Often we think of marketing and sales strategies that will increase sales and profits. However did you know putting the right marketing and sales strategies in place can also increase the Value, not just the profit of a business.
Recently on the Marketing Strategy Show we interviewed Craig West from Succession Plus on what marketing and sales strategies and factors you should have in place to maximise the value and profit of your business. Check it out here or on Itunes.
Basics of Business Valuation
- Understanding the basic equation for valuing your business is of vital importance. A Business Valuation is normally based on your net profit times a multiple
- For example a business with $500k net profit and;
- a multiple of 3x times net profit = $1.5million valuation
- a multiple of 2x times net profit = $1million valuation
- Net profit is fairly simple to work out (you work out the normal profit then take out any personal expenses) to get the businesses real net profit
- However the multiple is the biggest factor in deciding the value of the business
- Why is the multiple the really important factor? You can improve the net profit by ten thousand or even a hundred thousand dollars but if you can improve the multiple it will have much more significant impact on the valuation of the business.
- This is a common area people skip over, they spend a lot of time maximising the profit but no time at all worrying about or thinking about increasing the multiple.
- So how do you increase the multiple? The most important factor for a buyer is lower the risk so when they take over the business it can continue to grow. So, to increase the multiple you need to reduce the risks in a business.
- Having the right sales and marketing strategies and processes in place can lower the risk.
- If one business has ongoing regular recurring sales to the same customers, that will be far more valuable than the business that has to make a new sale for every dollar that it gets.
- Also critical is what does your sales funnel look like? What is your pipeline? It really is about demonstrating to people (the buyer) that you have got the ongoing ability to reproduce revenue going forward
- So where to start? Begin with an end in mind and identify an exit early on. My view is, as soon as you start, you should know how you are going to exit. Because a lot of the decisions you’re making including all of the marketing and branding and those sorts of things which we’ve been talking about should be focused towards your exit
Key Person Risk
- A massive problem small and medium businesses face is key person risk. Unfortunately for a lot of small and medium businesses all their revenue, all of their new leads and all of their clients comes from their own personal efforts or their network or a combination of both.
- There’s often a key person who is typically the founder, senior partner or some similar title that generates a lot of the new revenue coming into the business so from a buyer’s point of view, that’s not attractive at all, it has a high-risk factor
- Alternatively, if you have a highly technical business, you could have got only one person that knows how that machine works or how that production line runs. If so you’ve got a problem there
- You need to have the ability to delegate tasks and ensure that other people working for you are well trained in aspects of the business pertaining to them. The second part of it is systems and processes
- This is where we typically seeing lower valuations because everything is in the Founder’s head (his whole network) and it’s not really documented very well, there’s no CRM, no automation and no follow-up
- Another big thing to consider when trying to increase the value of your business is customer risk
- Having one big customer worth sixty, seventy percent of your business seems great as its less work for the entire business but there’s also a higher risk from the buyer’s perspective is that customer leaves after the business is sold.
- There is also the potential of something going wrong if the key contact leaves the key customer.
- If this big customer leaves and you don’t have the necessary lead generation to recuperate then you stand to lose a massive chunk of your revenue in the blink of any eye
- All that means is that your multiple will be lower and therefore the valuation of your business is lower
Analytics and CRMs
- Websites, Digital Marketing and social Media are critical to business development today whereas five-ten years ago it was only a blip on the radar
- When people look at your business with the thought of investing or purchasing people will ask how your digital and social media strategy works? How easy is it? How costly is it? This was never an issue for consideration in the past.
- The other thing people will want to look at is a CRM system or your online database.
- It is important to look at a company’s CRM and website and social media accounts if you are interested in buying as looks can be deceiving. For example, a company may have a beautiful looking, easy to “interact-with” website, but if you were given access to the back end you can see it’s a mess. They don’t post often, have a ton of bounce-backs on emails etc
- Any accountant within your business will tell you that you need to have monthly profit and loss statements and perhaps a balance sheet. Similarly from the marketing and sales viewpoint you need to be having regular monthly reports and tracking details on leads, sales, pipelines, etc, analytics if you would like to call it that
- It is equally important to have quality marketing data alongside the regular board meeting notes, minutes and monthly reports
- If you are able to provide data from Google, Facebook, LinkedIn, Twitter, and analytics for the past few years and illustrate a steady increase in growth and activity then that is a tangible valuable asset to the buyer straight away that will increase your multiple.
Is Branding Important?
- Branding is important to large companies like Apple, but is it as important to a small to medium size business if you want to increase the multiple and therefore value of the Business?
- Where Craig lives there is one café for example that stands out, It’s always packed, There’s always people there. It’s very well run. It’s got a well-known name and a brand and that’s on a very small scale compared to something like an Apple but it counts when exiting
- The brand is not just a nice logo in the front window, it’s about the service, it’s about the furniture, how the staff look after you, it’s whether they serve you on time. There’s a whole stack of things that make a Brand.
- All of that can increase the multiple of the Business vs another Business.
Types of Revenue
- The type of revenue is also important
- Let’s use accounting firms as an example. Accounting firms will typically send out one invoice at the end of the year and after they do all your tax however, the smart ones have started charging clients a fixed monthly retainer
- So, say instead of charging one fifteen-thousand-dollar invoice for the year you charge them 12 payments of $1200.
- The $1200 a month is much more valuable than the $15,000 once a year because the business now has recurring revenue. It’s predictable cash flow and it’s not going to go away
It’s not just a Business it’s an Investment
- Business owners have to spend effort and attention into not just running the business day to day but strategically thinking about how do I make my business more valuable
- The temptation is when you’re running a business, not to worry too much about things like reporting and analytics and just get on and do it.
- Systems and process are all in the business owners’ head so that they don’t need to worry about that or hire someone to do that.
- A focus on growing business value as well as profit will generate new sales and profit but it also does have a significant effect on the multiple and therefore business valuation
- A full review of the business and marketing strategy as well as some tactical marketing would help potential purchasers see that there’s a track record that generates new leads and new revenue streams
- Showing potential purchasers the history and the track record gives a breakdown of the profits and where those profits were generated in the business
- Begin with an end in mind and identify an exit strategy/strategies early on.
- As soon as you start, you should know how you are going to exit. Because a lot of the decisions you’re making, including all of the marketing and branding and those sorts of things which we’ve been talking about, should begin with your exit in mind.
- The other important thing is a lot of the stuff that we do around marketing, around branding and around just generally preparing our business for an exit just makes smart business sense. It’s not about just an exit strategy.
- Having a good marketing strategy, an implementation plan and systems around your marketing function is going to make your business more valuable but you are also going to make it more profitable, easy to run, less stressful, more enjoyable, more easily transferable to your son or daughter or brother or whoever it is you want to transfer it to
- over the business. Manage and buy is the old term. What needs to be in place from a sales and marketing plan to have that?
We hope this will help you better understand maximising value in your business and how you can think about the exit to help inform you in the now.
If you would like to discuss your marketing strategy or an effective Integrated Marketing Plan for your Business we would love to help. Just call 1300 676 448 or contact us for an obligation-free discussion.