Tag Archives: business operation

Inventory Blues – Is Excess inventory Weighing you Down?

Ideally, you want to have as little inventory on hand as possible in your business. Afterall keeping a lot of inventory, ties down your money. Having to keep a large amount of inventory on hand means that your money is sitting idle and not making money for you.

Large Inventory costs also affects the value of the business. If in addition to the business, if they have to also buy a large amount of inventory, their return on investment becomes smaller and you have a smaller pool of buyer.

However, some businesses are unique and they need to keep a large inventory. For example, if your business is built on buying very old cars, restoring them, and selling them for a fat profit, you will try and buy old cars whenever they become available, restore these and then sell them for a fat profit. And you may have several years of inventory sitting with you.

However, a typical buyer who is looking for buying your business based on cash flow, will not only have to pay for the value of the business based on the cash flow, but also buy the inventory which may not generate profit for some time, but still needs the inventory to generate profits.

In such cases, one may have to come with some creative ideas.

We came across a similar situation where this Company services and sells refurbished equipment of a very specialized make that is currently not manufactured and the owner was contemplating selling his business. Based on current sales, the Company had 3-4 years of inventory in stock. One of the ideas that we suggested to them was that the they would create a supply / management agreement with the buyer where they would supply the refurbished equipment to the buyer over a period of time, and build in a profit component in it. It will be somewhat similar to seller’s note but with higher return as he is also providing some service. Otherwise the buyer would have  to pay over $2 million more for inventory for a business that is generating about $500K of earnings, and would be a difficult proposition.

Don’t be a Juggler!

juggler_juggling_balls

A common occurrence in many small businesses is that the owner makes all of the important decisions. After starting and building the business, owners are afraid to relinquish control. They do not feel that the others are capable of running the business like they can. So you are constantly juggling various tasks and making every decision.

This is what we describe in the Value Builder System as “Hub and Spoke” system. You as the owner are the Hub and everyone else is the spoke. This can also happen if you are not the owner but a manager where you are making all the decisions.

But what happens when you, the Hub, are away? Things don’t get done. And as a result you have a hard time to get away from work. You may not have taken a vacation in years.

Not only this is stressful to you, it is also very inefficient and demoralizing for your employees (or those who work under you). And more importantly, this will drag your value down value. Research by the Value-Builder team has shown that businesses following the Hub-and-Spoke model, where owners are in control of most of the decisions, sell on an average of 2.92 times their pre-tax profit. However, the businesses where the owner is not significantly involved in day to day operation and has management team and employees empowered to make decisions and running day-to day operations, sell on an average of 4.54 times the  pre-tax profit.

By making your business much less dependent on you, you can increase the value of your business by 55%! Not only that, you will have happier employees and less stress for you. You can now afford to take vacation.

But how do you do this? To start with, create operating manuals for your company. Write detailed procedures for everything that needs to be done. For each job function, you have a system or operating manual describing what needs to be done. Once you have these ready, train your employees to follow the processes and systems and give them the right tools. To quote Michael Gerber in E-Myth Revisited: “Organize around business functions, not people. Build systems within each business function. Let systems run the business and people run the systems. People come and go but the systems remain constant“. How does McDonald’s delivers the same burgers and same experience across thousands of outlets – they have the system and procedures nailed down.

Making yourself as a business owner (or manager) less important and having a system in place is just one of the eight value drivers that improves the overall valuation of your company. If you are curious about what is your score on this ValueBuilder scale, take this 13 minute survey.

So long for now.

Yatin

 

 

 

 

Getting Your Business Ready to Sell

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sold_jan7_2016_pond5bought

Whereas most of you might have had experience selling your home, you may not have had an experience in selling a business.

Whether you are selling a home or your business, your goals are the same: Sell it quickly and get the best price. To do this, in the case of your home, typically you want to clean up the home, remove all clutter, fix up things that are broken, and stage it to look attractive.

In some ways, selling a business involves similar things – fix areas that may need fixing, keep clean books and easy to understand financials, and make sure that the business runs smoothly and your place of business looks attractive and presentable.

But in contrast to selling a home,  making a business sellable and being able to get top dollars, often can take a year or several years of preparation. The best strategy is to run the business so that it can  be easily sold even if you are not planning to sell it. This will only make your business stronger and more profitable, easier to run,  and if it becomes necessary for you to sell your business, you are prepared.

So what makes your business attractive to buyers? What we see from our experience is that the buyers are in general looking for following qualities:

  1. Healthy Business.  Most of the buyers are looking for a business that is healthy, making money, and can provide for good income for them. Exceptions are start-up businesses which have good potential for a strategic buyer, or someone who loves a challenge of turning a business around and is looking to buy such a business for cheap. (Somewhat similar to home buyers who are looking for move-in ready homes versus fixer-uppers). Most of the time, we find that it is very hard to find buyers who want to buy a business making little or no money. The value of the business also improves significantly if it generates healthy profits.
  2. Business is on Auto-Pilot. Which means that there is an excellent management team in place, with good processes and standard operating procedures. It requires very little input of the owner in day to day running of the business. This also increases the value of the business significantly because the buyer does not have to bring in expensive management team.
  3. “Sticky” Customers. Customers are heart and soul of the business and nothing pleases a buyer more than to see that these customers are ‘sticky’ and ideally are  tied to the business via long-term contracts, providing consistent revenues every year.  Getting new customers is not easy – one of the main reason people buy a business rather than starting from scratch. Sticky customers will improve the value of your business.
  4. Diversified Customer Base. Buying a business where a high percentage of business is dependent on a few customers is risky for the buyer. If that customer leaves, the business will suffer. Ideally, no single customer should be responsible for more than 5-10% of the revenue, unless that customer does have a long-term contract.
  5. Happy and Competent Employees and Management Team. If the employees have a high morale and management team is doing a great job, the transition to the new owner becomes seamless.
  6. No Legal Issues.  No one wants this headache.
  7. Clean Financials. Buyers don’t like “fuzzy” financials and mingling of personal and business expenses. Keep your books clean. Whereas some personal finances are easier to explain (e.g. certain management perks such as car allowances, Life insurance payments), others cannot be and you will unnecessarily create distrust for the buyer. You maybe save some on taxes, but lose out on the value and attractiveness of your company.
  8. Keep it Lean and Trim. Always try and curtail unnecessary or extravagant expenses and keep your margins high. This does not mean paying too little to your employees or not giving them good benefits (these are short term savings that does not help you long-term), but it does mean investing in tools and processes that help you run your business efficiently, improving productivity, focusing on the profitable segments of your business and cutting down on frivolous expenses.
  9. Stand-out from your Competition. Buyers would love a business that is somewhat different. This could be due to some unique technology or product, could be from particular branding, or could be from niche business focus. A stand-out business would attract strategic buyers and almost certainly bring you good value.
  10. Business Reputation. Finally, does your business enjoy a good reputaion in the marketplace? Are your customers happy or fanatic about your service? Are employees talking good things about your company? Is there any regulatory or legal trouble? Buyers would love such businesses.

Knowing what most buyers are looking for will help you make your company more attractive to buyers and also will help you get top dollar for your business.

You can also read an excellent book by John Warrillow, called Built To Sell. He also runs very interesting podcasts on the subject. Another great book, that emphasizes “Work on your business and not in your business”, called E-Myth Revisited by Michael Gerber is also a classic, that is a great read, and will help you run the business smoother and in turn make is more sellable.

Coming up  next … How much is my business worth?

So Long Friends,

Yatin

Time to Tune-up Your Business

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spark plug

time to tune up

New year is a good time to take stock of your business. Like your car, business needs periodic tune-ups to make it run smoothly.

Car needs oil change to reduce friction and wear and tear on the engine, new spark plugs for for it to accelerate smoothly, and replacing worn out parts  so that it will not break down on you and leave you stranded. Your business deserves the same care.

 

Here are some quick thoughts on tuning up your business this year:

Streamline Your Processes and Systems (Oil Change)

Every business has systems and processes – in how you handle new and existing customers, how you handle your products and services, manage your people, etc. In a young, growing, organization, these constantly change. Dig deeper into your  systems, talk to your people who use these systems and see if you can change some of the steps or processes to make these more efficient. Identify a few flaws in your system and fix some of the easier ones right away. This will help your company run smoothly.

For example, in our company, to keep track of our inquiries and status of each inquiry, we have switched to a master spreadsheet which tracks new inquiries and their progress. This master spreadsheet as a google doc, accessible to all of the relevant staff members – so everyone sees the same copy, and can make edits. This now allows us to see the progress on each project and makes us more efficient.

Accelerate Your Growth (Change Your Spark Plugs)

When you look at increasing value of your business, nothing beats the bottom line – revenues and profits. Always think of how you can push the business. This could be offering more products or services, improving or upgrading your products or services, gaining more customers by better sales and marketing or a combination of all of these. Or it could be acquiring another company to gain new products or market share.

For example, in our company we are implementing a few changes this year. A simple thing is just making the whole process more efficient – from the time we get the listing to the time we put it to market and the way we approach prospects and follow up with them. And trying to Another thing we have already started doing is offering our customers additional products and services by expanding our marketplace. We have already invested in software that will allow us to offer directory and classified services as well as way to sell their own products or services. Over a period of time, we see this as an important extension of our marketplace.

Make Your Business Sturdier (Replace Worn out Parts)

Just like you don’t want to be stranded somewhere because the car won’t start due to an old battery or broken fan-belt, you certainly do not want to be to have your business suffer due to breakdown in your critical systems or equipment.  Time to examine your critical systems and see if  you need to invest in new equipment, software or hardware and how to ensure that your business will not suffer down-time.

One of the important steps that we have undertaken is to put all of our important documents and data in the cloud. We use ShareFile , Dropox, Mailchimp and Evernote software so that our whole team has access to the important files from anywhere in the world. We also use cloud-based email systems (Google appliance) and use software as a service whenever possible (for example for accounting and tax, ) so that we always have access to these services. We are also going to invest in a smart scanner such as Fujitsu that can digitize and file all your documents and has an ability to take different sizes of papers and scan them very fast.

You can think of what your business needs and upgrade or replace the critical systems that you cannot afford to be without.