3 Ways to Increase the Enterprise Value of Your Family Business
When you’re wrapped up in the day-to-day challenge of running a business, you can easily overlook some big-picture opportunities to boost your bottom line. Here are three factors to focus on today.
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Many entrepreneurs focus on revenue, innovation and people to lead their enterprise forward in the future – but business tends to get in the way. Finding, recruiting and hiring talent, maintaining relationships with key customers and vendors, dealing with the day-to-day issues of growth and management of the business over time create bottlenecks that stunt growth and decrease your business’s value.
In the course of running your business, you must prioritize many variables, such as product differentiation, market share, margin, customer concentration and satisfaction, human resources, legal, innovation and the list goes on and on. For illustrative purposes let’s key in on three factors:
- Sales and Marketing
If you had to grade yourself on a 1-10 scale, how would you score for getting the most out of these three key areas?
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Reviewing best practices on these three critical areas could boost the enterprise value for your business.
Get Your Financials in Order
Perhaps one of the most important parts of running a solid business is having your financial affairs in order. Cash flow is the critical lifeline that keeps businesses’ hearts pumping, and many times the reason businesses fail is that this heart stops beating. One thing that immediately increases your business’s enterprise valuation is having clear and articulate financial statements.
Financial statements allow the owner to measure progress and adjust accordingly, as well as provide a potential buyer a historical track record of the company. The most basic statements are income statements, balance sheets and cash flow statements. Consider auditing your company and grading yourself on how clearly your quantitative proof of the company’s financial health is.
Once you have your financial statements created you can begin to track trends, such as:
- Changes in assets and liabilities
- Increase/decrease in company equity
- Liquidity/working capital
- Inflow of new assets and outflows to produce revenue
- Where the company’s cash comes from and how to pay for operations or invest for the future
- Income, expenses and depreciation
- Cash flow received from or used for investing, financing and payment of debts
Having clear and concise financial statements delivers many benefits. The primary advantages to you and your business include a documented paper trail of activities, a snapshot of your financial health and insights into performance, operations and cash flow.
Fine-Tune Your Operations
What is going on behind the closed doors of your business? Regardless of your industry, improving the operations by thinking strategically about processes and systems as it relates to your vision, leadership and procedures will increase the enterprise value of your business. Consider scoring your business on the following operational metrics:
- Leadership, people and culture
- Procedures, workflows and compliance
Do you have a vision statement for your business? You should. A vision statement is a description for your internal team, customers, partners and investors showing what your business can achieve if there were no barriers for a particular time frame (i.e., one, three, five, 10, 25+ years). Vision statements help provide the business a sense of direction.
What would your best customers think if they were “flies on the wall” on a given day in your business? What does your business stand for? What core values are most important to build the culture within your organization? How is your team getting along? Do you feel like you have the right players in the right positions in your organization?
Scaling your business through systematic procedures and processes does not only save your business time and effort, it is also the ultimate contributor to enterprise value. My favorite example is McDonald’s. The process of assembling a cheeseburger starts with toasting the bun, placing the sandwich paper on the counter, arranging the toasted buns, applying ketchup/mustard/onion/pickles/cheese, placing your cooked patty, closing the buns and wrapping. This entire process is tracked for efficiency, with an average time of 208.2 seconds for those going through the drive-thru window. The point is simple: Anything that is done more than once should have a clearly defined process.
What happens behind the closed doors of your business is important, because operational metrics aid your financial reporting, which will increase the enterprise value of your business. Operational reports are a sign that your company understands and values key drivers of your company’s performance.
Develop a Clear Sales and Marketing Plan
Perhaps the most exciting part of being an entrepreneur is the feeling in your heart and stomach when your business is growing its top line revenue. Your business attracts higher value multiples when you can show proven and systemic methods for revenue growth as opposed to growth being based on individuals in the business today. Common scoring metrics that will differentiate you from your competitors are:
- A sales and marketing plan
- Sales process
- Key metrics
Your sales and marketing plan should outline strategies specifically around awareness of your product or service among a defined group of “soon-to-be” buyers. How will your messaging emphasize to your prospective buyer that your business has a solution to an issue that they have (or may not realize that they have) and that your products or services will make their lives easier and more fulfilling? Endless resources are online to help create your plans and processes as they relate to your industry and business. Consider getting your mind around:
- What makes you and your business unique?
- What problem are you solving for your prospective buyers?
- What questions are your prospective buyers asking themselves?
- Is your marketing message consistent with your marketing materials?
Do you regularly measure your progress and what are your key sales and marketing metrics being measured? The goal of your sales and marketing metrics is to help determine if your outcomes align with your goals and what areas require fine-tuning. Four common metrics, regardless of your industry, to track would be:
- Annual revenue
- Average profit margin
- Conversion rate
- Return on investment
Sales and marketing awareness will open your eyes to many exciting facets of your business. Anytime we can obtain a better understanding of our buyer, or get feedback, we can then use this knowledge to better design and build systems and strategies to increase our businesses’ value.
In closing, implementing any or all the ideas discussed today should lead to a great enterprise valuation of your business. Financial, operational and sales and marketing systems are fundamental to any business and require constant review.
Who knows, as you review your business you may find a new reason to reinvent yourself and the business? Cheers to your success!
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Dennis D. Coughlin, CFP, AIF, co-founded CG Capital (opens in new tab) with Christopher C. Giambrone in 1999. He has been in practice since 1996 and works with individuals nearing retirement and those whom have already retired. Proud of his humble upbringing, Dennis shares his advice with the same core principles that he was raised with. When not in the office, you will find him with his family enjoying the outdoors.
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