Value Adding News - April 2010We have been busy working with clients over the last few months but have put together some great news and articles to help you increase the value of your business.
In this month's issue
3 Key Principles That Make a Business ValuableThere are lots of practical ideas, advice and tips available on what makes a business valuable. Our growing Free Library of articles explains a lot of helpful advice that you can implement to increase the value of your business right now.
But all of this advice can be boiled down into 3 Key Principles:
Most importantly - you need all three key principles to realise value in a business - one or two won't do. If you want to create tangible real value from your business you must have all three principles in place.
- A business must be transferrable.
- A business must be viable.
- A business must be "in demand".
This article explains the 3 Key Principles and what you must look for in your business.
Principle #1 - A business must be transferrable
A business is transferrable if:
- You own the business.
- Others can operate or manage the business.
- There are systems are in place.
Franchisees can often sell the "cash flow" but not the intellectual property, and so they don't own the whole business to be able to sell it.
Having systems in place not only gives buyers added confidence that they can run the business but that the business can be "scaled up", thereby increasing the return they will get for their investment. Business systems need to be:
- Well documented.
- Promoted across all staff.
- Training provided.
- Automated where possible.
- Contribute effectively to operations and decision making.
How well do your systems measure up and do you have the right ones in place?
Principle #2 - A business must be viable
It makes sense (or perhaps dollars $$$) that a business making profits will be more valuable than a business making no profits. Although a buyer will often consider a business making a loss when they know what they must do to turn it around. But it is extremely unlikely the buyer will offer an attractive price.
A recent survey that we conducted found that 70% of businesses that were reaching their financial goals had received an offer for their business in the last 12 months.
But viability is not just about making a profit. The business must be:
- Meeting it's obligations.
- Making enough profit to justify the investment.
- Generating wealth (or cash) for the owners.
Ultimately a business must be generating more cash for its owners to make it a viable proposition for someone to want to buy it - and therefore attract a suitable price. The link between cash flow and profit is critical in realising the value in a business. A business may be profitable, but if the business will soak up the all the cash through ongoing investments in stock, promotion and equipment then it is not creating wealth.
How well does your business generate cash and could you show this to a buyer?
Principle #3 - A business must be "in demand"
A business can be transferrable and generate heaps of cash - but if there are no buyers there is NO VALUE!
Most business owners think there is a "sea" of buyers out there waiting for them to come onto the market. In reality there is a "jungle" of possible investments that these buyers can make, and buying a business is just one of them. Your business will compete with all of the possible investments, including property, the stock market and other businesses.
In some cases a business' location or industry may not attract a buyer. Not many people are in the market seeking a manufacturer of vinyl record players or horse-drawn carts. But having buyers interested in your business is not just about your location or industry, in some cases the risk profile or returns simply mean no one is interested.
If your business doesn't match the returns and the risk profile that other investments offer, then buyers go elsewhere.
How effective could your business attract a buyer?
What can you do next?
If you have each of these three principles covered in your business then you are creating value. The question then becomes: are you creating ENOUGH value?
We have a simple and time-effective process for answering this question and challenging your business strategy - it is called Your Value Now. It can be completed in 1 hour over the phone and can deliver practical ideas on what you can do next to achieve the value you want from your business.
Follow the link to lean more about the process or sign up for the 1 hour phone call and select the Your Value NOW option.
IBISWorld Complimentary Industry Analysis - Small Road Freight EnterprisesThis month IBISWorld reviews the transport industry in Australia. Whilst the revenue of the overall transport sector has grown 3.7% per year for the last five years, road freight has grown by only 0.8% per year. IBISWorld have found that whilst road transport is the backbone of the industry, aggressive pricing strategies, industry overcrowding and growth in other forms of transport have seen the road freight sector stagnate.
However small road-freight enterprises have seen robust growth.
To access the full article follow this link to our Free Info section and click on the link to the IBISWorld website.
As we have described in other areas of this site, the value of your business is directly related to the potential cash flow in the future. So it makes sense to build your future cash flow pipeline by developing relationships with larger organisations.
myBRC Complimentary Article - Developing relationships with larger organisations
But there is another reason to develop strategic relationships with other businesses - they can also provide a valuable exit strategy in the future. If the relationship is managed correctly, your strategic partners will see how valuable your business really is and be prepared to pay a premium for it at a later date.
This month's complimentary myBRC article is by Robin Power from Affinity Maker, who describes how to develop relationships with larger organisations.
To access the full article follow this link to our Free Info section and click on the link to the myBRC website.
What are the Top 8 key factors that dramatically increase the price of your business?
We recently put together the Top 8 key factors that we have found dramatically increase the price of your business, based on our own experiences and the research that others have conducted. Although some are deceptively simple, they can help increase the cash flow of a business well before any exit strategy is chosen.
As a special gift to our newsletter readers, we have listed all eight below:
We also realised that the best results come from Key Factors 5 - 8. These factors can not only dramatically improve the cash flow of the business but also increase the effective multiple your business could attract. Doing this often means adding zeros to the value of your business!
- Meeting financial goals
- Structured financial reports
- Be prepared for an offer
- Creating competition for your business
- Documented and effective systems
- Size of the business
- Well defined competitive advantage
- Strategic alliances
The first four factors are explained in more detail on our website: First 4 Key Factors
You can read all about the BEST 4 Key Factors by following the link at the bottom of the First 4 Key Factors page and downloading the article.
If you want to know how your business could benefit from implementing any of the key factors then send us a quick note and we will be happy to discuss how the key factors can relate to your situation - free of charge.
Read Part 2 of our interview with Chris Nolan of Ragged Edge 4x4We have been working with Chris Nolan for over four years, first helping to establish operating procedures and an expansion strategy for his regionally-based gym KC7, then later in assisting to establish his 4x4 hire drive business as the only extreme 4x4 hire/drive business in Australia.
Here is the second of three parts to an interview we conducted with Chris recently.
In this interview he talks more about what building value means in his businesses and also teases us with some new ideas he has for his business.
Read the Part 2 of our interview series here.
Our newsletters will be covering a range of topics this year, including:
Newsletters For 2010
What else would you like to know about? What questions have you had about your business and its value?
- When do you create value - Part 2?
- What is succession planning all about?
- How effective business networking can significantly increase your business value.
- The industries positioned for huge growth in 2010 and beyond.
- How can SMEs use acquisition to create value?
- Getting the financing mix right.
We want to provide you with information that helps you - so let us know by sending us an email or by going to our Contact Us page and filling out the enquiry form.