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Posts by DefStrat

When Being Absent From Your Business Makes It More Valuable

Is your business a business or a practice? If the business is really just you and the things you do, you have a practice and that’s not good news. Even if you have a whole bunch of employees, if the business revolves around your skills, knowledge and authority it may still be a practice. That’s a problem when you want or need to exit the business.

Practices, particularly those in the medical field, are saleable but generally at much lower valuations than businesses with similar revenues and earnings because the key asset (you) will have to be replaced by someone skillful and costly. Even then, clients may decide not continue with the practice. Customer relationships with practices are almost always personal.

When your practice should really have been a business it becomes even harder to exit. If it’s not designed to run without you, or just “not designed,” most financial buyers – people who want to own but not run the business. If you we’re thinking of employee or family buyers it’s unlikely that you’ve groomed them sufficiently to succeed. Assuming you’re healthy, that leaves you stuck with buyers who will give you a small amount of money up front and put the rest of the sale price in an “earn-out” that requires you to stay, operate under their direction and meet difficult goals. If you’ve enjoyed being your own boss, working for the new owner will be very challenging. What you actually earn in that period may well be less than what you’re used to taking out of the business. If the earn-out is based on a stretch goal at the end of a couple of years as most are, odds are you’ll never see it because you’ll leave, be dismissed or fail, perhaps through no fault of your own.

To get out of the practice trap the first thing you need to do is figure out everything that you do personally or have the main responsibility for. Add to the list all those things that other people do but you’re the best at.  After you’ve made that list you have to figure out who else can do them instead. If such people don’t already work for you, you need a plan for finding and hiring them. If you’re not able to afford such people yet, you need to plan how you are going to get big enough so that you can afford them.

Once you know the who, you need to work on specifying the detail of what. While talented people will put their own spin on jobs, they should start off with a detailed description of all the steps that need to be done – that’s the process . In many ways, the written, detailed process you create is even more valuable than the planning for other people to do your stuff. Done right, they will make it easier to replace you while you’re on the road, on vacation or otherwise unable to perform. Should it be necessary for your family or a successor to replace you unexpectedly, they’ll have a much better chance of succeeding. Even better, showing them to a potential buyer for your business is likely to bring you a higher price.

Now, if you’ve gotten this far, I hope you are wondering what you’ll do with all that time you going to have! Wouldn’t that be a great problem to work on?

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Managing Scarce Resources – Like Everything!

In all but very large businesses all of the resources that are important – money, people, attention  - are scarce and must be managed carefully. For example, let’s say you’ve figured out that you have a few additional dollars above repeating costs. If you chose to spend a dollar on development, that’s a dollar you can’t spend on marketing or quality assurance. The trick is to figure out all the places you could usefully spend money and prioritize them by how much value they will add to your business.

Your attention is a key and scarce resource that should be managed carefully. In most small companies there’s only one owner or key executive and very little else in terms of management resources. The good news is you can focus real attention on managing your own time. The bad news is there’s only the one of you to do all the things required and no one to tell you what do. The hard part is figuring out what will give you the best return on your time. Chances are it isn’t to be found in the interrupts that keep appearing at your door or in the list of things you’re used to doing every week.

The most important things you need to be doing require a minimum threshold of effort to provide a return. For example, if you spend an hour thinking about product quality only infrequently, or only when a client complains, you’re unlikely to improve product quality. That would take a lump of attention in the beginning to formulate a plan, then another lump to solve problems and get new processes in place and finally, regular little lumps to make sure your plan is still working. Set aside uninterrupted blocks of time to think about a few important issues like the quality of your product or service and how to improve the value of your company.

Every addition to your product line – models, features, services, software tools  - requires money, time and attention to create and support. And money, time and attention are limited. While adding offerings seems like an obvious way to increase revenues it is often less effective than focusing more attention and resources on what you are already doing.

Speculative conversations, like those about things you might do or directions you might go in, divert attention from other more important tasks and are often unproductive because no one in the conversation has sufficient information. One solution is to make a rule set that limits the number and length of such conversations and design processes to acquire the information required to resolve common conversations more fruitfully. For example, if you weren’t thinking about a potential order you don’t really know how to fulfill, you could be designing better marketing or making sure your product  was reliable.

People, like money and attention are scarce resources that must be managed carefully. You only have a few key people. Your most important job is to allocate your key resources. In the case of people, that means you being sure each one and you agree on their activities and that you check regularly to make sure they are doing what you agreed (and it’s still the right thing). Just like you need to guard against unplanned interruptions from them, you should protect them from interruptions from you. Organize your interactions into brief, planned meetings with written advanced agendas.

What’s Your Business Worth – Valuation vs. Value

Some day you’re going to want or need to sell your business. It’ll be to late then to do much to increase the price you’ll get. Even if you think sale is a long way off now’s the time to understand how prospective buyers will view your business so you can do things that will increase it’s price at sale. Let’s start with some terms – Valuation vs. Value.

Wikipedia says valuation is “the determination of the economic value of an asset or a liability“. So, if you want  to know what your business is worth you just look up a local specialist in valuation and pay his or her fee to tell you, right? Or maybe not. People who do valuation work serve an important role, but determining the real worth of your business isn’t really part of it. Valuations are most commonly needed when you want a figure for a business for purposes other than a public sale of the business -  a partner to partner sale, an estate assessment, a taxation amount. Folks who do valuation mostly use accounting formulas (often, discounted cash flow) that can be readily repeated by another such expert and will be accepted by authorities like courts and the IRS.

Some valuation services come up with “value” in a more market-like way comparing your business to others sold in similar industries and markets to get a sales or profit ratio which they can use to produce a figure for your business. Unfortunately most sales of small to mid-sized businesses are both unpublished and largely based on factors other than sales or income

The real value of your business, the only one that really matters to you, is what an independent buyer will pay in a “well advertised sale” and that’s way more complicated than any formula. Over the next few posts I’ll discuss different factors that come into determining what someone will pay for your business. I hope you’ll find them both interesting and helpful in preparing your business to draw it’s highest price.

Quality – Your Most Important Marketing Trick

How good is your product or service – really? If you’re not delivering the best you can do, any time or money you spend on marketing is wasted. Advertising, web sites, promotions and the like make sure your prospects can find you and tempt some of them to give you a try. How good your product is and and how fulfilling the buying process is determines whether first time buyers become regular customers.

How do you start to assess the goodness of your product and customer experience? Here’s a few easy ways:

Ask your employees – You may be the only person at your business who doesn’t really know. Take employees aside, make clear there’s no penalty for honesty and ask them what they think. Find out what they’d change if they wanted to better for customers.

Ask your customers – Call ones you know – call some you don’t know too. Have someone get on the phone an conduct a short survey.

Secret Shopper – Get a friend to buy something from you and tell you what the experience was like and what he or she thinks of the product. Get them to go though the whole process in detail.

Buy from yourself – If you have a web site, pretend you’re a customer and carefully evaluate the experience you offer. Go to a competitors site and do a careful comparison

Make a list of what needs to be changed, how you’re going to change it, by when. When you’re done fixing your product and customer experience, you can think about marketing.