Making the Business More Valuable, Part 2
By Bruce Juhola / Rimrock Parnters
In last month’s column, we discussed the “Value Drivers”, those items that drive up the value of a business. We focused on the primary Value Driver, a stable, motivated management team. In this column, we will look at several more Value Drivers that the business owner will need to address to maximize the value of his/her business at the Exit.
Business or Operating Systems
In addition to building a solid management team, owners must also build reliable operating systems that can sustain the growth of the business. The second Value Driver is the development and documentation of business systems that generate recurring revenue from an established and growing customer base. If you leave shortly after the sale of your company, what remains? If the answer is capable management and highly efficient business systems, you will be able to leave your business in style.
Business systems include the computerized and manual procedures used in the business to generate its revenue and control expenses, i.e., generate cash flow, as well as the methods used to track how customers are identified and how products or services are delivered. The establishment and documentation of standard business procedures and systems demonstrate to a buyer that the business can be maintained profitably after the sale.
Put yourself in the shoes of the would-be buyer for a moment. As a buyer, you want assurance that the business will continue to move forward under new ownership, and that the operations will not break down if (and when) the former owner leaves. This assurance can best be obtained when there are documented systems in place that will enable the buyer to repeat the actions of the former owner to generate income and grow the business.
What are the critical business systems that can enhance business value? The business should have systems that will cover the following procedures:
- Personnel recruitment, training and retention
- Human resource management (an employee manual)
- New customer identification, solicitation, and acquisition
- Product or service development and improvement
- Inventory and fixed asset control
- Product or service quality control
- Customer, vendor and employee communication
- Selection and maintenance of vendor relationships
- Business performance reports for management
What are the elements of a successful Business system? Michael E. Gerber has written extensively about systems in his book, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It. He suggests that there are nine elements of a successful system. Theoretically, that may be true but for our purposes, we can limit our discussion to four prime characteristics: The system must have a clear purpose. What is the desired result of the system?
The system must incorporate accountability. Who is responsible for executing each step of the system, and at what time in order for the system to accomplish its goal? How will you objectively measure the success of the system?
The system must be documented. If the system isn't written down, it may or may not exist in the mind of employees and could be an endless variety of interpretations. If a system isn’t described in writing, employees can’t be expected to follow it and a potential buyer can’t know that it truly exists.
The system must be repeatable. If your systems only work if you are there to execute them, they do not meet the standard of “repeatable”. Your systems may be dependent on a particular position but they must be independent of any particular person to be easily repeatable.
How does the busy owner create a Business system? There are a number of books (including the Michael Gerber book referred to above) and experienced business consultants that can help you to design successful systems. However, as you read these books and retain these consultants, remember this goal: identify only those Business systems that will increase the value of your business. Appropriate systems and procedures will vary depending on the nature of the business.
In future columns, we will examine in detail the other Value Drivers: Customer Base, Facilities and Equipment, Business Strategy and Financial Controls
This article appeared in Cascade Business News, December 5, 2007.
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