Additionally, they are surprised to learned that sales chance is extremely low for their business. There is one thing to know:
Only 15% of SMEs in sales/partnership process can achieve successful results.
In this case, although shareholders don’t have the intention to sell/form partnership in the near future, they must always create businesses that will be demanded and has maximum value.
At the same time, shareholders must manage their business as if this will last forever but at the same time prepare the business for immediate sales to maximise the value and prepare for the highest bidder. They need to manage their business so that when the time comes, they can walk out with their jacket.
Businesses are valuable and sellable when these businesses show the same performance without shareholders.
Although profiting and business growth seems like priority for business owners,
Company value maximisation must be set as the most important success objective.
company value maximisation must be set as the most important success objective.
In this scope, we will present 14 steps to increase your business value and how to maximise business value while preparing your business for sale.
14 GOLDEN RULES
1) Business running independent of business owner Business owners must create processes and systems that will work without their support. Only under these circumstances, an investor who wants to “manage” can be found instead of “business owner”. First step is to assign a manager to take daily responsibilities of the business.
2) Stable Profit When business profit increases above real inflations rates per annum, this can be considered as an important value for business. However, another important topic as profit is profit margin. Gross profit margin and net profit margin should be evaluated separately and profitability strategies must be developed for sustainability.
3) Repetitive Income One of the most effective factor on business value during sales is recurring revenue. Recurring revenue will help creating future projections and can increase business value by 100%. For example, membership revenue, subscription revenue, joint products (razor blade/razor relationship) etc.
4) Documented Systems Duty of shareholder who want to sell their business is to convenience investors that the business will show the same performance after the shareholder leaves that place. A business that operates with documented systems rather than individuals will increase business value and saleability.
5) Keeping Quality Management Team in the Company The last a new owner would want is key employees leaving the business after sales. Key employees are employees with critical functions in the business after the shareholder who sold his/her share. Quality employees will provide stability and create sustainable success within the business. If quality management team continues to work in the company after shareholders are out, this will increase sales chance and value of the business. Share option to key employees, sales bonuses, and promotions will help these employees to be retained in the company.
6) Business Managed with Data and Objectives Each business produced large amount of data in each active day. Bid data and data mining should not be a nightmare but the biggest helper of business owner.
Correctly organised competitive analysis, financial reporting standards, and key performance indicators (KPI) are important steps that will turn business into “fit” and valuable form.
As physical dependency of the business increases, dependency to rules of yesterday increases.
7) Financial Engineering Business owners often lack financial literacy. This function should not only be handled by accounting or finance department. Each shareholder must be able to analyse all financial tables.
As a result, business resources (equity capital-passive) and assets (active) should be used for the highest efficiency. For example, one of the common mistakes is not seeing that real “value” is shifting from real assets (factory, machinery, inventory, tools) to intangible assets (brand, patent, human resources, innovation, R&D, technology). Rules of the future are written by business that minimise real assets and has 80% of intangible values. Business owners must aim for 20% of real asset value among total active size.
8) Clarifying growth potential and growth strategies Tangible and well-planned growth strategies have enormous effects on business value and saleability. Future product range, target customer audience, active geography, and competitive advantage should be documented. All members of the team must understand and adopt these factors.
It is always important to remember that investors will look at the future and current performance of the business but investors is buying the future of the business.
Dependency must be kept below 15%.
9) Independency Theory One of the most important elements for business attractiveness is independence theory. Dependence to one customer or one key employee will increase future risks.
Structure where 50% endorsement is obtained from single customer and 50% of sales are made from single sales representative increases the risk of business. Decreasing dependency in all areas will increase investment attractiveness.
10) Free Cash Flow Quality Ability of a business to create cash flow is more important than net profit. Business must create optimum shareholder revenue after meeting business capital and investment business. It is observed that some business fail to create free cash flow although they create 50% endorsement increase annually for 5 years.
For quality free cash flow, high profitability, low fixed asset investment and well-managed business capital is necessary.
11) Employee and Customer Satisfaction These are two elements that must be included in key performance indicators. Studies showed that 68% of customer leave a business due to negligence and disinterest of company employees. Each unhappy customer expresses this problem 5 times more than a happy customer. Employee and customer satisfaction must be measured every year and steps to increase customer satisfaction must be a priority for the management.
For corporate investors, business that has endorsement lower than 10% of investors endorsement do not offer attractive investment opportunities.
12) Business Size, Activity Duration and Growth Rate Endorsement size and active years of a business are important criteria for investor. Passing the “death valley”, which is the first 5 years, annual stable growth and endorsement size of a business directly effects investment attractiveness.
When two businesses in the same sector and with the same product range are considered, 3 million TL endorsement for one business and 50 million TL endorsement for the other will increase the chance of second business. Additionally, instead of 100% growth one year and 10% growth in the next year, annual 50% stable growth is more attractive.
13) Human Resources Management with Performance Assessment System Human resources is the most critical responsibility of a business. Each business can buy building and machinery. However, the real thing that will make a difference in the market is the human resources. Higher employee motivation, fair and performance based management system, company culture that supports innovation will increase business attractiveness and value.
Critical thing is having an attractive, sustainably growing, and protected company for an investors means having a differentiator and focused strategy for businesses.
14) Sustainable Difference and Focusing Business built on strategies that can make difference. Sustainability of this difference is equally important. Real difference can be achieved with services surrounding a product rather than the product itself. Difference must be adopted and this difference must be turned into focal point. Only this way a business can be an attractive option for an investors even though this business is a small scale one. A business must be “best” in one topic.
None of the investors wants to purchase a business that works with low margin within price competition.