If your objective is to someday sell your company for the highest possible price, you would be well served by building reliable systems that can sustain the growth of the business.
A solid management team is the first value driver to focus on when you are preparing your business exit. In addition to building a strong management team, it is important to build reliable operating systems that can sustain the growth of the business. The second value driver then is the development and documentation of business systems that either generate recurring revenue from an established and growing customer base or create financial efficiencies. For most businesses, this includes all of the core processes that generate revenue or control expenses. These systems may include processes related to production or service delivery, but also may include people-related processes such as a succession planning or a performance management approach.
If the value of your business drops significantly when you walk out the door, you’ve got work to do. Look at your business from a buyer’s perspective. If you leave shortly after a sale, what remains? If the answer is top management and highly efficient business systems, you can be more confident that you will be able to get top dollar for your business.
In addition to the business systems related to revenue and expense, some systems are related to customers, such as tracking systems, and the delivery of your products and services such as distribution systems. The documentation of these systems is important to ensure that quality and consistency can be maintained after the sale. They also signal to the buyer that elements critical to the successful transition of a business are in place. Some examples of items worthy of documentation are:
- Financial control systems and accounting policies.
- Policies to ensure compliance with legal and regulatory matters, especially those related to employer/employee relationships and safety.
- Data management and information systems that tie the company together.
There are several business systems, which, once in place, enhance business value whether you plan to sell your business now or decide to keep it. These systems include:
- Human capital management including: recruitment, selection, hiring, and retention; performance management; training and development; compensation and benefits.
- Production including product or service quality control and improvement.
- Product or service research and development.
- Inventory and fixed asset control.
- Sales, marketing, and communications.
- Procurement including the selection and maintenance of vendor relationships.
Obviously, appropriate systems and procedures vary depending on the nature of a business, but at a minimum, those resources and activities necessary for the effective operation of the business should be documented. After you have built reliable systems designed to sustain the growth of the business, the next value driver to focus on is establishing a diversified customer base.
Are value drivers important to an early stage company? Absolutely. Think of an equity investor as you would a buyer for the business. The same value drivers will resonate. VCs will look first at the caliber of the management team. A great business idea is doomed to failure without the right team. Other value drives such as well documented systems, a solid cash flow growth plan, a diverse customer base, and risk management initiatives will make your business more desirable. Consider developing a Venture Value Scorecard to track your progress as you grow the value of your business.
If you have any questions about increasing the value of your business prior to your exit, please contact us to discuss your particular situation. We can help guide you through the process of identifying the current value drivers in your business and creating a roadmap for increasing value to meet your overall growth and exit objectives. Rick Tifone is a Certified Exit Planner (CExP) and a member of BEI’s Network of Exit Planning Professionals™. Send questions to [email protected] or visit our Exit & Succession Planning page.