Also, they get surprised to learn that their business has very little chance of being sold. It should be kept in mind that :
Only 15% of small and medium-sized enterprises that experience the sales/partnership process can achieve a successful result.
In such a case, what should be done is to create businesses that will always be demanded and have a maximized value, even if the shareholder does not have an intention to sell/get a partnership in the near future.
Shareholders should always run their company as if it will last forever, but at the same time, they should keep it very ready to sell it by maximizing its value as if they will sell it to the highest bidder tomorrow. They should always be ready to transfer the ownership and leave it.
Businesses become valuable and salable assets when they show the same performance without their shareholders.
Although getting a profit and growing the business seems priority targets for business owners,
Company value maximization must be set as the most important goal to be achieved.
in this scope, we will shortly describe how to increase the business value and maximize business value while preparing the business for sale in 14 steps. 14 GOLDEN RULES
- 1) Business running independently of the business owner
Bosses must create processes and systems that will run without their daily support. Only under these circumstances can an investor demand the "business" rather than "the owner of the business". The first step to take would be to assign a manager to take over the daily responsibilities of the business owner.
2) Stable Profit
The fact that the operating profit increases over the inflation rate in real terms every year is one of the sine qua non for a valuable business. However, the profit margin of the business is another issue that is as important as the absolute amount of the profit. Gross profit margin and net profit margin should be evaluated separately, and profitability strategies should be developed for sustainability.
3) Recurring Revenue
One of the most effective factors on business value during sales is recurring revenue.
Recurring revenue facilitates future projections and can increase business value by 100%. For example, subscription revenue, membership revenue, joint products (razor blade/razor relationship), etc.
4) Documented Systems
The duty of the shareholders who want to sell their business is to convince the investor that the business will continue with the same performance even after they leave.
A business that operates in line with documented processes independent of individuals will increase its salability.
5) Keeping a Qualified Management Team in the Company
The last thing the new owner of the business would want is the leaving of key employees from the business after the sale. Key employees are those who assume critical functions in the business, other than the shareholders who sell their shares.
Qualified employees bring stability to the business and create sustainable success for the company. If the qualified management team continues to work in the company even after the shareholders leave, the sales chance and the business value will increase. Offering incentives such as share options, sales bonuses, and promotions to key employees will ensure the retention of these employees in the company.
6) Business Managed by Data and Goals
Each business generates huge amounts of data every day it is active. Concepts such as big data and data mining should be the biggest assistant of the business owner, not the fear.
Correctly designed competition analysis, financial reporting standards, and management in line with key performance indicators (KPIs) are the key steps that will make the business “fit” and valuable.
The more the business is dependent on physical investments, the more dependent it is on the rules of yesterday.
7) Financial Engineering
One of the issues that business owners are least knowledgeable about is financial literacy. This function should not be left only to the accounting or finance department. Each shareholder should be able to analyze all financial statements very well.
As a result, business resources (equity capital-passive assets) and assets (active assets) should be used in a way to obtain the highest efficiency.
For example, one of the important mistakes commonly made is not seeing that the actual “value” has been shifting from real assets (factory, machinery, inventory, tools) to intangible assets (brand, patent, human resources, innovation, R&D, technology).
Companies that minimize their real assets and where intangible values constitute 80% of business value set the rules of the future. Business owners should aim to keep the value of real assets below 20% of the total assets in the company's balance sheet.
8)Clarifying growth potential and growth strategies
A concrete and well-planned growth strategy has a huge impact on business value and salability. The business should document its product range, target customer group, the geography in which it will operate, and the competitive advantage it will focus on in the coming years. It should ensure that the whole team understands and adopts it.
It should be always kept in mind that the investors consider the history and the current performance of the business but they buy the future of the business.
It should be aimed to keep the dependency rate below 15%.
9) Independence Theory
One of the most important factors affecting business attractiveness is the independence theory. Dependence on a customer or one key employee will increase future risks for a business.
The structure where 50% of the turnover is obtained from one customer and 50% of the sales are made by one sales representative are important risk factor for the investor. Decreasing dependency in all fields will increase investment attractiveness.
10) Quality of the Free Cash Flow
The ability of the business to generate cash flows is more important than net profit in many ways. The business should be able to generate optimum shareholder returns after meeting the working capital and investment capital needs at the end of the fiscal year. Some companies are observed to fail to generate free cash flow although they have achieved a 50% increase in turnover every year for 5 years.
A quality free cash flow requires high profitability, low real asset investment, and well-managed working capital.
11) Employee and Customer Satisfaction
These are two important criteria that should be the first key performance indicators. Studies reveal that 68% of customers leave the companies they receive service from due to the indifference and disinterest of the employees. Each unhappy customer expresses their experience 5 times more than a happy customer.
Employee and customer satisfaction should be measured regularly every year and steps to increase customer satisfaction should be the priority of the senior management.
For the institutional investors, target businesses with turnovers smaller than 10% of their turnovers do not offer attractive investment opportunities, except when they are very strategic.
12) Size of the Business, Duration of Activity, and Growth Rate
Both the turnover size of the business and the number of years it has been operating are important criteria for the investor. The fact that the business has passed the first 5-year period, which is called the "death valley", has a stable growth each year, and its turnover size directly affects its investment attractiveness.
Assume that there are two businesses operating in the same sector and they have the same product range, one has a turnover of TRY 3 million while the other has a turnover of TRY 50 million. In such a case, the second company is more likely to find investors.
Also, it should be taken into account that a stable 50% growth per year is more attractive than the growth of 100% one year and 10% the next.
13) Human Resources Management with Performance Evaluation System
Human resource management is the most critical responsibility of a business. Every business can buy buildings, machinery, and equipment. However, what makes the real difference in the market and brings success to the business is the human resources of the business.
Keeping employee motivation high, a fair and performance-oriented management system, a company culture that fuels innovation increase the attractiveness and value of the business.
The most critical issue is that the business owners should have a distinctive and focused strategy to have a business that is attractive to investors, that achieves sustainable growth, and is protected from competitor attacks.
14) Sustainable Difference and Focus,ng
Making a difference is the genes on which successful businesses build their strategy. The sustainability of the said difference is at least as important as the difference itself. It should be kept in mind that the actual difference will be ensured by the services provided with the product rather than the product features.
The difference should be adopted and made the focus of the business. In this way, the business can become an attractive company for the investor even if it is small. The business must be “Number 1” in one aspect.
No investor wants to buy a business that works with low margins in price competition.