The Seacoast Bank Note

Building Business Equity and Growing Value

Posted by Seacoast Bank on Apr 30, 2018 1:25:15 PM

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Creating a saleable business includes strategic planning that will allow you to offer more than just your main asset (your product or service) to a buyer.

To get the optimal selling price for your business, you'll need to create an operation and a tangible brand. This process requires you to build a company that makes the way your business operates an asset in itself. This includes building a tangible brand, sustainable sales pipeline, value-driven marketing message and other performing assets without which your product or service wouldn't sell as much.

What do "Equity" and "Value" Mean?

In their narrowest sense, "equity" and "value" refer to dollar amounts at a given point in time. For example, if you have $300,000 worth of assets and $100,000 in liabilities, you can say that you have $200,000 in equity in your business. If your business generates a profit of $120,000 per year, you can say the business has an ongoing value of $120,000 per year to you.

In their broader senses, "equity" and "value" include non-tangible assets that will help your company generate revenues or reduce costs in the future. For example, you can build equity in your company by negotiating an exclusive sponsorship with a trade association or charity that will directly increase your sales. If you have a customer loyalty program that earns customers points or prizes and a significant number of customers participate in the program (leading to more sales), this is a form of equity. You might be a large enough account for one of your suppliers that you can negotiate a contract that gets you a lower price per unit than your competitors, allowing you to sell your product at a lower cost.

Business Equity vs. Business Value

An Oregon painting contractor recently retired, selling his $4.5 MM annual business for millions of dollars. He was only able to do that because he planned to build a saleable business early on. A few years after he starting his painting company, this owner knew he wanted to build a business he could sell for more than just his equipment (which would be worth pennies on the dollar) and his customer list.

He created separate residential and commercial lines of business. He formed a holding company that allowed him to lease his equipment to his painting company, adjusting his lease prices for each job. This allowed him to be more competitive on larger jobs, securing that revenue.

As you look to improve the value vs. the equity of your business, you'll need to create assets tied to your operations that help drive sales of your product or service and reduce your costs so you increase profits.

Build a Tangible Brand

Your brand is more than just your image or reputation in the marketplace. It's the desire of your target customer to buy from you because they believe you have a unique selling differential. This might include your price, which can position you either as a high-end product with an upscale perceived value, or a bargain product that offers affordability. Your brand might be based on customer service, especially if you sell something buyers aren't expert with and need guidance. In this instance, people don't buy from you just because they want your product, they buy because they want your support.

Sears' Craftsman Tool line became a decades-long success in large part because of its lifetime guarantee. Many buyers didn't purchase Craftsman tools just because they wanted the assurance their wrenches would be replaced if they broke. Customers bought Craftsman tools because they knew Sears could only offer that type of guarantee for top-of-the-line products. Evaluate your customer service to determine if you can offer a warranty or guarantee that won't financially burden your company and will improve your brand, boost your sales and become an asset of the business. This is easier if you have a history of few customer complaints or returns.

These are the types of strategic brand-building decisions you'll need to make to create a brand that is an asset. 

Develop Marketing as an Asset

Marketing is not advertising, PR, social media and sponsorships. Those are forms of marketing communications. Marketing is the coordinated effort that connects your product to your pricing to your place of sale. Once you have those strategically developed, only then can you create effective marketing promotions.

One way to turn your marketing communications into an asset is to create an inbound marketing sales funnel. Unlike disposable print ads, Facebook posts, brochures and tweets, an inbound marketing campaign is an asset that keeps customers and potential customers coming back to your website for your educational blog posts, white papers, podcasts, videos, survey results and other content. When it's time to sell your business, you can demonstrate that your inbound marketing is an asset, using data you collect and document. This data includes information such as number of website visitors, page views, leads, conversions, click-throughs and sales.

Strategically Manage your Capital

When you sell your business, a buyer will want to know your historical, current and long-term financial situations. Setting up a strategy to manage your capital is important for optimizing your selling price. Areas you'll need to focus on include: 

  • Maintaining a strong balance sheet
  • Planning cash flow
  • Managing account receivables
  • Optimizing debt service
  • Developing operating capital
  • Handling investments
  • Creating a definable profit strategy

Your profit strategy will tie into your marketing pricing strategy. For example, you might set your prices low to generate higher sales and revenues, generating your profits that way. You would do this if your target customers buy your type of product or service based on price. You might also keep your prices low to create a barrier to entry to competitors. Conversely, you might set your prices higher based on a lack of price sensitivity in your marketplace or your desire to create higher perceived value among customers who want "the best."

Building cash reserves and keeping debt low for multiple years will help build your business equity and value, increasing your eventual sale price. If you can defer taking a raise in salary the final few years you own your business in order to use that money to keep debt low and cash reserves higher, you might end up with more personal cash based on a higher selling price.

Develop Strategic Partnerships

Exclusive or special deals and relationships with vendors, suppliers, trade associations, charities and other partners can strengthen your sales funnel and increase your value. For example, if a local sports medicine practice can become the official athletic trainer of its area's college or university sports program, that's an asset its competitors can't duplicate. If you can write an expert column for a local newspaper or magazine, that's a tangible asset.

Diversify

If possible, look for ways to diversify your business into new product or service lines. For example, the owner of a restaurant might expand into catering. The owner of a tennis facility might start offering aerobics, yoga and Pilates classes for its health-conscious customers. This diversification would also open up new sales opportunities in the club's retail shop. This type of business expansion requires careful planning, but if executed correctly, offers new ways to increase revenue and the final sales value of a business.

Re-Invest in your Business

One way to increase sales and revenues is to re-invest profits back into your company. This could include retaining top employees with bonuses and raises, replacing or repairing machinery to make products cheaper, replace older trucks to reduce maintenance and operating costs, or buying instead of leasing your office, restaurant or warehouse.

Are you phones, computers and other technology assets integrated in such a way that they help your office and field staff communicate better? Do you lease specific types of hardware and software so that you can quickly upgrade as technology improves? Do you have a cloud-based employee communications system that allows staff to make real-time updates to projects, sales reports or other important information wherever they are?

Re-investing capital can temporarily decrease your profits, so you'll need to work with your accountant to make sure you can show a potential buyer why profits were not higher during the last three years, how your re-investment increased revenues, and what this will mean to the company, in terms of sales, revenues and profits, for the next three years. In many cases, re-investment improves a business's long-term value more than not spending that money in order to increase a company's short-term equity or cash value.

Business buyers want to know the balance sheet value of a business at the time of sale and the annual profit they can take out of a company. But more importantly, they want to know what type of long-term equity and value the business has. As an example, buying a new machine that will reduce your production costs by $25,000 per year for the next five years adds $125,000 worth of long-term value to your company, while not making that purchase only strengthens your balance sheet value by $25,000.

Offer Continuity

When someone buys your business, will you and your key employees leave? If so, how likely is it that a new owner will be able to operate the business as well as you and your staff did? Remember, many people who buy a business don't plan on just doing as well as you did—they believe they'll be able to do better. Take a look at your key staff members and determine if you are too reliant on one or two key employees (such as a lead salesperson). Can you stay with the business as a consultant for one or more years after you sell your business? Can you offer one or two key employees a bonus to stay with the company one or two years after the sale? Do you have a written operating manual that provides not only day-to-day directions for running the company, but also some institutional memory and strategies for the future?

Create Transferable Value

If you want to create a business you can sell for its optimum potential selling price, you must build business equity by creating a company that has definable value (beyond its balance sheet) that can be transferred to someone else. If you can't sell your company today with the confidence that a competent buyer can operate it as profitably—and hopefully more so—as you, then you have not build the right kind of equity and value in your business for an optimal sale price.

Start building a strategic plan for building a saleable company this year, and within a few short years (or less), you'll be able to cash out for maximum value.

 

Do you own a small business or plan to start one? Learn about Seacoast Bank's business banking solutions.

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