Exit Strategy – Don’t Confuse ‘Growth’ with ‘Value’

What’s the most important thing that most business owners fail to consider when planning for business succession or sales of their business?

The answer is that the vast majority of CEO’s or owners of privately held companies confuse Growth with Value. In order for any company to be ‘worth’ buying there needs to be transferable value in the business. Lots of companies are successful in growing, in fact many of our own clients have seen tremendous growth over the last 3 years, however, that growth has to be aligned with a strategy that creates value in the business outside of just top line or bottom line growth!

So, how do you know if your creating value in your business?

Tracking growth or using key performance indicators have is fairly easy whether you are looking at revenue, profitability, rev per client and so on.  Measuring value however is a little tricker – so tricky in fact that we often start with looking at the areas that reduce value and work to eliminate them first – that strategy by default will make your business more valuable.

A couple of key metrics to focus on would be…

1. Who in the business owns most of the client relationships?

If the CEO or business owner has or owns all or most of the key client relationships, what happens when the CEO moves out of the business? Can those relationships be transferred. In most cases they won’t and any new owner of that business will have to either go find new clients or work very hard to gain the trust of the current ones. Either way, that has an impact on the value of the business.

2. Customer Concentration

We all want to have repeatable business – that is, those customers or clients that come back time and again to buy our services or products. The challenge when looking at the value of a business however is, what we call EXPOSURE! Take a look at your clients base. Are you relying to much on 1, 2 or 3 clients to bring in the majority of your business? What would happen if one or more of those clients went away? The most valuable businesses have a wide client base that doesn’t create an overly exposed revenue stream.

3. What % of our Revenue is Repeat Business?

Who many of your clients come back and buy time and again from you, or, is your business one where a number of clients pay you an ongoing fee for  your services. How your business model works will and does have an impact on its real or perceived value by anyone looking to purchase it. A business that has recurring revenue streams will be regarded higher in teh valuation stakes than a business that continually has to find new customers every day, week or month! So the real question is, can you develop products or services that clients will continue to pay for over the long term versus a one time purchase.

There are different characteristics of a business that influence its value and all to often the CEO or owner of that business believes that they are doing all the right things to get to a successful exit however, all the decisions that are being made are almost always being run through the filter of are these the right decisions to GROW the business rather than  increasing the value of the business.

Creating TRUE value in your business goes way beyond just driving revenue and profits. It means creating an organization that can continue to grow and thrive without YOU being there (read Built to Sell by John Warrillow).

James Lawson is one of Northern Virginia’s top Business Coaches. He works with and helps business owners TRANSFORM their business from where they are to what they ultimately want, creating value and wealth.