Business owners worry about how much their business will be worth when they eventually exit. For most of them, the business is their most significant personal asset. In the short term, however, they feel that they have to focus on profits rather than value. They don’t realize that a focus on long-term value will result in increased profits as well.
Once the business model is proven and the business is profitable, it’s better to focus on value rather than profits. Here are 8 ways in which this approach results in higher profits.
1. Growth Potential: A potential buyer will look for opportunities to grow the business further. Looking at your business through the lens of a potential buyer can identify options for near term growth and profits.
2. Working Capital: High working capital needs decrease the value of a business. Improving cash flow makes the money available for profit disbursement or reinvestment.
3. Recurring Revenue: Predictable income streams are very attractive to potential buyers. They also decrease marketing and sales expenses, increase operating margins, and improve profitability.
4. Unique Selling Proposition: Buyers like a niche market with a defensible competitive advantage. Fewer competitors result in pricing flexibility and higher profits.
5. Customer Satisfaction: High levels of customer satisfaction result in repeat business and referrals. This leads to higher operating margins and increased profits.
6. Reliance on Owner: When a business is sold, the owner needs to be able to exit as soon as possible. In the meantime, over-reliance on the owner creates a choke point for decision-making, growth, and profitability. Building a team allows the owner to focus on what they enjoy most and do best.
7. Strategic long-term view: A strategic long-term view reveals opportunities that can frequently be implemented in the short and medium terms. Examples are hiring of key management, capital investments, and acquisitions.
8. Independence from Clients, Vendors, and Employees: Decreasing reliance on clients, vendors, and employees puts a company in a stronger negotiating position with each.
a. Some small and mid-sized companies refuse to sell through big-box retailers if this results in over-reliance on a few retailers and compromising profit margins.
b. Multiple sources for key inputs decrease risk and improve pricing leverage.
c. Key employees can hold a business hostage. Cross-training and documentation decrease the threat of employee defection, and keep salaries within industry norms.