What would someone do if they had a blank check and owned your company?
Growth for growth’s sake can get a business into trouble, but if you want to maximize the sale value of your company, you have to put things in place to give the buyer the opportunity to take the company forwards. Even though it might be the end of the journey for you, remember that it’s the very start of the journey for them. Your company has to be equipped to take them somewhere.
Think transferable value or in plain english, transferable cash flow. If someone were to purchase your company, how fast could they x5 your current cash flow?
Does your business have growth potential?
- What would happen if you had x5 demand tomorrow?
- Could you scale to the wants and needs of somebody else?
- If someone gave you a blank check to fund your business, could you immediately use it to drive more profit?
The snowball effect
In Warren Buffet’s book Snowball, he cited a toll bridge as the ultimate growth business because you build it once and it keeps making money without the need for additional capital. But for those of us who are not in the business of toll bridges, the sheer volume of capital investment required just for the right to do more business can often be a big challenge. If you were a law firm and set yourself a target of x5 growth, you’d probably need to fork out for five more attorneys!
Exactly how much a business can grow and how much capital is needed for that growth is influenced by the marketplace it operates in, but there are some absolute rules that ALL businesses can follow to make growth possible once they have the relevant capital in place.
1.) Standardize your operation
Get those Standard Operating Procedures (SOP) right and you can multiply your output when the time comes. Document everything and make sure that all of the key knowledge in the organization is easily sharable. One of the biggest stumbling blocks to growth is ‘tribal’ knowledge, i.e. individuals within the workforce know how to operate day-to-day processes, but make themselves irreplaceable because of a lack of knowledge-sharing within the organization. This is often particularly acute in the case of a hands-on business owner. Be warned… if this becomes an issue at the point of sale, it’s probably too late to do anything about it.
2.) Aim to make yourself redundant
Growth can only happen on a large scale if the human element of day-to-day business is minimized. If a task is menial and repetitive enough to be automated by technology then it quite simply should be. The more a business can function without skilled human beings, the more it can be scaled.
This doesn’t mean that all employees should be replaced by robots, but it does mean that all employees should be open to change – and even better – be constantly looking for ways to make their day-to-day work more efficient. A company with a culture of innovation will always be worth more than a company with a culture of protectionism.
3.) Training is an investment
Although it costs in the short term, a properly trained workforce is essential to the scalability of a business. A potential buyer is going to need the assurance that the existing staff are good enough to execute whatever ambitious plans they may have for the future.
BUYER BEWARE! I have personally had the experience of sending an engineer to college for 4 years only to watch them get their degree and 4 days later quite for a 50% raise.
The key to the perfect balance in training, employee retention, culture, and compensation is not an easy one but it is one that must be constantly worked on.
4.) Scalability
How fast could you scale your business in new markets, new geographical areas, new products to current customers?
A business with a wide range of potential in new products/services or marketplace is likely to be more appealing to a buyer than a business with a limited ability to scale with an infusion of capital. It all goes back to growth potential. Even if YOU don’t decide to diversify, there is plenty of value in making sure it is geared-up to, should the right buyer come along with a blank check!