In 2012/2013, I was complimenting what I’d learned throughout my MBA and 5 years with ActionCOACH Business Coaching about how to grow business profits by researching what the ‘multiple’ of profits are when it comes to increasing business value.
I found a book called ‘Built to Sell’ by John Warrillow. John had ‘Built’ and ‘Sold’ a number of businesses and then got really interested in the mechanics of their valuations and what factors contribute to a businesses valuation. John researched thousands of business brokers and mergers and acquisitions experts and presented his results, in the form of a story about applying them to one of his businesses, in his book.
The 8 Drivers of Value
John found that there’s 8 factors, or as he terms it, there’s ‘8 Drivers of Value’. A full description of each Driver can be found in my YouTube Channel’s Value Builder System Playlist. Here follows a very brief overview to get you thinking about how well you would score in each of these 8 areas, and importantly, if you think you could exit your business without an earn-out.
What often prompts a Business Sale
Unfortunately, for too many business owners, serious consideration about the sale of their business is prompted by either an unexpected need for a considerable amount of cash in a short amount of time (often health related) or they have reached an age a few years before they want to retire.
Either way, and again, for too many business owners, when they get their business valued the valuation is a lot less than what they need or want for whatever they need it for – if it will sell at all.
The problems with an ‘earn-out’
At this point they may get tied into an ‘earn-out’ as the purchaser of the business will want the (selling) business owner to stay in it, to hand it over, to ensure good business continuity.
Now, of course, the selling business owner doesn’t want this because the amount of money that they will earn during the period of their ‘earn-out’ will be tied to the performance of the business and someone else, someone new, and not them, are in control of that. And that earnout period could be 6, 12, 18 or 24 months.
How to avoid an ‘earn-out’
Now, my question to you is, how do you feel about investing 12 to 24 months ‘earning-out’ of your own business and doing so without the desired degree of control over the amount you will earn during that period?
Why not keep control of your business whilst investing in 12 to 24 months – in advance of selling – with a ‘Value Builder System’ expert (obviously, like my good self!) to build your business so that it will sell for the amount of money you need or want, whenever you choose to sell it and you’ll be able to walk away on that day if you want to? You can exit without, earn-out.
What is fantastic about these 8 Drivers is that they are not only increasing the profitability of your business – they are reducing the business’s dependence on you. This makes your business a much more viable option for someone to purchase it as it widens the market for potential buyers because, if the business doesn’t need you and we’ve systemised it well whilst going through the 8 Drivers, then someone from outside of your industry could buy that business from you. If you own a restaurant you wouldn’t need a restaurateur to buy your business.
So it makes much more sense to invest 12, to 18, to 24 months to get your business ready so you can sell it for the price you want and walk away than it does ending up being an employee in your own business during an earn-out.
The 8 Drivers of Value
So here’s the 8 Drivers. Again, I’m not going to go into much detail on this here so please see my YouTube Channel’s Value Builder System Playlist.
Financial Performance is your history of producing revenue and profit and the professionalism of your record keeping.
Growth Potential is the likelihood of your business growing in the future and at what rate.
The Switzerland Structure is named after Switzerland’s fame for its neutrality and relates to how dependent your business is on any one key employee, supplier, or customer.
The Valuation Teeter-Totter aka Valuation See-Saw is about how much your business is ‘see-sawing’ in its profitability. How much is its profitability ‘see-sawing’ from one period to the next, how smooth is your profitability graph?
Recurring Revenue is the proportion of your revenue that is automatic, that is contracted for a period of time into the future that you can rely on receiving. In fact, this is so important that John wrote a second book “The Automatic Customer: Creating a Subscription Business” on just this Driver – and surprisingly, it is much easier to implement than most people initially think it will be! .
Monopoly Control is how differentiated your business is from others in your industry.
Customer Satisfaction is not only the likelihood that customers will buy from you again, it is about how likely they are to refer you to others, to advocate for you if they’re asked, or as a Raving Fan does,to refer you even when they’re not asked. So not just repurchasing but referring.
Hub and Spoke is akin to the Switzerland Structure yet this is about you, the owner, as the hub in your business with the spokes that go around you. How dependent is the business on you and how would the business perform if you were unexpectedly taken away from your business? And that is a key question for a purchaser and they would much prefer that the selling owner isn’t needed once the sale is complete.
The Value Builder System
So they are the 8 Drivers. The Value Builder System itself is a 12 module programme that takes you through an initial assessment across those 8 Drivers and then, one module at a time, deep dives into a Driver to improve your business in that area. Towards the end of the programme, the modules become more focused on getting your business ready for sale, developing your marketing pack, and how to take your business to market and sell it.
How I deliver the Value Builder System
You have a choice between working with me 1-2-1, ie me with you and your business. Alternatively, you could work with me alongside other like minded business owners in groups of two or three or five, which has a proportional reduction in your investment for the programme [I like to keep things nice and simple!] and therefore the programme will fit any size and type of business.
So, what would you prefer?
* To wait until you need a lot of money and fast – only to find out that your business won’t sell, or won’t sell for anything close to what you need, so you have to continue to work or work an ‘earn-out’?
* Or to invest in me and the Value Builder System to own a business that will sell, for what you want, when you want, and allow you to walk away then and there….!?!?
What next?
And, as always, your thoughts, comments and questions are very welcome and please do share this – with whoever you think would get value from it – and to subscribe for more great content, all the very best, Rich.
Rich Wainwright | Business Coach, Trainer and Keynote Speaker