To build a “highly sellable” business you need to focus on what your buyer wants. Savvy buyers will always drill deep into your business to assess its real value to them as a buyer.
In our last post we covered four key drivers of business value. In this post we look more closely at two of those value drivers – reducing reliance on you as a business owner and building recurring revenue streams.
Reduce reliance on you as business owner
One of the biggest fears buyers have when buying a business is they will effectively end up just buying you, the business owner, not your business.
And it’s a very real concern. In a lot of businesses, particularly smaller businesses, the owners are heavily involved in all significant aspects of the business – they develop the products or services, make all the key decisions and manage all key customer and supplier relationships. It’s also common for these types of businesses to have little in place in the way of systems, processes and procedures.
When potential buyers look at businesses like this, they end up doing one of two things: they either walk away, or offer a low price because they are not convinced about what they are actually buying.
In a recent post we covered why it’s useful to think about your business as a product when you come to sell it. A useful extension of this is to think about what your key roles should be as a business owner and how you add the most value to your business.
I believe you add the most value as a business owner by doing things like:
- establishing your business’s purpose
- developing your business’s vision
- designing and creating your products and services
- building your business to sell
- and finally selling it.
If you focus on these things, you need to develop ways to get done all the other things that need doing in your business. The most effective way to do this is to change your mindset – as Michael E. Gerber, author of the iconic book The E-Myth Revisited, says – from working in your business to working on your business.
Most importantly, if you haven’t done so already, you need to build a management team that runs your business at an operational level and systematise your business as much as possible. This won’t happen overnight. In fact, it may take years. But if you don’t start doing it you risk staying, as Michael Gerber puts it so well, “self-employed” rather than building a business you can one day sell.
Build recurring revenue streams
One of the key areas to focus on in building value in your business for potential buyers is the nature of your revenue streams.
Most businesses focus on overall revenue, but only a few really focus on the nature of their revenue streams. Buyers, on the other hand, are very interested in the types of revenue you earn. And the sort of revenue buyers like most is annuity-style revenue (that is, revenue that is virtually guaranteed to turn up for them in the future once they have bought your business).
Surprisingly few businesses have high levels of annuity-style revenue; most just start each month hoping they will sell more products and services. However, most businesses have scope to improve in this area if they focus on it. Doing this well will significantly lift the value of your business in the eyes of a buyer.
To give you a feel for ways you can build more annuity revenue into your business, here are a few ideas:
- Develop a “platform” product that requires ongoing purchases of specific consumables. Nespresso has done this brilliantly with its coffee machines and customized coffee pods.
- Create products or services which are sold on a renewable subscription basis. Subscriptions for magazines or other information services are a good example. Not only do you get paid in advance but the likelihood of customers renewing a subscription is much higher and cheaper to secure than constantly seeking brand new customers.
- Develop an “automatic renewal” service. A good example of this is a storage facility where you pay, say on a monthly basis, to have your goods stored for you. The beauty of this type of revenue is it will keep coming in until a customer actually decides they no longer need the service and take active steps to cancel it.
- Enter into long-term contracts with customers. Mobile phone companies have made an art form of this type of annuity income by offering “free” upfront phones provided customers sign up for long-term service contracts.
Moving to higher levels of annuity income in your business will take work and time. You may need to develop or modify products and services and it’s likely you will need to engage differently with your customers.
However, increasing your annuity revenue will build significantly more value into your business for potential buyers.
In our next blog we will look more closely at how minimising reliance on particular suppliers, customers and employees and developing high customer satisfaction adds value to your business for potential buyers.