You probably won't take a hard look at your businesses' value until you are close to retirement or are ready to move on to something else. Maybe you've run a few simple business valuation calculations or learned what your competitor got acquired for, but you never took it any further than that.
Perhaps it's because your business has become a part of you. You've gone through the rollercoaster of emotions that only other founders, entrepreneurs, and small business owners can relate to. You know what it takes to create a business from nothing and turn it into something that customers want. Also, into something that supports you, your family, and your employees.
How do you put a fair value on that? The answer is you can't. In fact, any valuation you receive from investors, competitors, or business brokers will, at best, feel underwhelming and, at worse, insulting.
The Hard Truth
The investor, competitor, or your business broker are only interested in hard numbers, and irrespective of the method they use to value your business (Assets, Earnings, or Discounted-cash-flow method), their valuation will ignore years of sweat and tears you put into your business.
They will take the emotion out of it and only focus on financial numbers, growth potential, and how well the business can operate without you. This last point, how well can the business run without you is usually why so many small businesses don't sell or sell at a very low valuation.
Referrals Are Great, But They Will Hurt Your Valuation
The fact that you built your business on referrals is a source of pride to you, but to a potential investor, this is one giant red flag. Why? Because referrals are the result of personal connections - between you (or your key employees) and your customers, suppliers, and partners. A relationship that a potential buyer is terrified of losing as soon as you step away.
Step 1: Remove Yourself From Sales
The less reliant your sales funnel is on you, the better. If you only take one idea from this article, then this is it. You will half your business' value if you have your fingers in all aspects of sales. Even worse, if you are the only person making sales.
Why do so many founders, entrepreneurs, and business owners have such a difficult time removing themselves from sales? Because it means giving up a lot of control, and not just any control, but control in the heartbeat of their business. Simply put, without sales, you don't have a business.
We are not suggesting you altogether remove yourself from sales. For example, you may still want to check and approve large deals that would have a consequential impact on your business. However, if you're going to make your business more valuable, you have to remove yourself from day-to-day lead generation and sales activities. Your potential buyer expects your employees to handle sales, and not you (Owner, CEO, Founder, or President).
Step 2: Automate Your Lead Generation (And Customer Acquisition) Process
Have you ever wondered why so many tech companies and specifically SaaS (software-as-a-service) companies, are valued 5 to 10 times more than regular businesses?
- Scalability. You can quickly scale from 1,000 customers to 10,000, 10,000 to 100,000, and so on.
- Automated customer acquisition process
We acknowledge that many businesses cannot scale quickly (e.g. service type businesses), but every business can automate their customer acquisition process.
Let's look at two examples, so you can observe the difference between a customer acquisition process that is very manual (undesirable) and very automated (desirable).
- You print sales materials
- You send your sales team to locations where you think the customers are
- Your sales team follows up
- They discuss the potential customer with management (or you)
- The decision is made to pursue the deal or not
- Phone calls are made, emails are sent, and meetings are scheduled
This type of funnel is undesirable to investors because it's labor and time-intensive; hence, it's very challenging to scale (grow) - For example, the potential buyer of your business will probably have to hire a lot more people (salespeople and supporting staff) to achieve any substantial growth.
- You set up two digital marketing channels for lead generation. For example, you worked hard to improve your Google ranking, so now, Google Search brings 30% of new leads to your business. Also, you run Facebook Ads every day and they bring 40% of new leads.
- You build a solid reputation, so referrals bring 30% of new leads.
- All leads are automatically sorted in your CRM (Customer Relationships Management) software.
- Your sales team is automatically assigned hot leads.
- Cold leads go into an email funnel - automatically emailed important information every week
- Depending on how leads respond to your content (e.g., website, or email), they are downgraded or upgraded automatically (hot or cold lead)
- Phone calls are made, emails are sent, and meetings are scheduled
This is just a simple example of what a sophisticated customer acquisition funnel looks like. Why is this second funnel so much more appealing and valuable? Because it's measurable, automatic, and, most importantly, predictable.
To a potential buyer or an investor, the second funnel is extremely appealing because they can see the path to growth. For example, increasing the Facebook Ad budget will increase the percentage of leads coming from Facebook. Similarly, focusing more on search engine optimization (SEO) will increase the number of leads coming from Google.
Unsurprisingly, businesses that have a sophisticated and automated customer acquisition funnels are a lot more desirable (and valuable) because:
- They are easier to scale
- They can grow without new sales or marketing hires
- There is a direct correlation between marketing spend and customer acquisition
- The funnel can operate without the CEO/Owner/Founder
Step 3: Build An Excellent Online Presence
Most customers are not early adopters or risk-takers, so they want to feel like they are dealing with an established and reputable company.
A terrible website is one of the quickest ways to destroy customer's confidence in your business - irrespective of what you are selling. On the other hand, a great website will make your business feel trustworthy and bigger then it actually is. The same applies to social media, email, and all the other digital marketing channels your customers use.
From the business valuation perspective; if your business looks bigger and more sophisticated then it actually is, it will typically attract more interest.
Making your business look larger and more sophisticated is much easier and cheaper online.
Furthermore, if most of your competitors are lacking in this area (online presence), then this can be your unique selling proposition (a reason for your competitor to acquire you).
Recently we saw a startup sell within its first year of operation. Did they have an incredible new offering? No, the offering was very similar to their competition. However, they did an excellent job of establishing themselves online, making their main competitor nervous enough to make a very generous offer that the founders accepted.
Your potential acquirer will look for physical, financial, intellectual, and digital assets. And to many, digital assets are the main reason why they acquire a business.
Related: Must-Know Digital Marketing Trends
Even if you are not thinking of selling your business, increasing its value is of utmost importance. It will help you acquire bigger deals, secure better terms with your financial institution, and attract better employees.
The good news is, most of the recommendations we covered in this article are not expensive to implement. For example, remove yourself from day-to-day sales activities, create an automated customer acquisition funnel, and truly establish your business online.
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