What would you pay for your company ?

Did you ever look at your company from a buyer’s perspective? Would your business be attractive to a buyer? At what price?

Even if you have no plans to sell your business, these questions are relevant. If you begin to do the things that will maximize the value and attractiveness of your business to an outside buyer in the future, you will also improve your results today .

I recently helped a client with the purchase of a local manufacturing company. Had the seller considered these questions three years ago and taken action, he would have been able to easily add several million dollars to the sales price. He also would have made the transaction easier to close.

So you’re not planning on selling your business in three years, why worry about it now?

When you look at what makes your business valuable and attractive to a buyer, financial results such as cash flow, EBITA, revenue growth and consistency, and market share are some of the most obvious components of value. These are metrics that command the constant attention of most CEOs even if no sale is anticipated.

Non-Financial factors:
There are many non-financial factors that contribute to the valuation and attractiveness of a business. The following is a list of several common non-financial business issues that may reduce the value of a business and make it less attractive to prospective buyers. Improvements in these areas will add value when you go to sell and pay dividends as long as you own the business.

Dependency on you - if your presence in the business is critical to its continued health and success, you have a job and not a business. Buyers will see this as a big negative when considering the value of a company.

Dependency on one or a few customers – in most industries, if you have a client that accounts for more than 25% of annual revenues, future revenues are riskier than they would be by a more balanced customer base.

Insufficient systems, procedures and performance indicators – how well has the business been systematized. Could someone from outside the industry transition into leadership easily? If the business has adequately been systematized, the core processes of the business have been documented and possibly automated. The impact of loosing one or two key people has been reduced because the knowledge is in the business, not just in a few key employees.

Weak or inaccurate financial reporting – nothing slows down a buyer’s due diligence like poor or incomplete financial reporting. It raises immediate red flags with buyers, bankers and investors.

Action steps:
Take a break from the day to day challenges of running your company and put yourself in the shoes of a buyer from outside your industry. Make a list of the challenges you would face buying the business in its current condition. Turn that list into a roadmap for improving the current and future value of your company.

The January 2007 issue of Inc. Magazine has a business valuation guide that looks at 147 different industries. For each industry it notes the number of businesses sold in the survey period, the median annual revenue and sales price, and the industries three best valuation multiples.

Example:
For Computer Related Services, the best valuation indicator is 5.41 x Discretionary earnings (Net income + taxes + interest expense + owners compensation + non-cash charges), the second best valuation method is 1.34 x net sales. Determine your companies approximate value by averaging the 3 indictors provided for your industry. These indicators are a good starting point and the ultimate value will depend on many factors including the non-financial factors listed above.


“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand."
--- Sun Tzu

Did you grow your unpaid sales force in 2008?

Savvy business people know how important networking is to building business. When done properly, it can be one of your most important marketing activities and a key component of a referral based business. Building a network of people who refer business to you requires an effective networking strategy and skills that typically need to be developed.

Are you a good networker?

The following are some of the most interesting truths and delusions about networking that came from Ivan Misner’s new book “Truth or Delusion?”

If you provide good customer service, people will refer business to you. DELUSION: According to Misner, good customer service is a prerequisite. It’s a minimum expectation. To keep the referrals coming you must provide great, outstanding and memorable customer service. People refer you because they expect you to do a great job that enhances their relationship with the person they are referring.

The person benefiting the most in the referral process is the person receiving the referral. DELUSION – SOMETIMES: According to Misner, it’s true the person receiving the referral has an opportunity to make the sale, but in many cases, the true winner is the person who provided the referral. The referral source walks away with enhanced credibility and a stronger relationship with both the vendor and the customer.

For networking success, when describing your products or services, you should try to tell people about everything you do. DELUSION: Misner says “don’t shotgun your message – sharpshoot it”. When you tell a referral partner a laundry list of services or products you offer, you are placing a burden on them to remember all the things you do and match them with people they know who might need one of those offers. If you stay focused on one specific product or service when you initially engage a referral partner, it will be much easier for them to learn and remember the specific value you offer and to make a referral to you. It may seem counter intuitive but according to Misner, casting a wider net will result in less referrals.

It’s not what you know, but who you know. DELUSION: According to Misner it’s not what you know or who you know – it’s how well you know them that really counts. It takes time to develop trust and all things being equal, people prefer to do business with someone they know and trust. Referral networking is more about farming than about hunting.

Customers generated through referrals have a longer “shelf life”. TRUTH: I thought I’d close with at least one statement that was intuitive. According to Misner, "Studies have shown that customers who come to you by referral do remain customers longer, all else being equal."


If you haven’t dedicated some of your marketing energy into building and sustaining a network of referral partners, you should consider making it a goal for the New Year. An unpaid sales force in the form of a strong referral network may be the ticket to reaching your business goals in 2009.

“In word-of-mouth or referral marketing, your integrity and your reputation are on the line all the time. You can't hide behind an ad.”
-- Ivan Misner, PH.D.