The following is an excerpt from SCORE Business TV’s episode on Business Valuation.
“Value means a lot of different things to a lot of different people, but in SCORE, our Exit Strategy Team focuses on trying to figure out where we’re going to fix the leaks that are in the business. The value leaks that occur within a business, and in effect, how can we look at that business, so we can retain value?” says Peter Gruits, SCORE mentor and co-founder of SCORE’s Exit Strategy team. Peter and I created the Exit Strategy initiative to help businesses think about and improve their business value prior to exiting. This helps the entrepreneur business owner achieve maximum value when they decide to exit.
Gruits continues, “There are numerous places to look for value leaks. Some common areas are having too much of your business concentrated in a few customers; having customers that aren’t really profitable; and spending too much time with unprofitable customers. Another area for a potential value leak is within your staff. If you are keeping employees that you know you should get rid of, your good employees really are being compromised as a result of those bad employees. Inventory mismanagement is another wide-open area for leaks. Your business may be storing inventory that’s obsolete. If you’re paying for space to store it, that’s a leak. If you have spare parts inventory for equipment that you don’t have anymore, that’s also a value leak. As the owner, you may be doing too many of the things yourself, and you’re not really holding yourself to the performance standards of the business. That’s a leak. SCORE Mentors are available to help you identify and fix these leaks.”
Eric Robinson, CPA and partner in Robinson Gruters, a Venice accounting firm, affirms, “You could have two companies with the same revenue, but one has more leakage than the other, which will affect its profitability. It could affect the return on assets; it could affect the discount rate. All of these things affect the eventual sale or purchase price of the business.”
Robinson continues, “I think that SCORE can actually increase the value of a business by requiring you to plan, by making sure that you do your homework, and by asking yourself what is driving the value of your firm?” And then, you can make sure that you gear your actions towards that valuation and that metric to increase the overall value of your company. SCORE’s Exit Strategy process forces you to focus on the key components driving the value of your business. Many entrepreneurs tend to be disjointed and unorganized. Once you develop an Exit Strategy, you will hone-in on what needs to be done to achieve your goals and what the buyer is going to be looking at. Although you’re the entrepreneur, you have to look at the business through the eyes of the buyer, and sometimes they’re not looking at it the same way.”
The 85/15 Rule
A business owner can do two things to increase the value of their company: (1) increase profitable sales, and (2) decrease costs. I believe that the entrepreneur/business owner should spend 85% of their time on increasing sales and scaling the business and 15% of their time on efficiencies, such as identifying and plugging the value leaks in the business.
Where to look for the leaks?
“Everywhere,” is the short answer. In addition to the leaks mentioned above, there are other obvious places to look for value leaks.
Human Resources – Do you need all the employees that you have on staff full time, year-round? In most businesses, once you hire someone, they become a fixture in your business. Nearly every employer reading this column who has at least ten full time employees has an employee they have considered terminating. Employers notoriously hire fast and fire slow, when exactly the opposite is the right sequence.
Non-employee costs – Look at all of your costs, direct and indirect, from highest to lowest. Sort them and ask yourself what you can do to impact each number: cut costs, change vendors, renegotiate prices, drop unprofitable products or services. Then, “Just Do It!”
Software efficiencies – Is there software for your business that will help you streamline your business operations? If you can calculate a payback within one year, then it’s a no brainer.
Professional services – Are you paying too much in banking fees, insurance premiums, accounting services or legal fees? Now may be a good time to entertain some professional changes.
A dollar saved is a dollar earned – Virtually every dollar you save in costs will fall to your bottom line. You could call a plumber, but what you really need is a SCORE mentor who can help you identify and fix these value leaks. Now, that’s a great feeling plugging those leaks, isn’t it?
Dennis Zink is a volunteer, certified mentor and chapter chairman of SCORE Manasota. He is the creator and host of “Been There, Done That! with Dennis Zink,” a nationally syndicated business podcast series and SCORE Business TV (centreofinfluence.org). He facilitates CEO roundtables for the Manatee and Venice chambers of commerce, created a MeetUp group, Success Strategies for Business Owners, and is a business consultant. Email him at [email protected]
Note: This post was first seen at Herald Tribune.