Before you embark on a strategy to make your business more valuable and transferable, be sure to identify and correct the risks that might threaten your company’s success.
“All of that work is futile if you don’t de-risk the business first,” said Brian Trzcinski, the director of business market development at MassMutual. Look for red flags that can indicate potential threats and take action to help eliminate any that may interfere with your plans to grow and monetize your business.
Here are five red flags to take note of:
1. Management – Are you going it alone?
If you’re the only one at the helm, your business is at risk if something happens to you. Fight the tendency to do it all and protect yourself by choosing and training a self-functioning management team. Having a team makes the business more attractive to potential buyers who are risk averse. They welcome having a team in place to increase the odds of continued business success.
“An owner can be like an octopus with their arms in every aspect of the business”, said Chuck Richards, CEO of CoreValue, a leading business evaluation software company. “That makes things tough when they’re ready to sell. They’ve got to find an octopus who looks exactly like them.”
2. Sales & marketing — Is there only one stellar performer?
If one salesperson is responsible for winning and servicing all your clients, the company’s book of business is vulnerable when he or she leaves. The solution is to systematize your sales and marketing functions, then document the process so additional salespeople can be trained and develop a track record of performance. Doing so can make your company more valuable to potential buyers who prize business continuity and uninterrupted cash flow.
3. Operations — Are they as efficient as they could be?
Streamlining and systemizing the way you do business is essential to maintaining or gaining market share. If you haven’t evaluated the efficiency of your operations, now may be the time to do so — and you should assume your competitors already have. That evaluation may reveal hidden costs, unnecessary waste, significant bottlenecks, and more, all of which can be addressed and corrected. And it may lead to brand new ideas to simplify the workflow.
Consider measuring the impact of these changes from the customer perspective. In other words, determine whether customer satisfaction and loyalty have increased. If so, that’s exceedingly good news for you, as it can lead to higher profit margins, faster revenue growth, and ultimately, increased business value.
4. Financials — Do you think in words?
According to Richards, very few business owners think and communicate in numbers, but investors and bankers do, and it benefits you to speak their language. Know the numbers on your income statement and balance sheet and be able to explain them. The same is true for your cash flow statement.
Richards recommends preparing a report that connects business operations to the company’s financials. For example, let the report present the direct relationship between your new product introduction and an increase in revenues. He also suggests owners be ready to explain in detail how money flows in and out of the business. Confusion around that topic can cause investors and buyers to forgo making a deal.
5. Personal goals and business value — Are they disconnected?
Your business is probably your most valuable asset and the one you’ll depend on to realize your personal plans. For example, if you plan to monetize the business by selling it, you’ll want to see whether the estimated proceeds will be sufficient to support your retirement lifestyle. If your company’s strategic plans call for rapid growth and expansion, the business should have sufficient cash on hand to cover the associated expenditures or the financial strength to secure a loan or other financing.
While your books should never reflect the intermingling of personal and business finances, you’ll want to consider your situation holistically for the purposes of long-term planning. Keeping your business and personal affairs in different silos and thinking about them separately can leave you vulnerable on both fronts.
“When the two are disconnected, business owners end up having to decide which fire—business or personal— they want to put out first,” said Richards.
The business is there to provide income and should help you realize your personal goals…whatever they may be. Creating a valuable, transferable business while accumulating other personal assets gives you the greatest flexibility in charting your course and reaching your destination. (Related: Gauging your exit readiness)
Before you grow your business, you should de-risk your business. Because growth is what’s invigorating and risk is what’s uncomfortable, it’s an essential step that many business owners often ignore but need to prioritize.
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When planning for your future, having a knowledgeable guide can help alleviate confusion and avoid costly errors. Our professionals have the experience and the know-how to help you remediate risks and achieve your goals. Contact MassMutual today to learn more.
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Core Value is not a subsidiary or affiliate of Massachusetts Mutual Life Insurance Company (MassMutual) or its affiliated companies.