Three Strengths (According to Owners) That Might Actually DECREASE Business Value
When we work with business owners to enhance the value and sellability of their businesses, we often facilitate a SWOT analysis, involving owners and their senior managers. This is usually an efficient and effective way to identify the strengths, weaknesses, opportunities and threats relevant to their companies. Then we put our “purchaser hat” on, to evaluate how buyers might perceive the SWOT results, and to identify their impact on value.
But business owners don’t always perceive value factors the same way that potential purchasers do. In many cases, we hear owners speak proudly about perceived strengths, unaware that those same factors might increase risk, and consequently decrease value, in the eyes of purchasers. Here are three of these potential factors:
Business Owner A: “I am on top of every aspect of my business. I know all my customers – some are among my closest friends. My staff are good, but none of them know our business like I do. So I lead by example – I work longer and harder than anybody, and I think my staff really respect me for it.”
Many businesses are built on the talent, hard work and leadership of their owner(s). But when it comes time to sell the business, overreliance on the contribution of the owner is the number one inhibitor of business value. If the owner is the “engine” of the business, how well will it perform without its engine? Even if the selling owner agrees to stay on for a transition period, will they have the same drive and commitment when they are no longer the owner?
One of the best ways to increase business value and sellability is to identify and implement strategies that allow the business to perform successfully, independent of its owner(s). When potential buyers perceive that the business can thrive even after the previous owner has sold and moved on, they will be more willing to offer full value.
Business Owner B: “Our strategic plan is in my head. That keeps us flexible enough to react to changes in the marketplace. I know exactly the direction I want to take the business, and don’t need to waste time and money writing it down. Besides, it becomes outdated as soon as we write it, so there is no point.”
As many business experts say, “A goal not written down is just a wish”. The best strategic plans are developed with input from all corners of the business, are carefully documented and communicated, and have processes defined to measure progress in achieving them. Business buyers perceive much less risk if the company they are evaluating has a well documented, up-to-date strategic plan. Not only does it provide deeper understanding of the business and industry, but it suggests a culture of strong management and provides a roadmap for future success.
Business Owner C: “We have developed our own proprietary software to manage our business. We looked at all the packaged software out there, and none of it met our needs. We have an in-house programmer who developed the software herself, and she knows it like the back of her hand. When we need something new, we just tell her and she programs it for us. I don’t know what we would do without her.”
Unless a business is large enough to justify a full IT department (and sometimes even if it is), relying on a proprietary software system adds significant risk, and will often cause a buyer to either discount their perception of value, or walk away altogether. A business with its own proprietary software is responsible for all future development costs – often this is out of the company’s control, since upgrades to third party linked or complimentary programs will necessitate upgrades to proprietary software to ensure compatibility. Software technology changes rapidly, and it may not take long for the language upon which the system is programmed to become outdated or obsolete. And relying on a very small IT department (often a single programmer) could leave the company totally exposed (or even disabled) if the programmer suddenly leaves.
There are countless framework software systems (often called Enterprise Resource Planning, or ERP systems) that can be customized to meet the needs of most businesses. They are often scalable, with applications for businesses of all sizes. While software system conversions can be disruptive and expensive, the benefit of shifting the responsibility for upgrade and maintenance to the software provider is usually worth the cost. Further, the business will often have a choice of software support providers, further reducing both cost and risk.
When a purchaser considers buying a business, they often base their purchase decision, and the size and terms of their offer, on the risks they perceive in stepping into the shoes of the seller. If the seller can mitigate these risks by identifying and implanting “risk reduction” strategies, the prospective buyers may be more willing to offer higher prices and better terms.
Understanding what drives and inhibits value in a business is an important step in our Value Enhancement and Exit Readiness (VEER) Program. Contact us today for a free, no-obligation consultation to learn how our team can help enhance the value of your business in anticipation of a business transition.
