratios, marketing activities, and the lifetime value of its customers. At this point in the year, you should already have a list of your Critical Success Factors… the things you absolutely need to get right, this year, in order to succeed.
Second, a superior business focuses on what needs to be done in order to build a valuable enterprise. This means that the owners are giving attention to the quality, as well as the amount, of revenues and earnings. Not all customers and product lines create the same amount of profit.
Third, the business is sensitive to its customers’ needs and wants. This requires that you get feedback on a regular basis from your very best customers about what you could do better. It also means that you are differentiating your business from your competitors. If your prices are the only way your customers can compare you to your competitors, then you have a big challenge on your hands. If your customers stay with you only because of your prices, then they most certainly will leave as soon as they find lower ones.
Fourth, the business is appropriately managed and led. Many businesses are well-managed but poorly led. You need to have efficient operating procedures and a mechanism for controlling operations so that the business turns revenues into profits year after year.
Finally, a superior business has a clear succession plan and an exit strategy for the owners. The time to develop your exit strategy is long before you want to get out of the business. This requires a lot of planning and thought, and the time to be working on this is right now.
What we’re talking about, here, is what we call working on your business, rather than in it. A business that can operate without the owner is a more valuable enterprise than a business that relies on the owner being there every day to open the doors and run the cash register.
Here are some ideas for improving the value of your business this year. First of all, find out what your business is worth right now. Second, set a target for what you want your business to be worth in five years (or less, if you want to retire sooner). Third, work with your team of advisors (you have one, right?) to improve your business so that it delivers the value (and the lifestyle) that you deserve.
Paul Svendsen is a part-time faculty member at Central Oregon Community College. He can be reached at 389-4740.
