Over half of Canada’s current small business owners will want to retire in the next 10 to 15 years. A key to their success in achieving this goal is to fully understand how valuable their business is.
Understanding the key strengths and weaknesses of the business will assist in optimizing its value. In addition to financial performance, there are several other key factors that contribute to business value. Some are growth potential, the extent of recurring income, dependence on the owner, and customer satisfaction.
Another critical factor, not always fully understood or considered, is the level of dependence an organization has on its customers, vendors and employees. Depending too much on too few customers, suppliers or employees can be an unfortunate case of too many eggs in one basket.
Having success with your customers is valuable. With success, the customer may purchase more of your goods or services, and thus increase your profitability. However, too much success with a limited number of customers can be a serious business exposure. If one or two customers are the primary source of revenue, the organization could be exposed to significant instability should the customer either grow rapidly or cut back in their purchases from the organization. Ideally you want to have a number of strong customers to increase the diversification and stability of the revenue stream.
The same holds true for vendors and suppliers the company relies on. Often you find a very good supplier who provides great quality and service consistent with your organization. There is a natural tendency to lean on this supplier because they support the business so well. However, it will back fire if the quality, service or cost of their support changes and you don’t have another supplier to turn to. Ideally you want to source a group of vendors and suppliers you can trust to do the job. By having a collection of resources, you minimize the dependence on a single source and eliminate a potentially significant business exposure.
Similarly, if you are too reliant on one, or a few, key employees, you are at risk if they leave the organization and when it comes time to discuss compensation. While it is invaluable to have strong employee engagement, it’s critical to build a diversified team to support the organization.
To build business value, these structural challenges need to be addressed on an ongoing basis. They can be a moving target. Everything may be just fine for some time, but things can change very quickly. Making sure you have these bases covered is very important in achieving maximum value if you want to sell the business. They’re equally important for the continued improvement of the business’s value when you have no intention to sell anytime soon.
If you’d like to find other ways to increase the value of your business, why not complete our 20-minute Value Builder Assessment, on-line questionnaire at http://www.thevaluebuildersystem.com/osborne-group . We’ll arrange a complimentary review of the detailed results that will show what steps you can take to build a more effective business and make it ready to sell at maximum value when the time comes.
Visit Osborne-group.com for other Principals’ ideas and opinions on a range of topics. The Osborne Group provides interim executive management, consulting and project support across all sectors and over a broad scope of service areas.
