Having investigated and worked with many small business owners, and having been one, and having discussions with business brokers, too many times business owners have inflated ideas of what their business is worth. There are many good tools to give you a more well-rounded valuation. The worst tools are mere multiples of revenue or EBITDA…or taken from the latest Inc. magazine article.
Too many small businesses rely on the multiples and then are shocked when an offer comes in much lower than 1x revenue, for example. The offer is usually a fraction (percentage) above the asset value of the business. Perhaps a strategic buyer—one currently in the industry, or adjacent industry—will pay a ‘premium’ over other acquirers because you have distribution channel, a product/service offering they want, talent they need or… But most buyers aren’t strategic; most offers are less than what the business owner was expecting. The indignant response of the owner usually points to the value of the customer list.
Customer lists are only worth something in the first 30 days…maybe longer if you have ‘subscription’-type services. Collectively, businesses are creatures of habit. We often order the same products and services that we have before—as long as they work—and simply renew contracts, or ‘copy over’ purchase orders. (Even as an individual, I bet you travel the same routes to/from work, buy gas at the same stations, pick a limited range of entrees from the menu of a restaurant you frequent, buy the same labels at the grocery store, etc.; businesses, a collection of individuals, are the same.) Until something nudges the inertia in a different direction—poor quality, price increase, e.g.—or wakes us from our behavioral stupor, we won’t make any changes.
One such bump in the inertia is ownership change in a supplier. Now, your customers will ask if they should stay with your product or service, or look around. That’s why customer lists are only good for 30 days.
If you’re counting on the customer relationships—for many year even—to create value in your business, please rethink that strategy. We can help. We can point you to different tools to evaluate what a non-strategic buyer would offer.
We can develop your next-generation leader of your business for when you retire (or want to back off a bit from your business).
How does a business owner gracefully pull back or exit from the business he/she has built? Often the plan is to sell the business. But 80-90% of small businesses for sale aren’t sold. (The rate is 30-40% for large enterprises.) If you’re a betting person, you’d be bucking the odds to think your strategy is to sell the company on the open market. Even if you do sell, you may not get the proceeds you think you’ll get because, if you’re like most small businesses, most of the value is in what you know and do; no one can buy that.
Additionally, companies don’t do well when someone from outside comes into the company. Their value doesn’t increase. Insiders do better at creating short- and long-term value. Insiders also already feel passionate about making sure the company continues to be a success.
You probably don’t have a staff person ready to take over the business and lead it as the staff or new leader buy the business from you.
That’s where we come in. We’ve proven in many industries how to unlock the leadership potential in your staff. We can be your interim CEO/COO and develop the new business leader from your team. Contact us at firstname.lastname@example.org
If this ‘waste’ isn’t killing your company, it’s slowing it down more than you may realize…even if you’re growing. Most of you have heard about the Seven Traditional Wastes as identified by Lean Methodology. But this one killer waste is more pernicious and prevalent: the use of wrong metrics.
Too many corporate dysfunctions have been created through the use of Efficiency. It drives all sorts of internal-looking, suboptimal actions and decisions that the customers become dissatisfied and the organization lacks alignment and misses creating the overall optimal success for the whole team. Similarly EBITDA and ROI have been great for the short-term but not the long-term success. Even tactical measurements like On-Time Delivery have driven wasteful spending on expedited freight, overtime and excess staffing, excess inventory and so on. There are many more examples.
How many of your metrics are customer-centered? How many are measuring the effectiveness of the organization as a whole, rather than just one part? How many are measuring activity but not results and, worse, measuring activity that doesn’t drive the needed results but the unnecessary results?
We’ve helped companies and non-profits measure the right things that lead to accelerated growth.