Categories
Selling

How a Business Broker Can Help You Sell Your Brewery

Starting a business is an opportunity to put your unique touch on a company. Operating a brewery allows you to be creative, and build a loyal following. 

Selling your brewery presents a number of challenges, and a business broker can serve as your trusted guide throughout the process.

Overview of the Brewery Industry 

As of July 2019, the brewery industry in the United States generated annual revenue of $33 billion through almost 9,000 businesses employing more than 89,000 people. Unfortunately, the industry has been hit hard due to the COVID-19 pandemic and lockdown orders. The associate executive director of the California Craft Brewers Association, Leia Bailey, mentions that “Craft brewing is a very low margin business.” With 75% of craft beer consumers reporting that they will wait to return to craft breweries sometime between June to late August, the future of the industry is unclear.

Small brewers face several ongoing challenges:

  • A smaller brewer cannot negotiate supply contracts based on a large amount of volume. These businesses must pay higher prices for materials compared to a large brewer.
  • All brewers are subject to commodity price fluctuations, including the cost paid for hops, grain, and other materials.
  • Small brewers have higher supply costs and must charge consumers higher prices to generate a reasonable profit.
  • Smaller brewers must comply with the same regulatory requirements as large producers. There are a number of regulations that address the health and safety of customers that buy beverages.

Brewers can sell on-premise or distribute off-premise through retail locations, bars, restaurants, and grocery stores. Off-premise sales are on track to improve year over year for 2020, but the increase has not been able to make up for the loss of on-premise sales.

What makes a brewery attractive to a buyer?

The Value Proposition

Successful brewers frequently change their product offerings based on consumer tastes, and they have strong customer relationships. Assess your business and determine which of these traits apply to your business:

Uniqueness in the market

High-performing brewers create attractive products, and many offer a unique retail experience for customers. You can generate a loyal customer following if your products are unique and of high quality. 

Financial track record

Succeeding in the food and beverage industry can be difficult, and changing customer tastes require businesses to adapt. A brewer that can generate consistent profits and cash inflows will stand out from others in the industry.

Recurring revenue streams

Consider this quote from the Harvard Business Review: “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.”

Valuable companies generate repeat business, which leads to a consistent stream of revenue. A brewery that keeps customers coming back is a valuable asset. 

If your brewery has some of the traits explained above, you may decide to explore a business sale. There are several steps you should take to prepare for a possible sale.

Preparing for a Sale

Take action on these issues, so that your business is well positioned for a sale.

Analyze your company operations, and document all routine tasks in a procedures manual. Using a manual reduces confusion about each task, and serves as a training tool for your staff.

Assess your accounting system, and use technology to save time and to produce accurate financial statements. Use software to manage accounting, invoicing, and other tasks.

Your managers produce value, because they make smart decisions to grow sales and profits. If there’s a gap in your organization that is holding you back, find a manager who can fill the position. Delegate more of your management tasks to your team.

Review your contracts with partners, employees, vendors, and customers. Many of these agreements must be changed if you sell your business. Find out where your contracts stand now so that you can make plans for an eventual sale.

Create incentive compensation plans for valuable employees, so they’re motivated to stay after a business sale.

A business sale requires careful thought and planning, and a business broker can be your trusted advisor along the way. 

Work With a Business Broker

Business brokers can help with these issues:

  • Use industry knowledge and marketing efforts to find buyers
  • Understands the seller’s motivations, and the potential obstacles to a sale
  • Find buyers who are ready to provide documents for due diligence
  • Pricing: Use metrics to determine the business price
  • Research: Analyze the sales of similar companies, and industry trends
  • Negotiates the final price on seller’s behalf

An effective business broker can make all the difference in a company sale.

A Success Story

The owners of Cheboygan Brewery recently worked with the business brokers at Raincatcher and finalized their business sale. In this video, the owners explain how the experts at Raincatcher helped them sell their business.

The owners did not have a plan to improve the value of the business until they worked with a business broker. Raincatcher developed a marketing plan that presented Cheboygan Brewery’s value proposition. Once the sale process started, Raincatcher put a system in place to speed up the data collection and due diligence process.

Both owners were happy with the terms of the sale, and noted that Raincatcher’s help was critically important.

Work With a Trusted Advisor

At Raincatcher, our business brokers focus on the seller’s needs, not our own.

Our objective is to educate the seller about their options. If it makes sense to work on the business, we will recommend affiliates that we partner with in order to help the owner maximize the value of their business. The Raincatcher team has worked with thousands of businesses, and we all have the small business entrepreneurial spirit.

Raincatcher works with other professionals, which may include an exit advisor, valuation expert, accountants, and attorneys. Our firm uses industry-leading proprietary valuation resources to value your business.

We will be your trusted advisor throughout the entire sale process, so you can sell your business at an attractive price.

Categories
Buying Selling

The Ultimate Guide to Business Valuations

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how to value a business guide

Your business may be your most valuable asset, and building a successful company can take years of time and effort. If you’re considering selling your business down the road, this comprehensive guide to company valuations can help you make an informed decision – and maximize the price you receive for the sale.

Accounting Rules of the Road

Guide to Business Valuations 2

Many larger businesses use an accounting system that complies with Generally Accepted Accounting Principles (GAAP), and these rules apply to accounting transactions and how financial statements are generated.

While you may not use GAAP accounting now, you may need to implement these accounting standards as your firm grows. At a minimum, implementing the accrual method of accounting is a definitive best practice.

If you follow these rules of the road, a potential buyer can compare your financial results with similar companies and make an assessment about your firm’s value. Also, if the purchaser buys your company, they can take over your system and use the same accounts and policies to operate the business.

Accounting Process

Businesses handle their accounting using the accounting cycle, and the process is repeated each month and year. Generally speaking, accounting requires a firm to collect source documents (receipts, invoices, etc.), post accounting transactions, record adjusting entries, and generate financial statements. You can read about the 8 steps in the accounting cycle here.

Here are the most important accounting concepts you need to know, and how these concepts impact a business valuation:

Guide to Business Valuations 3

Accrual accounting

Accrual accounting requires businesses to post revenue when earned, and expenses when incurred to produce revenue. Matching revenue with expenses provides the financial statement reader with a more accurate picture of profitability, and accrual accounting disregards the timing of cash inflows and outflows.

Assume, for example, that a home builder purchases wood in January for a house that is built and sold in April. The wood material cost is posted as an expense in April, along with the revenue generated from the sale.

Accrual accounting is used when producing financial statements for a business valuation.

Adjusted trial balance

A trial balance is a listing of each account and its current balance, and accrual accounting requires firms to make adjustments before financial statements are produced. The adjustments are posted to match revenue with expenses, so that company profit is correctly stated.

Say, for example, that a restaurant pays $6,000 in insurance premiums on June 30th, and the premiums are paid for six months of coverage. The owner would debit prepaid insurance (an asset account) for $6,000 and credit cash $6,000 for the payment.

The premium payment is an asset, because the restaurant does not have to pay the expense in the future.

Each month, the owner recognizes one month of insurance expense by debiting insurance expense $1,000 and crediting (reducing) prepaid insurance $1,000. This same entry is posted for a total of six months.

These entries post insurance expense to the month that the insurance coverage was in force, and disregards when the cash payment was made.

Normalizing adjustments to financials

Some expenses may not comply with accounting standards, and those expenses will be removed when a potential buyer analyzes your financial statements. These changes are referred to as normalizing adjustments.

This is the most sensitive issue you’ll face as a business seller, but you have to consider the buyer’s point of view.

Assume, for example, that the business pays for 100% of the vehicle cost for a family member who only works part-time in the business. Let’s also assume that a CPA audits the financial statements and determines that 100% of the vehicle cost is not an allowable tax deduction. The CPA may suggest, and situations vary, that 40% of the vehicle cost is a business expense, since the family member only works 2 days per week, which is 40% of a full five-day work week.  The remaining 60% is a personal expense that should not be represented in the accounting records of the business.

The buyer would compute an offer price for the business based on the audited financial statements, which would remove some of the expenses.

Have a CPA review your financial statements for accuracy and completeness. You’re better off making changes to your financial statements before presenting your records to a potential buyer.

Financial statements: Including past years

A business valuation requires trend analysis, including trends related to sales, accounts receivable balances, and the change in profit levels over time. Trend analysis helps a potential buyer see where the company is headed, and any potential red flags that must be addressed.

For this reason and several others, an owner needs to provide financial statements for the past three years, and possibly five years, if accurate records are available. Some buyers also like to see pro forma financial projections at least 12-months out and beyond to see the projected growth trends of the company.

Accounting software can help you post accounting transactions accurately, produce reliable financial statements, and backup your data on the cloud. Consider using software now, so that you can provide accurate financial statements in future years.

Guide to Business Valuations 7

Goodwill: Defined, how goodwill is created

Goodwill is created when a parent company buys a subsidiary, and the parent pays more than the fair market value of the net assets (assets less liabilities). Goodwill is an asset account in the balance sheet, and goodwill amortization reclassifies the asset balance into an expense account over time.

If your business has a goodwill balance, a potential buyer will want more details on the original goodwill transaction, and how the goodwill amount is being amortized over time. The buyer will also dive into the remaining value of goodwill to determine if it is under or over-valued.

Guide to Business Valuations 8

Getting help: Working with a CPA

Consider hiring a CPA to review your accounting transactions when you start your business, and you may hire a full-time accountant as your firm grows and becomes more complex. Using a CPA ensures that your transactions and financial statements comply with GAAP requirements and makes the valuation process much easier.

You could also hire a bookkeeper to help record the day-to-day transactions and reconcile your accounts. There are many bookkeepers who specialize in different accounting software and industries. The bookkeeper can keep your financials up-to-date, and your CPA can review your financials on a quarterly or semi-annual basis to ensure accuracy. In time, this can help save costs and also allows you to accurately track the trends of your business to help make better decisions.

Reviews and Compilations

In some cases, a prospective buyer may want a CPA firm to perform a review or compilation of your financial statements.

As explained here, a compilation is a cursory check of your financial statements, and the CPA firm provides a letter explaining that a compilation was completed.

A review, on the other hand, is more involved than a compilation. In this type of engagement, the CPA firm will make inquiries about your financials, and the accounting principles used to generate your financial statements. The accountant will also perform analytical procedures to understand the relationships between account balances.

In addition to your financial statements, the CPA firm performing a review will require your most recent trial balance, monthly bank reconciliations, and other documentation.

A potential buyer may want to see a compilation or review report on your financial statements.

How to Value a Business: The Valuation Process

Guide to Business Valuations 10

The valuation that a buyer and seller ultimately decide on can involve dozens of factors. A business valuation also involves people, and you need to understand how some individuals can impact your firm’s value. Here’s an overview of the valuation process:

Professionals and Their Roles

There are several experts who are involved in most business sales, and each has some level of impact on a company’s valuation:

Business Broker: A business broker is familiar with the buying and selling process. They are familiar with the market and can provide a valuation to help sell your business. In addition, brokers will help to prescreen buyers, negotiate offers and help close the deal.

Accountant and/or Tax Preparer: As discussed earlier, you may have an accountant work in your business directly, or you may have them simply review your accounting activity and financial statements each month. Most businesses also use an accounting firm to prepare the business tax return. Accounting requires judgment, and the judgments your accountant makes will impact the financial statements, and ultimately the valuation.

Attorney: A business may use one attorney for day-to-day business transactions and contracts, and a second attorney for the business sale documents. If a firm has a legal contingency, an attorney may be required to assign a dollar value to the financial impact of any contingency, and the dollar amount will impact the valuation.

Wealth Planner: A wealth planner will help you to evaluate investment options to save on taxes and maximize the money you receive from the sale of your company. They can also help create an estate plan to protect your investments.

Having an experienced team is very important to get the best price and terms on your business. Each of these professionals has a role to play in a business valuation and sale.

Role of the Business Broker

The professional who may have the most involvement in your business valuation and sale is a business broker. An experienced broker can add tremendous value to a company sale, and he or she may perform these tasks for a seller:

 

Pricing: Your broker can research and explain the metrics used to determine the price of businesses in your industry.

 

Guide to Business Valuations 16Industry research: Your broker can analyze the sales of similar companies and identify sales trends in your industry.

 

Guide to Business Valuations 17Buyers: Perhaps most important, a broker can use a network of contacts to find potential buyers and educate them about your business.

 

Guide to Business Valuations 18Negotiate final price: The broker can also use industry experience and the knowledge gained on past transactions to negotiate the final selling price.

 

Ask industry peers and your network of professional contacts to help you find a business broker.

Factors That Impact Valuation

A business valuation is based on both financial and non-financial data, and a buyer may value some forms of information more than other metrics. A seller, also, may consider some measurements to be more important than others. Finally, keep in mind that the true value of a business involves opinions and judgment.

This section discusses many of the tools used to assess the value of a business, and why buyers and sellers consider this data to be relevant to a sale.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)

Earnings before interest, tax, depreciation and amortization (EBITDA) may be the most common valuation metric, and you’ll hear about companies that are priced as a multiple EBITDA (“3 times EBITDA”, etc.).

The earnings total refers to net income, which is defined as (revenue less expenses), and the earnings balance includes all expenses. EBITDA takes earnings and adds back the expenses incurred for interest, tax, depreciation and amortization. Consider each of the line items individually:

 

Guide to Business Valuations 19

Interest expense: Interest incurred on all loan balances.

 

 

Guide to Business Valuations 20

Tax expense: Federal, state, and possibly local taxes paid on company earnings.

 

 

Guide to Business Valuations 21

Depreciation expense: Assets are resources used in a business, and fixed assets depreciate as they are used up over time. A $20,000 piece of machinery, for example, might be depreciated at a rate of $4,000 year for five years.

 

Guide to Business Valuations 22Amortization expense: Intangible assets, such as a patent or copyright, incur amortization expenses as they are used to produce revenue. Assume, for example, that a company buys a patent for $200,000 and accounting standards dictate that the patent must be amortized over 20 years. The firm will post amortization expense of $10,000 per year.

 

After adding back (removing) these expenses, the EBITDA balance is larger than net income.

Capital expenditures: Weakness of the EBITDA method   

While EBITDA is widely used and understood for valuations, it has an important flaw that business owners need to know. EBITDA does not account for the cost of replacing assets over time, and this cost may be substantial for some businesses.

Here’s an example: Bob owns Lakeside Restaurants, a business that operates three restaurant locations. Each location’s balance sheet lists over $400,000 in assets, including furniture, fixtures, ovens, and refrigerators. Over time, these assets will need to be replaced – and EBITDA does not account for asset replacement.

Assume, for example, that the Downtown location has a number of assets that are near the end for their useful lives, and the store posted a large amount of depreciation expense in the last 12 months.

It’s possible for the Downtown location to produce the same level of revenue, even with older assets. Since EBITDA adds back the depreciation expense, the potential buyer does not consider the aging group of assets.

The balance sheet will report the declining book value (cost less accumulated depreciation) of fixed assets, but EBITDA does not reveal the issue to a buyer. Both net income and EBITDA should be considered for a valuation.

Profit vs. cash flow

Generating a profit does not immediately translate into a higher cash balance. Most small business owners minimize profits to reduce tax burdens. However, when selling a business the opposite is true. A business needs to show the higher operating profit of the business in order to generate higher valuations and terms.

A valuation should also consider the cash inflows and outflows of the business, because no company can operate without a sufficient level of cash.

A potential buyer will pay close attention to the growth in sales, compared to the increase in accounts receivable. If sales are growing at 10%, and the accounts receivable is increasing at a 25% rate, a business will eventually run short on cash. The company is selling more, but the average customer is paying more slowly.

Eventually, a cash-strapped business may have to borrow money to operate, and incur interest expenses. Alternatively, a firm could sell equity and raise funds from an investor.

Profitable companies that can also generate cash inflows quickly, combined with reducing their cash outflows, are the most valuable to a buyer.

Trends in profits and market share

A potential buyer analyzes several years of financials to assess trends in your business, including profit trends. If, for example, a particular product’s sales are increasing, how can the buyer grow sales even more?

Also, a buyer will consider the size of your market, and your company’s position in the market. If you operate in a growing market in which no company has more than a 5% market share, the buyer may see an opportunity to grow sales, which makes your business more valuable.

Potential buyers will also consider the diversity of your product offerings. If your sporting goods store sells equipment for both summer and winter sports, for example, you can manage a slowdown in one particular product line. If, on the other hand, you only sell baseball and golf equipment, you’re more at risk if these sports decline in popularity.

Here are some other factors that impact a valuation:

Guide to Business Valuations 23

Return-on-investment (ROI) and relative risk: Many buyers make a formal estimate of the return earned on the investment, and compare that to a formal calculation of relative risk.

Customer concentration: A number of small businesses start by serving the needs of a few key customers. Over time, however, you need to diversify your customer base to increase your firm’s value to a buyer.

Guide to Business Valuations 25

Reputation: If a seller can demonstrate a strong reputation in the market, brand awareness, and a powerful social media presence, the business is more valuable to a buyer.

Guide to Business Valuations 26

Management team: An experienced management team can make smart decisions to increase profits and grow sales, and retaining talented managers has value to a buyer.

Guide to Business Valuations 27

Location: Being located in an area that is growing or in a prime location can affect your valuation. Being located in a rural area can reduce the number of buyers that are interested in your business, in turn negatively impacting your valuation.

Guide to Business Valuations 28

Growth: Selling your business when things are good and your business is growing is important when valuing a company. If you have a business model that is growing or your business is in a growing industry this can significantly impact the value of your business.

 

All of these factors play a role in the valuation of a business.

Deal Structure

Estimates vary, but it can take six-months or longer to complete a business sale. Your timeline can vary greatly, depending on the size of your firm, how well your records are organized, and the current state of the economy.

Once you start to identify buyers, you need to consider how much information you’ll provide to them, and in what form. The structure of the sale has a big impact on the sale price, and you should work with your business broker on negotiation strategies for the sale.

There is another issue that has a big impact on the valuation of a business, and that is whether the buyer purchases the entire company (an equity purchase), or specific assets of the company. Note these important differences:

Equity Purchase

Assume, for example, that Riverbend Furniture, a manufacturer, buys 100% of Standard Furniture, a competitor. An equity purchase means that Riverbend is buying the entire company based on the Standard’s equity (assets less liabilities). If Standard’s equity is $2 million and Riverbend pays $2.5 million, $500,000 is posted to Goodwill on Riverbend’s books.

If Standard has agreements with customers, vendors, or suppliers, those agreements can be assumed by the buyer. Also, the buyer may be able to avoid a transfer tax on an equity purchase.

Asset Purchase

An asset sale allows a seller to collect on their accounts receivable balance, and the buyer to specify what seller liabilities they want to assume.

If, for example, a seller has $500,000 in cash, $1.5 million in fixed assets and $2 million in receivables, the seller can include the fixed assets in the sale, but exclude the cash and accounts receivable.

As a result, the seller delivers the business free and clear, meaning they take the cash and accounts receivable balances, and pay off the liabilities.

A business valuation will be impacted by the type of purchase the parties choose.

The Payoff

Selling your business may be the culmination of years of work and effort, and the sale may be the most important financial decision you’ve ever make. Put a team of professionals together who know what they are doing and can guide you will help to maximize the sale price of your business.

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In the News Selling

6 Steps to Sell Your Business for Maximum Value

While the sale of every business is unique, the fundamentals are the same, and there are well-established steps you can take to find the right deal. The more prepared you are the more likely you are to maximize profits and your business value.

Take a look at the infographic below for 6 steps to selling your business for maximum value…

Categories
Buying Exit Planning Selling

The Buyer Lens – What Gets Buyers Excited About Your Business

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When we talk to business owners who are ready to sell their business we spend a lot of time reframing their view. There’s a big difference between being an entrepreneur who’s built a business and the same business owner who’s decided to sell their company.  We talk about looking at their business from the buyer’s lens and what’s important to them. About restructuring their business into a “built to sell” company and uncovering their hidden value that attracts buyers who will pay you what your business is worth.

This is an important step for an owner.  Buyers are looking at a specific set of drivers that show the value of the businesses they’re evaluating.  A common set of criteria if you will that separates the average companies from the great ones. Over the years, we’ve done a lot of research and learned through our own exit planning and brokerage teams what’s a nice to have versus an almost universal need of most buyers.

Here’s what we’ve discovered:

  • Financial Performance. Your financial performance is critical and might be a deal breaker right out of the gate if you don’t meet the buyer’s investment criteria. It’s why you need to make sure your financial and accounting records are clean and up-to-date. It’s your company’s best representation of your performance over time. Errors and irregularities are often deal killers right from the start.
  • Customer Satisfaction. We all like satisfied customers, and buyers are no different. But they look at this a little differently.  Strategic buyers hunt for companies that have a high potential for growth, because they know they can scale them.  The key is measuring your customer’s satisfaction with your business in a unique way to showcase companies with a high potential for growth. To do this, we like to get our customer’s net promoter score by capturing their customer’s response to this question, “On a scale of 0 to 10, how likely are you to repurchase from our company and refer our company to your friends and colleagues?”  People who give you a 9 or 10 rating are your promoters, those who give you a 7 or 8 are your passives, and people who give you a 6 or below or your detractors.  You take your percentage of promoters and subtract your detractors percentage to get your score.  Let’s say you get 100 respondents from your confidential survey, and 50 give you a 9 or 10, and 18 give you a 6 or below.  You’d have a net promoter score of 32 (50 minus 18).  Since the average business scores a 15, and world-class brands score a 50+, that’s pretty good and definitely better than average.
  • Growth Potential. Buyers are looking for companies that have the potential for growth and  having the right product and service mix in the right markets.  It’s also, putting on the buyer’s lens, an indicator of how rapidly they could grow your business by bringing in their working capital and size to scale.
  • Recurring Revenue Potential. Some buyers are willing to pay two to three times revenue for companies that bring in a large part of their revenue through subscription models, which is significant.  When you compare that to most valuations multiplying your net profits by a multiple to arrive at your company’s worth (I’m oversimplifying, but you get the idea).  We’ve written a blog that goes over the nine subscription models that is worth a read, especially when you see the potential for your company and the value created.
  • Monopoly Control. Most of us have played Monopoly or at some point heard of it.  It’s a simple board game where you build houses and convert them to hotels, with the goal of making all or most of the money from your fellow game players.  You want to corner the market and create a monopoly, hence the name.  Buyers are wanting to see that your company and your products and services – your brand – is defendable against your competition.  And they want to understand your unique value proposition that resonates with your customers.  That separates you and makes your customers raving fans who want to not only buy more of what you sell, but they want to tell their friends and colleagues, too. (see how these intertwine?)
  • Owner Freedom. We’ve spent a lot of time on owner-dependency and its impact on your company’s value.  Businesses that are dependent on their owners, even synonymous with them, are essentially worthless to buyers.  Buyers know to be successful with an owner-dependent business they’ll need the owner to come work for the buyer for upwards of five years for the buyer.  This structure is an earn out, and a percentage of the sales price for the business is held back and earned by the owner when they meet agreed-to growth targets over time.  Reducing your business’s dependence on you, the owner, will have an immediate impact on the value of your company, and it will allow you to get all or most of the purchase price up front, which is significant.
  • Business Dependency. If your business is dependent on any one (or a few) key customers, suppliers, or employees, you’ll raise an immediate red flag with buyers. There’s risk in buying your company.  What if you get most of your products or inventory from a key supplier, and the supplier raises prices or takes a lot longer to deliver?  How about if they walk away from you?  Is there a key customer who brings in 40% of your revenue and decides after the sale of your business to take their business to a competitor?  Will the buyer have to fire a lot of employees to get the operations in line with the reduced sales? And what if a key employee leaves the company upon learning that the business has been sold?  Is there a key employee who sells a majority of your products and services? These are all risks that buyers think about, and they will likely walk away from deals when they see these issues, or they’ll significantly lower their asking price to compensate for the risk.
  • Positive Cash Flow Engines. We say this a lot, and you’ve heard it before as an entrepreneur: “Cash is king.” Companies that bring in a lot more cash for every  sale they make are very valuable and sought after by strategic and financial buyers. These businesses can really scale and need a lot less working capital to run, since they are flush with cash.  Remember, you want cash coming in much faster than cash going out.  When you’ve created a positive cash flow engine for your company, you’ll increase the value of your company, and you’ll attract buyers who hunt for these situations.

As mentioned, there are several important drivers that a buyer looks for when purchasing a business. If you would like to learn more you can take our 13-minute assessment, which gives you a value score on a 1 to 100 scale. Businesses that score an 80 or above have been proven to sell for 71% more than businesses below that score. We will review the assessment results with you and develop an action plan around the eight key value drivers, helping you prepare to sell your business.

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Categories
Selling

Scaling Your Business for Maximum Growth and Profitability

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A good friend of mine who I’ve known for many years talked to me about building his finance and accounting staffing agency and why he was so successful.  He said, “Steve, I’ve had many opportunities to expand the type of recruiting my business does.  Our customers have asked us to add IT, human resources, sales and more.  I always thanked them for the opportunity but never took them up on their offer.  There’s power in focusing on the “one thing” – when the economy goes down, if my competition is stretched too thin I get their business.  When it’s going great, I do more and more finance and accounting recruiting because all my customers know exactly what I do, nothing more, nothing less.”

He sold his business to a competitor for $8 million, and when the 2008 mortgage meltdown occurred, he bought it back for $2 million (that is not a typo).  Since he kept the rights to his company’s name when he sold it, he hung his shingle with a very familiar and trusted brand, and he’s since rebuilt the company to twice what he originally sold it for.

That’s a success story.

So, let’s translate his success to scaling your business.

First, you need to look at your products and services from a profitability standpoint.  I know you like selling Widget A, but you make a lot more money selling Widget B.  This is an important first step in the process, since you want to scale with the right mix of products and/or services.

Second, there’s power in “less is more.” Simple businesses offer less products and services that they sell to a lot of customers, versus a large number of products and services sold to a few customers.  Remember my friend’s statement, “Focus on the one thing?”  Buyers want to buy businesses that they can easily wrap their heads around, and they know that if you sell too much, you’re stretching your working capital and your team.  It causes problems and is hard to sustain, let alone scale.

Once you’ve got a good idea of profitable product and service you’d like to scale your business with, you’re not done.  You need to think about each product and service this way:

  • Teachable: Is the design, sale and delivery of the product or service teachable to your employees?  Some are very complex and need a lot of knowledge and experience, where others you can teach low-level employees how to build, design, sell and deliver easily.
  • Repeatable: Is what you’re selling repeatable, meaning that it requires little to no customization to sell? This is really important, because if you customize your solutions to every customer’s need, it will be really hard to scale.  And it will need a lot of experts to manage the product and service suite.
  • Relevant: And finally, does the product and/or service resonate with your customers? Does it meet their needs and wants? Do they want to repurchase from you and refer what you’re selling to their friends, family and colleagues?  This is critical – it doesn’t matter if what you’d like to scale with meets all the other criteria.  If your customers don’t care, then you need to reconsider things.

When you’ve come up with the products and/or services you’re going to scale your business with, you need to document all the processes that interact with your products and services.  That way, you can teach your employees how to answer customer calls, order materials, design/build the product, sell the product or service, delivery the product or service, ship the product, handle customer calls, do the accounting, etc., etc.

Good luck scaling your business – it’s fun, innovative and exciting. And it of course helps you maximize your downstream profits and the value of your company.

 

 

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