If you are like most businessowners preparing your business for sale, the sheer number of tasks that you must undertake to ensure a smooth transition may seem overwhelming. Regardless to whom you are selling your business, it can oftentimes seem that your priorities and those of your investors are at odds. While investors are looking for a business that is turnkey and a demonstrated history of success, you are more interested in keeping your legacy intact and looking after your customers and employees. Oftentimes, only finances are considered when preparing your business for sale; however, strong operational management can increase its valuation and ensure that your business can run when you’re gone – ensuring that your goals and those of investors are aligned.
In this post, we’ll explain how to identify the hidden operational assets that can drive up your business’ valuation, explain how to take advantage of them in structuring your business for sale, and finally what actions you can take today to increase your business’ valuation.
Your business’ hidden assets
Like the tip of an iceberg, the financial statements only tell a part of your business’ story. There are three hidden assets, not shown on your business’ financial statements, which can dramatically improve both its valuation and attractiveness to investors. They are your:
- Processes – how your business does what it does,
- Operating Measures – how your business measures its success through Key Performance Indicators,
- Management System – how your business structures itself to accomplish its goals.
Each of these hidden assets adds value to your business’ three keys stakeholder groups: customers, staff and investors. Your business ultimately must centre the customer and ensure that all business activities drive value to them. In addition, when your business’ operations are clearly defined and targeted, it increases staff engagement, as employees have more structure and can clearly see the value they are providing to the organization. Finally, investors gain significantly more visibility into your business, and know that it will be able to operate without its founder, increasing their confidence and driving up your valuation.
How to operationally structure your business for sale
Business owners can take concrete steps over the course of approximately three months to prepare their hidden assets for sale, increasing investor confidence, valuation, and the certainty that a business will continue to operate without its founder.
Business processes are the everyday activities that make your business run. They start with a trigger and end with the delivery of a service or a product, either internally or externally. Examples include the month-end accounting process, or the process of processing a returned item from a customer. Documented processes can add value to both investors and owners. Investors look for defined operations and want a clear picture into how your business operates. If they have a good enough view, you may even attract a larger number of investors from diverse industries! From your point of view, documented processes mean that your business’ activities are replicable without you, ensuring that your legacy is maintained. They also affect your employees and customers, by reducing their fear of change – if they know that operations will continue as normal after the sale, staff engagement will be positively affected, and customers are more likely to stay with your business. In fact, this is how McDonalds won the hamburger race – through consistent, documented operations!
Processes can be best documented through a simple activity known as process mapping. In a process mapping exercise, your managers and staff can go through each of your processes and map them out with sticky notes on a large piece of brown paper. Give each stakeholder in the process a “swimlane” on the left side of the map, to track where information flows throughout
the process. Processes are then mapped from trigger to end customer, keeping track of every interaction, both with individuals and with systems. To learn more about how map processes, click here.
The end goal of a process mapping exercise should be a set of well-understood, well-documented processes that are understood and consistently followed, to ensure that your employees can continue carrying out your business activities after you exit.
2. Operating Measures
Oftentimes, only financial metrics are regularly measured. While financial metrics are a good indication of your business’ performance, they do not tell the whole story when it comes to operational efficiency or customer satisfaction, both of which are vital to your business. Operational metrics can help potential investors understand how your processes contribute to your business’ success and allow you to showcase customer satisfaction levels to investors. You can then use these metrics to hold team members accountable and provide a scorecard for your business against the industry.
Four key metrics measure your business’ ability to deliver customer value:
- Service – the ability to achieve planned output levels
- Speed – the time required to produce a unit
- Productivity – the inputs required to achieve actual output levels
- Quality – the number of units that are “good” compared to the overall number.
Read more here on how to begin measuring Key Performance Indicators.
3. Management System
For a business to operate after the exit of its founder, it must have clearly defined accountabilities to ensure there are responsible authorities for decision-making at each level of the organization. This increases staff engagement by providing a clear internal career path in your business and provides investors with clear training requirements for onboarding new staff after the acquisition. The management system should take advantage of the processes and operating metrics established earlier and ensure that all staff within a business understand their place within the overall structure. Besides having a clearly defined organizational chart with responsibilities, the management system should have 4 key characteristics:
- Process owners for each area of the business – who is responsible for the key activities that are taking place?
- Accountabilities and set targets for the operating metrics – ensure that metrics are being used internally to improve performance.
- Clear communication of expectations to the front line – ensure that employees understand the significance of their activities, as well as the expectations that are incumbent on them.
- A regular meeting cadence for review of the operating measures – by regularly reviewing your organization’s operating metrics with all levels of the organization, you can ensure that you are on track to meeting goals. These metrics should be reviewed daily with front-line staff, and weekly with middle management.
Action Plan to Maximize Valuation
You can unlock the value of your business’ hidden assets starting today, by:
- Documenting your processes with your team using the simple brown paper method
- Developing a set of customer-focused operational metrics to track and maximize business performance
- Assigning accountabilities for the operating measures and establish the meeting cadence with your team
The key to success is to start now to ensure that your organization has documented processes, operational metrics, and a solid management system!
Learn more about some of the steps you can take with these Propel Solutions Insights:
- The 4 KPIs you need to measure performance
- 3 Steps to Developing KPIs
- Evolve your organization through Process Mapping
- How to Manage KPIs
- How to Implement KPIs
At Propel Solutions, we have helped multiple business owners structure their businesses for a more effective sale. If you want to maximize your business valuation, contact us at [email protected] or 604-346-5185 to set up a call and determine how we can help prepare your business for the future.
Questions? Contact Us
If you want to learn how to instill a culture of Continuous Improvement within your organization contact us at Propel Solutions today. We specialize in creating high performing teams and have a proven track record of powerful results.
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