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Maximize Business Value Focus Sheet, Part 2



In this series we’ve already talked about budgeting, succession planning, and building your Green Box, and Growth. Today, we wrap up our 2 part close to that series - where I’m going to give you 22 things (11 last week, and 11 this week) for you to do in 2022 to maximize your business value!


#12 - Sharpen The Saw


Make a commitment to sharpening your saw this year. Every lumberjack knows that a sharp saw makes the job of cutting down a tree much easier! Abraham Lincoln famously said “Give me six hours to chop down a tree and I will spend the first four sharpening the ax.”


What great advice for business owners. Seek out seminars, webinars, and learning opportunities - and then take those lessons and apply them to your business!


#13 - Use A Business Operating System


Every business has an “operating system” - whether you know it or not. Many are home grown and have evolved over time. But it doesn’t have to be that way.


There is an abundance of great business operating systems out there being used by thousands of businesses every day.

  • Gino Wickman’s Entrepreneurial Operating System (EOS) as described in his book Traction.

  • Verne Harnish’s Rockefeller Habits as detailed in his book Scaling Up.

  • Donald Miller’s Business Made Simple from the book by the same name.

  • Objectives and Key Results (OKRs) as detailed in John Doerr’s book Measure What Matters. James P. Womack and Daniel T. Jones coined the term

  • Lean Manufacturing in their book The Machine that Changed the World which describes the efficient operating model of Toyota.

  • Open Book Management or OBM as outlined in Jack Stack’s book The Great Game of Business. I could do this all day.


The point is, there are lots of systems to choose from - and most of them have similar elements.


The basic premise of a business operating system is to provide a framework for setting goals, monitoring progress and achieving results. These systems include ways to hold people accountable - and most of them even provide a meeting template and cadence.


If the business is firing on all cylinders, awesome. If, however, you desire to drive higher efficiency and maximize business value, I would pick two or three of the books above, read them, and pick one to implement in your business. And I strongly encourage you to get a certified implementer no matter which system you choose. Sure, you can do them on your own, but you’ll get further, faster with a professional.


#14 - Document Your Processes


If you don’t do anything else, do this one. This recommendation is the single biggest thing that can improve the value of any business. A business with clearly documented, repeatable processes is always more valuable than a business that has none.


The benefits of having solid, documented processes are countless:


  • Reduces the probability of serious errors

  • Makes training new hires easier and more efficient

  • Minimizes knowledge gaps among peers and departments

  • Helps adhere to regulatory and compliance requirements

  • Defines the expectations of how tasks should be performed.

  • Mitigates risks.


I could go on and on.


Without duplicatable processes, it’s sort of like running the business playing a corporate version of the telephone game we all played as kids. The owner starts the business, hires the first employee, and trains them how to do things. Later the business expands, and that person hires and trains the next person, and so on. With each new hire, the training experience changes until one day, the owner doesn’t even recognize what’s happening in their own business.


In every business, there could be hundreds, if not thousands, of processes performed every day. I’m frequently asked if all of them need to be documented. The simple answer is yes. But for any business that does not have them, documenting those critical processes is a great place to start. Search for our podcast (Ep #10) for more on documenting processes.


#15 Use a Scorecard (KPIs)


This is one of those magic bullets that every business owner needs.


Identify and track Key Performance Indicators (KPIs) that can be measured daily, weekly, monthly, or quarterly. KPIs, also known as metrics, are critical. Thorough and intentional KPIs indicate when your business is doing well and simultaneously hint at the weak parts.


There are two primary types of KPIs - Leading and Lagging. Leading indicators measure activities that support the achievement of the desired results and are actionable. Lagging indicators measure the results, so it’s too late to take action that will change the outcome. A great mix of KPIs includes both leading and lagging indicators. Measuring the right KPIs will have a tremendous impact in moving a business toward the desired outcomes.


KPIs must be well defined and quantifiable. My personal preference is using the SMART goals method. George Doran, Arthur Miller, and James Cunnigham first introduced the concept of SMART goals in a 1981 article - “There's a S.M.A.R.T. way to write management goals and objectives.” SMART is an acronym that stands for Specific, Measurable, Attainable, Realistic, and Timely. I typically replace the word Attainable with Aspirational, but either works.


There should be a minimum of two or three KPIs for each department in the business - finance, sales, marketing, operations, etc. The key to selecting the correct KPIs is identifying those metrics that tell instantly whether the business is on track or veering off track.


Some great examples of KPIs include:

  • Cash On Hand

  • Gross Profit Margin

  • Earning % of Revenue

  • Receivables Days Sales Outstanding (DSO)

  • Inventory Days On-Hand

  • Employee Turnover

  • Revenue by Employee

  • Recurring Revenue % of Revenue

  • Sales Lead Conversion Rate

  • Production Error Rates

  • Service Quality

  • Service Timeliness

  • Customer Retention

  • Customer Satisfaction


There may be more than 2 or 3 metrics for each department. In my last business, we had at least a dozen KPIs measured by our managers in their specific departments. However, as a management team, we selected the most important 2 or 3 in each department to review weekly in our management meetings. For example, in customer support (think help desk for a software company) - we measured the number of calls, time to answer the phone, time to resolution, number of escalations, calls by rep, calls by product, and so on. We measured each of these things daily, weekly, monthly, by representative, and by product. Although our manager was measuring 2 or 3 dozen metrics on his dashboard, he only reported on the number of calls and time to resolution - along with any other metrics that were outside of the ordinary (acceptable) parameters.


Don’t just make a list and measure everything. Pick the drivers in the business and set goals to achieve the desired result for each metric. In doing so, the team will know if the business or department is on or off track. An excellent place to start is benchmarking against the industry. Many industries and trade associations commission benchmark studies which are sources for good data - but I caution that while industry benchmarks may be a good place to start, KPIs should be specific for every business. They should hone in on the goals of that business.


Once the right KPIs are determined, they have to be consistently measured - and then action should be taken to make sure the train stays on the right track.


#16 - Make Growth a Priority


Many (dare I say most?) small businesses remain flat (little or no growth) for many years. For them, the business is about balance. Let’s face it, growth is a lot of work. And, if the owner is comfortable with the income the business provides, why work harder to grow the business? Let me say it as plainly as possible.


A growing business is always more valuable than a flat or declining business. Many small business owners don’t care about growth because the business has become a lifestyle business meaning that the business exists to support the owner’s lifestyle. While there is nothing wrong with that on the surface, business owners who treat their business that way usually miss out on building long-term, sustainable value in their business.


In most industries, businesses trade at a range of earnings multiples. For example, let’s say a particular industry trades at 3 to 6 times earnings. Businesses that are flat almost always trade on the lower end of that scale while businesses that are growing at a reasonable pace (compared to their industry averages) trade at the higher end of that scale.


I’ve repeatedly seen that business owners value their business on the future growth potential of the business rather than past performance. They recognize that there is growth potential, but they have not invested in realizing that potential because it’s risky or they are just plain comfortable where they are. Unfortunately, as I’ve stated over and over, buyers value businesses based on past performance, not future growth (unless the business has some disruptive technology or service). The buyer will have to make investments to realize that future growth potential.


So, business owners with a flat or declining revenue graph for the last 3 to 5 years need to kick it in high gear to get that arrow moving up and to the right… profitably.


#17 - Find Ways to Build Recurring Revenue


Buyers love predictable revenue. And you should too!


The past performance of a business is very important in determining the value of a business. However, buyers are ultimately purchasing future performance, not past.


The best way to show predictable future revenue is to convert as much business as possible to recurring revenue. And, by the way, you can convert nearly everything to recurring revenue. Let me give you an example.


In 2004, traditional purchase options dominated the restaurant technology industry - software, hardware, and services purchased or leased upfront. That’s when I started to experiment with monthly recurring payments. By 2008, we had fully implemented a process to sell software, services, and hardware for a low, convenient monthly payment. Admittedly, doing so required us to raise capital to fund the hardware and “delay” in profitability. We were able to take our business from 4% recurring revenue in 2001 to over 70% recurring revenue when we sold the business in 2018. Trust me; the buyer loved it. It also turns out that we were on the bleeding edge - because now nearly all restaurant technology is purchased via a recurring model.


Converting revenue streams to recurring revenue is tricky - but it’s eminently doable for most revenue models. It may require a bit of creativity, but it’s worth the effort.


If you can find a way to create recurring revenue in your business, it will become more attractive and more valuable in the eyes of a buyer.


#18 - Measure and Manage Customer Satisfaction


I am a frequent guest or keynote speaker at a wide variety of events. Whenever I am in front of business owners, I like to ask if customer satisfaction is critical to their business. Of course, nearly every hand goes up. Then I ask the follow-up question - how many of them measure and monitor customer satisfaction regularly. Almost all of the hands go down.


Wait a minute! Customer satisfaction is important, but the business doesn’t measure or manage it? How can that be? Satisfaction can only be managed if it’s measured.


Measuring and managing customer satisfaction is critical to the value of the business. When I sold my last business, we had a customer satisfaction issue in one of our operating units. It was serious. We used the Net Promoter Score (NPS) method of managing customer satisfaction, and we had a negative 27. In a nutshell, NPS measures customer satisfaction in terms of “promoters” and “detractors” - based on a one-question survey - ‘How likely are you to recommend this company to a colleague or friend?’ If you don’t know about NPS, let me assure you that a minus 27 was terrible.


However, we knew about it and took action to correct it long before putting the company on the market, so we disclosed it upfront. (As Paul Harvey would say… for the rest of that story, see the chapter entitled Don’t Try to Hide Anything.)


The short story is that customer satisfaction is almost always critical to a buyer. High customer satisfaction provides the comfort that the customers would likely continue buying after a transaction, and that’s important. Whether the business is going up for sale or not, customer satisfaction is important to the business’s long-term success, so it should be measured and monitored regularly.


#19 - Eliminate Owner Dependency


Owner dependency is one of the biggest obstacles to business transitions. A lower middle market business ($5M to $100M in annual revenue) that is owner-dependent will take a “haircut” on valuation. A micro business (under $5M in revenue) might be worthless.


Become expendable by investing in people and systems. If the business owner is the only person who is not expendable, the business could be worth nothing. Zippo. Nada. Zilch.


Many business owners thrive on being the only person who makes the business tick. Unfortunately, when it comes to selling or otherwise transitioning the business if the owner is the only one who knows everything, guess what happens to the value of that business when all of that tribal knowledge walks out the door?


Take action to document all of those things that only the owner can do. Make a list of them and then relentlessly document the processes. Most commonly, that list includes banking relationships, sales, key customer or vendor relationships. Once the processes are documented, consider training others to do the work.


I have always tried to operate my business as an “investor” rather than an “operator.” Investors are passive when running the business. Operators are up to their eyeballs in it every day.


For a business owner who doesn’t know if they are an owner/operator or an owner/investor - Try taking a 3-week vacation and unplug. If that sounds impossible, then you are an operator! If it sounds delightful, you’re probably an investor.


I practice this regularly. If the place was no worse than how I left it, I must be doing something right! The value of the business improves dramatically the minute it is no longer dependent on the owner. Besides, if you are tied to the business, that doesn’t leave much time for other priorities - family, community, causes.


The more the business owner can become expendable, the more valuable the business.


#20 - Plan for Management Transition


By now, you’ve heard this ad nauseam. Every business will eventually transition. Like it or not, we all have a shelf life, and it’s ultimately coming. And, no matter the desired outcome (external sale or internal transition), future managers need to be prepared to run and manage the business.


If it’s an internal transition to family or existing managers, those people need to be prepared to run the business. They may need specific training to lead and properly run the business, which may mean cross-training them in skills that don’t come naturally for them.


The same applies to an external sale of the business because a buyer wants to know that the people remaining after the transaction are prepared to carry on the business’s mission. An external buyer wants to make sure that the business can continue without interruption.


#21 - Build a Great Transition Team


When you decide it’s time to work toward that dream transition - no matter what it looks like - you’ll need to assemble a killer transition team to get the job done. The makeup of the team truly depends on the transition strategy. There are “common denominators” that work across all strategies (we’ll call those core advisors), and there are specialists that may be needed for certain

Strategies.


Those core advisors include a certified exit planning advisor (CEPA), a certified public accountant (CPA), a certified financial planner (CFP), a transaction attorney, an

estate planning attorney, and an insurance professional.


The “specialists” may include a family counselor (for family businesses), an ESOP specialist, a philanthropic advisor, a business broker (for small businesses) or an investment banker (for larger businesses) among others. So - get some advice and start assembling your team long before you think you need them!


Finally...


#22 - Become an Avid Reader


It is often said that the people who achieve the most in life focus on self-improvement. Perhaps that is why they are also often voracious readers.


My good friend Jim Roddy, author of The Walk-On Method to Career and Business Success and Hire Like You Just Beat Cancer, recently dropped some amazing wisdom on me. He said - and I’m paraphrasing here - that reading business books is like getting an MBA for $15.


He’s absolutely right. I don’t have an MBA - but I know most of the principles they teach in B-School because I read. A lot. In a typical year, I’ll read 40 or 50 books. Some years more, some less. I have 5 floor-to-ceiling bookshelves in my office and they are crammed with books. I have stacks of books on my desk (which I call the stack of shame, thanks to my good friend Mike Rose, author of ROE Powers ROI and the forward to my first book) because these are the ones that haven’t made it to the front of the line yet. Most people can’t believe I can find the time to read many books. But I have a secret weapon. The invention that changed my life years ago - books on tape.


Early in my career, I covered a two state territory and spent a great deal of time staring through a windshield. While I love music of all types (from classical to pop and everything in between), when you drive 40 or 50K miles a year, you eventually want to use that time productively - which is why I started listening to books on tape. Thankfully, I don’t have to lug around a case full of cassette tapes and longer with the invention of Audible.


My process is simple. Whenever someone recommends a book, I download it on Audible and if I’m really into it by the 2nd chapter, I also purchase the paper copy, because I like to take notes while I read. In the margins. On scraps of paper I save between the pages. On Sticky Notes. I think I personally kept 3M, the inventor of Sticky Notes, in business for the last 20 years.


Eleanor Roosevelt famously said to learn from the mistakes of others because you can’t live long enough to make them all yourself. Most of the things I talk and write about were either learned the hard way (by trial and error) or from reading books.


So - there are 11 more things you can do right now - in total - 22 things you can do to Maximize Business Value in 2022!


Call to Action:


Which one of these 11 things will you start TODAY?? It’s never too early to start maximizing your business value - so start right away. If you want me to hold you accountable - just shoot me an email and I’ll follow up with you!


If you need any help, just go to our website and click the button to schedule a call with me. And remember, we’re here to help. If we can help you in any way don’t hesitate to reach out!


Want to learn more? Check out our podcast:


ABOUT THE AUTHOR

Tom Bronson is the founder and President of Mastery Partners, a company that helps business owners maximize business value, design exit strategy, and transition their business on their terms. Mastery utilizes proven techniques and strategies that dramatically improve business value that was developed during Tom’s career 100 business transactions as either a business buyer or seller. As a business owner himself, he has been in your situation a hundred times, and he knows what it takes to craft the right strategy. Bronson is passionate about helping business owners and has the experience to do it. Want to chat more or think Tom can help you? Reach out at tom@masterypartners.com or check out his book, Maximize Business Value, Begin with The Exit in Mind (2020).


Mastery Partners, where our mission is to equip business owners to Maximize Business Value so they can transition their business on their terms. Our mission was born from the lessons we’ve learned from over 100 business transactions, which fuels our desire to share our experiences and wisdom so you can succeed.




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