All business owners want to build and preserve the value of their businesses. For many business owners, it’s the thing they were born to do. Most successful business owners, especially in the small-to-medium-sized business space, have a head-start in building business value. After all, a successful business inherently has value, or else it wouldn’t be considered successful. But what should business owners shoot for in building and preserving business value, and is there a ceiling to their success?
What Business Owners Should Shoot For
The point of building and preserving business value is to assure that business owners exit their businesses with financial independence. Once owners determine how much money they will need to consider themselves financially independent—which means never having to work again unless they choose to—they can then move on to determining the difference between what they have now and what they will need to achieve financial independence. For most business owners, the only way for them to bridge the gap between what they have and what they need is to increase the value of their businesses.
It’s important for business owners to note that there is no hard number for financial independence. Financial independence for one owner might be $5 million, whereas $5 million wouldn’t last another owner even five years. The key is to consult appropriate advisors to determine what their personal financial independence number is, then go from there.
So, which tangible actions can owners take to begin building and protecting business value?
Shattering Ceilings on Business Growth
When owners learn that they must make their businesses even more valuable than they already are, it’s often frustrating for them. It’s like having someone tell them “do better” without any guidance on what that means or how to do it. We aren’t here to simply point out that business owners would serve themselves better to grow their business value. We’re here to explain how they can do that tangibly.
To build and preserve the value of their businesses, owners must install Value Drivers. Value Drivers are aspects of a business that all private equity firms look for and pay handsomely for when purchasing a business. Even if business owners don’t intend to sell to a private equity group, they must install Value Drivers to build and protect business value. Value Drivers are the common language among all kinds of buyers, whether they’re large private equity firms or key employees who have worked in the company for years and are interested in purchasing ownership.
There are 12 Value Drivers that business owners must install if they want to properly build and preserve business value:
- Next-level management that stays after the owner leaves.
- Operating systems that improve cash-flow sustainability.
- A solid, diversified customer base.
- Recurring, sustainable revenue that’s resistant to commoditization.
- Good and improving cash flow.
- Competitive advantage.
- A documented and proven growth strategy.
- Financial foresight and controls.
- Differentiated products or services.
- Significant, defensible market share.
- Strong operating margins.
How on Earth Can Business Owners Install All These Value Drivers?
If you’re reading this and thinking, “That’s way too much for a business owner to tackle alone,” you’re right. Yet, it’s important for business owners to at least begin implementing these Value Drivers long before they intend to exit. It takes time to install many of these Value Drivers and get them humming. The best way for owners to begin examining which Value Drivers they need to grow the value of their businesses and the best way to do it is to consult an Exit Planning Advisor.
Exit Planning Advisors play important roles in helping business owners navigate which Value Drivers are key for their businesses. One of the most valuable things Exit Planning Advisors do for owners is putting them in contact with qualified advisors who can show owners the steps they must take for each Value Driver. Exit Planning Advisors work with their Advisor Teams to address each Value Driver appropriately and efficiently.
Another valuable service Exit Planning Advisors provide business owners is in addressing the most important Value Driver: having next-level management in place that stays after the owner leaves. For most business owners, this most important Value Driver is hardest to execute for several reasons. First, many business owners serve as the go-to person for big decisions. They are usually comfortable with being the hub of the company, and some even relish it. It can be easy for business owners to resist giving up control of decision-making responsibilities. Exit Planning Advisors can provide tangible information about why next-level management is important for the business’ continued growth.
Second, Exit Planning Advisors work with business owners to find next-level management. Next-level management usually comes from outside the organization and from companies larger than the owner’s. Approaching and obtaining this kind of management requires the right kind of funding and incentive packages. Exit Planning Advisors initiate the search and work with other advisors to create incentives to bring the best possible management onboard. This builds business value and allows business owners to relinquish tasks that they don’t want to do to next-level management.
Finally, Exit Planning Advisors work with owners to retain any current managers they want to keep. Some business owners worry that installing next-level management means they must fire their current managers. This isn’t necessarily the case. Strong managers who aren’t quite next-level managers often play an important role in business’ success. Exit Planning Advisors and their Advisor Teams help transition these kinds of managers to more appropriate roles, which keeps company morale high, prevents internal mutinies, and still works toward achieving the business owner’s exit goals.
Building and protecting business value is the most direct way that business owners can achieve financial independence for after they exit. Building and protecting business value requires them to install Value Drivers. Value Drivers take both time and expertise to install, and so business owners are best served turning to an Exit Planning Advisor to begin the process. Exit Planning Advisors have proven strategies to build Advisor Teams that can address business owners’ growth needs. They also have the tools required to create and implement tangible plans to install Value Drivers for business owners. Building business value is something all business owners strive for, whether they want to exit their businesses soon or at death. With the right advisors and ideas on their side, building and protecting business value is achievable for business owners.