Being Profitable and Strong Increases Valuation

In my last post I talked about 4 things every owner of a successful business must think about. They are the 6 reasons a company is sold, the 2 factors which apply to each of those situations and what being “profitable” and “strong” mean.

I promised then that I’d talk about how to make a company profitable and strong. So here we go.

1. How do you achieve consistent profitability? Here are 6 things every business owner can do to increase the odds that her/his company will produce consistent, industry beating profits:
a. Develop a strong product line – not only having width and depth in current products but also always having new products under development.
b. Build a great reputation – and recognizable identity or brand – in your target market(s) by delivering quality products and services, on time, that meet your customers’ needs.
c. Be in more than one market (which ideally do well in different phases of the economic cycle).
d. Have a broad customer base built on strong companies or affluent consumers.
e. Generate a stream of recurring revenue rather than working solely on projects which have to be replaced when complete.
f. Innovate – and create some intellectual property, products or processes, which can be protected, creating a sustainable advantage or a barrier to lock out competitors.

2. How do you make a company strong? Here are 6 things an owner can do to survive the loss of key people and keep his/her company’s balance sheet ratios looking good:
a. Document all processes. Especially the sales process which can be mapped, then managed, using a CRM system.
b. Involve all of the key people in a formal, annual business planning (and budgeting) process, which is completed 2 months before the start of a fiscal year and which includes formal, quarterly reviews.
c. Maintain strong internal financial controls, including cash flow forecasting, and insist on timely, monthly reporting.
d. If the management team doesn’t know and understand the drivers of the key balance sheet ratios have your accountant run a training program for them.
e. Always put leases and contracts – for everything and everyone – in writing.
f. Make Human Resources management a key part of your strategy and culture by e.g. driving accountability and responsibility through job descriptions; making decision making independent of the owner; identifying talent and training people for growth.

A company which is profitable and strong can survive the prolonged absence of the current owner as a result of injury or illness because it will continue to: 
• Execute its proven strategy.
• Be innovative, building barriers against competitors.
• Operate day-to-day without missing a beat.
• Produce revenues and profits at, or above, previous levels.
• Keep and attract good people.
• Attract financing should it be required.
• Survive any unexpected crises in the industry or economy.

The ability to do that also makes this type of company very attractive to a potential buyer – because the risk of the company failing in the short term is reduced significantly. And that means the valuation of the company – which determines the selling price – will be at the high end of the scale.

So by doing the 12 things I mentioned (and, in all fairness, some others like them) a business owner wins in 3 ways.

She or he makes great money while they run the company. They build security for themselves and their families in the event they are injured, fall ill or even die. And they maximize the return on the long hours, missed vacations and risks they’ve taken by getting a great price for the company if it’s sold.

How good is that?

If you enjoyed this you will also enjoy The 2 Truths Every Business Owner Has To Face and The Future Of Your Business: Succession or Exit

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Tags: business, competitors, customer, innovate, Jim Stewart, owner, People, Process, product, profitable, ProfitPATH, revenues, strategy, valuation

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