Surprisingly, not everyone wants to increase the value of their business. Oh, most everyone would like someone to pay them a lot of money for their business, but not everyone really wants to do what it takes to make their business marketable and really worth a lot of money. Otherwise, most businesses would be worth a lot of money. This is not the case.

After reviewing the condition of over 2,500 businesses in the last 12 years, I can state categorically that most businesses are not worth much money. Many are flat un-sellable, by the owner, by Private Equities or by anyone else.

I’ve seen the great, the good, the bad and the ugly. I’ve seen the deals that closed and the ones that coulda, shoulda, woulda happened…if only…

I’ve talked to over 20,000 business buyers, so I’ve got a pretty fair idea what they want to buy and how much they’ll pay and under what conditions they’ll pay a premium.

Every week I meet with people who have worked hard for years in a business of their own, all the while assuming they were building something of value. It is terribly painful for them when they learn that their business is either not worth much or not sellable at all. It’s not much fun being the bearer of that bad news, either.  I used to think just about anything could be sold, but over the years as I have grown more “seasoned,” I have learned that some things are not sellable because they are simply not worth buying.

I hope this is not your situation and that you own a thriving business. In any event, there are several excellent reasons for you to grow your company and make it more sellable and more valuable every year.

• Grow or die is a universal truth.
   
• Everyone leaves their business sometime, you just don’t always know when or how you’ll leave, so it makes sense to run your company so it can be sold at any time.
   
• Liquidity is a good thing.
   
• If you have a choice, living well beats the alternative.
   
• Entrepreneurs need to take care of their own future and that of their families. There is no “big brother” to take care of a business owner.
   
• For good stewards, controlling the flow of an ever increasing amount of money makes it possible to positively impact the lives of others. The greatest philanthropists in the world got that way through building wealth in business.
   
• The ability to operate a business is a gift. Denial of the gift by refusing to use it for the greatest benefit is tragic. It’s like a gifted athlete or musician or artist abandoning their talent and years of training and “coasting” through the final years of their career.
   
• Running a business you know is healthy and growing in value is simply more fun and satisfying than limping along trying to survive or just trying to hold onto what you have.

If you agree that it’s better to be succeeding in business than coasting or slipping, then why aren’t more business owners doing better? I’ll pass on discussing the folks that have gotten lazy, comfortable, afraid, or lost the fire, and focus on improvement for those who have a passion to be the best they can be. 

Let’s examine a systematic approach to making your business worth three times its current value…fast.

What do Business Buyers Want to Buy?

We’ll begin by considering what business buyers want to buy and what they are willing to pay top dollar for. It’s not your tangible assets. It’s not your people. It’s not “you” they want to buy. It’s not your cool ideas. It’s not your patents. It’s not your past glories.

Business buyers want to purchase a system for making money that they perceive has a high probability of making an ever increasing amount of money for them in the future.

Business buyers want purchase an organized way to make money that they can assess will yield them a return on their investment of time and money and energy that is more attractive to them than making an alternative investment.

That’s it. If you miss this point in designing your business, then trying to sell it will be like trying to sell a car with square wheels. It’s just going to sit there.

What is Value?

Value is one of those words that has become so over used its meaning has become fuzzy.

“Value” is the ratio of utility to price.
 
In other words, value is what the buyer gets in return for what the buyer pays.

More accurately, value is the buyer’s assessment of what he got for what he paid.

Buyers of anything, including businesses, ideally want what they assess to be the best value, but at a minimum, they want what they assess to be a fair value. Therefore, you can optimize the price you get by optimizing the objective and subjective utility or worth of what you deliver. This applies to selling all products and services and it applies to selling your business, which is your ultimate “product.”

Value is an Assessment made by the Buyer.

Value is not “real.” It is an assessment on the part of the buyer. Your assessment of the value of what you have to sell is interesting, but ultimately irrelevant if the market does not agree. Buyers vote with their money.

Some aspects of a business are objectively verifiable as to worth, such as the liquidation value of your accounts receivable. There is no profit in this kind of sale. The real profit is in “the rest of the story.”

I hate to use the Starbucks example because it is so overused, but it is very relevant to this discussion. The cost of goods sold in a cup of Starbucks coffee is not much different than it is for a cup of nasty brew at Mabel’s Good Eats Diner. Mabel gets a buck for her bottomless cup of mud. Starbucks gets four bucks for a small frapalottawhatever.

How come? Sure, some of the price differential is attributable to better coffee beans, but an expert coffee bean buyer and roaster will tell you the quality differential is not that great and that there are many sources for better coffee than Starbucks. Therefore, it has to be the rest of the Starbucks story.

Starbucks customers are of the view that they are getting a lot of utility relative to the price they pay. They are finding more worth in sipping their Joe at Starbucks than they do at Mabel’s greasy counter. Therefore, they value Starbucks coffee highly. Mabel would say too highly, but then Starbucks is raking in while Mabel is struggling. Maybe Starbucks knows something Mabel does not.

7 Steps to Building the Value of your Company.

Here’s how it works.

• Step One – Confirm Your Inside Reality. The inside reality of your business is your company’s ability to deliver on its promises. It’s your ability to make or provide a product that your customers assess is worth substantially more than the price you charge. Continuing the Starbucks analogy, if Starbucks coffee was bad, or they always ran out, or the stores were never open, or the facilities were filthy or the staff was insufferable, Starbucks would not have much of a future and its products would not command a premium price.
  
  Make sure your business is able to deliver the goods and produce satisfied customers. If not, there is no need to read further. If the inside reality of a business is not sound, it is either un-sellable or worth very little to a business buyer…perhaps less than liquidation value.
  
  On the other hand, most business owners think just because they can produce a quality product or service that their company will command a high price. That’s not so. Ability to execute well usually makes the company sellable, but the ability to execute is just the minimum standard for attracting interest in the marketplace and by itself is not a significant value enhancer.

You have to sell something worth buying,
and you have to have a story worth telling, but that is not enough.

• Step Two – Find out What Your Customers and Prospects Want. If you want to grow, you have to sell more stuff. There are two choices. You can try to sell more of whatever stuff you want to sell or you can sell more of the stuff prospects want to buy. One approach is more difficult than the other. How do you find out what people want to buy?

Ask them.

• Step Three – Give it To Them in a Compelling Way. You have to build a bridge from your internal reality to the outside perception. Just because you make an excellent cup of coffee does not mean customers will find it compelling to buy coffee from you. Just because your execution is flawless does not mean enough people will learn about your business to drive significant growth. If your offer is not compelling, people will not pay enough for you to earn gross profit margins that will enhance the marketability and worth of your company. Making a compelling offer is where marketing comes in. What’s one key to discovering what people think is compelling?

Ask them.

• Step Four – Sell at an Attractive Gross Profit Margin. Business buyers want to see gross margins in excess of 40%.
  
  50% margins or more are better. Way better.
  
  I imagine there are exceptions to this, but after analyzing several thousand businesses I have not seen the exception. Nor have I found a buyer who loves low margin businesses and says,

“Please, Mike, sell me a business that has a 25% gross profit margin. I want to struggle with cash flow, resent each sale I make, give lousy service, deliver marginal quality and be unable to drive profitable growth.”

In 20,000 conversations, not one buyer has said that to me. Go figure.

If you are not able to command a 40-50% gross profit margin, the marketability and selling price of your business will suffer. A lot.

If you are not able to sustain at least a 40-50% gross margin as a privately held company, one or more of the following is to blame:

• Your internal reality is weak. Maybe the quality of your offering is poor, or maybe it is costing you too much to produce it due to inefficiency.
   
• You do not have enough sales to utilize your capacity at high levels.
   
• You are not offering what people want.
   
• You are not offering it in a compelling way.
   
• Your marketing is not attracting enough of the right kind of new business to you so you can be selective about your customers.
   
• You are simply pricing below what the market is willing to pay. Pricing fairly, but boldly, requires courage, positive expectancy and a willingness to do what it takes to deliver full value. One of my favorite quotes is found in Napoleon Hill’s classic book, Think and Grow Rich:

“I bargained with Life for a penny,
And Life would pay no more,
However I begged at evening,
When I counted my scanty store.

For Life is a just employer,
He gives you what you ask,
But once you’ve set the wages,
Why, you must bear the task.

I worked for a menial’s hire,
Only to learn dismayed,
That any wage I asked of Life,
Life would have gladly paid.”

• Step Five – Build Your Marketing Program. Remember what business buyers want to buy?

Business buyers want to purchase a system for making money that they perceive has a high probability of making an ever increasing amount of money for them in the future.

This is what a powerful marketing program does. Buyers will believe your growth projections when they can see that your company has a good internal reality (something good to talk about), you know how to tell your story well and are saying it often to people who want to hear it. Good buyers want to see that your marketing program is strong, positive and pervasive enough that it has historically delivered annual increases in profitability. Buyers want to feel confident your company’s marketing program will bring in a steady stream of profitable new business in a predictable and controllable manner.

Projections are always dependent on the believability of the impact of a company’s marketing program. The reason most projections are disregarded is because the underlying marketing premise is flawed. It has not been tracked, measured and proven by past performance. To increase the value of your company, you must, you must, you must implement a systematic marketing program and prove by demonstrated results that it can attract new customers for you and for a new owner.

Ungrounded projections are “BS”.

“BS” does not sell companies.

A proven marketing program is the single biggest value enhancer in selling your company.

• Step Six – Make Your Business Transferable. Remember what business buyers want to buy?

Business buyers want to purchase a system for making money that they perceive has a high probability of making an ever increasing amount of money for them in the future.

Buyers have to make the assessment that your business will work for them. The key to this is systematization, and the most important thing to systematize is your marketing and sales program. Your selling system can not be reliant on you or on a handful of sales superstars or the lack of transferability will kill the sale of your company or severely reduce its market price.

• Step Seven – Understand the Numbers. Here’s where the discussion can get heated. Everyone has an opinion on what a business should sell for. I’m going to use some general examples. Are there exceptions? Sure. Do companies sell for more or less than my examples? Yup. What I can confidently say, though, after over a dozen years of doing deals, is that my examples are well grounded in experience and they are reasonable for your planning purposes. You have to play the probabilities. If you ultimately beat the odds, that’s great, but basing your exit strategy on landing a windfall price for your business is like planning your retirement based on winning the lottery.

So, remember what business buyers want to buy?

Business buyers want to purchase a system for making money that they perceive has a high probability of making an ever increasing amount of money for them in the future.

Business buyers want purchase an organized way to make money that they can assess will yield them a return on their investment (ROI) of time and money and energy that is more attractive to them than making an alternative investment.

In other words, business buyers want to buy a well grounded expectation of future cash flow and an attractive ROI. Assuming your inside reality is strong enough to deserve and support growth, here’s how you can triple the value of your business in 24 months or less.

Implement a systematic marketing program that drives an increasing level of profitable new business. Track it, document the results, and use it to ground your future sales projections.

Let’s say your business is like many we see. It currently has a net operating profit of $500,000 per year, and it’s been hovering around that level for a while. A multiple of 3 times earnings is a reasonable conservative valuation for an ordinary company; one that’s just sort of going along, doing what it does. It has an acceptable internal reality, but relatively flat earnings. A price of $1,500,000 would yield a buyer an estimated 33% ROI based on historic profits. Historic profitability is the best earnings number you can represent, given this example. Since the new owner will have to figure out how to grow the business and invest time, money and energy in the process, that 33% ROI is a fair reflection of the general market risk assessment.

(As an aside, I have lost track of how many times over the years I have heard a business owner say, “My business is worth a premium, because if a new owner came in and did some marketing they would make a lot of money.” Be advised, buyers have heard that song, and they will not hum along.)

However, if you implement a properly designed marketing program, you can drive your profitability to $1,000,000 per year within 24 months. That same marketing program can be used to support a believable projection of increasing profitability for at least another 24 months, so that prospective buyers for your business will be able to make a well grounded assessment of an attractive future and a desirable ROI.

If your new marketing program has delivered profit increases from the base of $500,000 to $750,000 to $1,000,000 over a two year period and it can reasonably be shown that the marketing system can drive additional increases in profitability of even $250,000 in each of the next two years, conservative pricing expectations should be in the $6,000,000 range. You will get a double boost. Not only will your earnings base be higher, but the risk factor will be lowered and the right buyer will pay a higher multiple on earnings.

Let’s count up the money.

$250,000 in additional profits in the first year, plus $500,000 in additional profits in the second year, plus $375,000 in additional profits in the 6 months it takes to sell the company during the third year, plus $4,500,000 in increased enterprise value.

That’s an extra $5,625,000 for two years of smart work. What could you do with the extra money?

Smart Marketing is the Key to Tripling the Value of your Company in 24 Months.

We Can Help.

After 12 years and 20,000 conversations, we know what business buyers want to buy and what they will pay for.

We know how to design and implement marketing and business development systems that can increase your sales, enhance your profitability and build your company wisely.

After all, if you’re going to grow your business, you might as well do it in a way that can dramatically boost its value and make it attractive to multiple qualified buyers at top dollar.

Bigger by itself is not necessarily better. Bigger and better…that’s the ticket.

If you would like to learn more about how to triple the value of your company within 24 months, you can:

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