James Mentor is Marketing. How to Boost Your Small Business Valuation

7 Tips to Build a Valuable Small Business Successfully in 2023

How to think about your small business finances, operations, and growth strategy BEFORE considering exit opportunities. 

Sell your small business, they said. It’ll be easy, they said.

Well, let’s just say ‘they’ clearly never tried to sell a thriving lemonade stand at the tender age of 7.

The reality is that selling your small business can feel like trying to solve a Rubik’s cube blindfolded… in zero gravity… while juggling flaming torches.

No need for panic, because you don’t need to worry about selling if you focus on building an attractive business that investors want to buy.

In other words, if you want to sell your small business, you need to transform key part of your business model into an asset worth buying. 

I’ve worked with hundreds of small businesses in the franchise industry that have easily packaged businesses and sold them in just a few months.

I’ve also worked with multi-million dollar SaaS companies with 2-3x multiple exits because they’ve designed an attractive business model.

In this guide, I highlight some of the most important strategies I’ve learned to help business owners build attractive businesses that are easy to sell when they’re ready to exit.

Understand Components of Your Business Valuation

Alright, let’s get real. 

You’re pondering offloading your small business and you want to make sure you get the best offer. 

Well, the first step is understanding what your operation is worth.

You need to do this before, during, and after you decide to sell you business. Otherwise, you may find that you’ve built a business that’s too hard to sell, or worse, can’t be sold at all.

While you manage your small business, try to focus on both the tangible and intangible assets in your operations. Some of these are obvious, some are not.

Either way, you never know what investors will find valuable when it’s time to sign. 

Small Business Intangible Assets in Business Valuation

Tangible assets like property or equipment are where the obvious money lies, but did you know your website traffic/audience also has a valuation of its own?

The true value often hides within intangible assets such as intellectual property (think patents), brand presence, and your market share.

  • Brand Recognition and Reputation: The positive perception and recognition of the business name, logo, and overall reputation in the market.

Valuable intangible small business assets you never knew you had:

  • Customer Loyalty and Relationships: Loyal customers, repeat business, and a consistent customer base.
  • Intellectual Property: Patents, trademarks, copyrights, and trade secrets.
  • Employee Skills and Expertise: The knowledge, skills, and expertise of employees. 
  • Supplier and Distribution Agreements: Exclusive or favorable agreements with suppliers, distributors, or partners.
  • Technology and Software: Proprietary software, systems, or technological innovations.
  • Contracts and Licenses: Existing contracts, licenses, or permits that give your business special rights or resource access.
  • Market Niche or Positioning: A unique market position or niche that your brand owns.
  • Social Media Presence: Engaged social media following.
  • Data and Customer Insights: Collected data and customer insights.
  • Location and Accessibility: Strategic physical location of the business contributes to foot traffic, visibility, and convenience for customers.
  • Partner Relationships: Brand and distribution partnerships.
  • Training and Processes: Well-documented and effective operational processes, training materials, and standard operating procedures.
  • Innovation and R&D Capabilities: Research data on new products, services, or process improvements.
  • Content and Marketing Materials: Content, marketing materials, and branding assets. that resonate with customers and promote the business.
  • Domain Names and Web Presence: Domain names, the website, and all the traffic that comes with it.
  • Non-Compete Agreements: Agreements from key employees or stakeholders. 
  • Cultural and Organizational Values: A positive and inclusive company culture that attracts and retains employees and resonates with customers.
  • Business Networks and Alliances: Participation in industry networks, alliances, or partnerships.

These hidden gems can exponentially enhance your company’s overall worth during business appraisals.

I’ve worked for companies that have sold for millions based on their web presence and brand strength alone, regardless of product capabilities. 

Your leadership team also plays its part in this story: Businesses aren’t solely about products or services but people too.

A solid management team positively impacts productivity per employee. And revenue per employee is an essential valuation factor for growing SaaS companies. 

Solve Inconsistent Revenue and Financial Issues in Your Small Business Model

small business inconsistent revenue stream screenshot Stripe

Remember, all of these signs affect your small business valuation, so you’ll want to think outside the box a bit for small business models that are prone to fluctuating revenue cycles that lead to unattractive financials.

Solving For Inconsistent Small Business Revenue Models

Seasonal business models, whale clients, and market volatility can all lead to fluctuations in your revenue model.

Think of ways to fit the following ideas into your small business model every week and you’ll never fear financial challenges again.

  • Seasonal Fluctuations:

Strategy: Diversify product or service offerings to target different markets during off-peak seasons.

Example: A ski resort offering adventure packages in the summer months to attract tourists.

  • Client Dependence:

Strategy: Expand client base by targeting new industries or demographics.

Example: A marketing agency targeting local businesses and e-commerce startups to reduce reliance on a few major clients.

  • Market Volatility:

Strategy: Pivot business model to cater to more stable or emerging markets.

Example: A renewable energy company shifting focus from wind to solar energy as solar technology gains momentum.

Consider these issues in the earliest stages of growing your business. 

Pay close attention to macro-economic factors that negatively impact your customer’s sentiment. 

By implementing cost-cutting measures or diversifying income sources, you’ll see quick improvements in existing finances. 

And guess what? That alone would make you more appealing to investors.

How to Maintain Clean Financials

Beside offering clear insights into how money enters and exits your business stage-left, these documents also serve as evidence of tax compliance – another crucial aspect during business valuation appraisals.

Don’t make documentation for these metrics hard for you or your potential buyers to find and understand.

How to Improve Your Financial Health

To boost your financial health while simultaneously giving yourself an irresistible allure to investors, do the following:

  1. Focus on Recurring Revenue: A stable recurring revenue stream not only offers assurance about post-sale revenue but also indicates a quality product or offer.
  2. Cut Unnecessary Expenses: Trimming overhead costs without compromising product quality or service delivery should always be a business’s top priority.
  3. Diversify Income Streams: The ability to juggle multiple sources of income demonstrates innovation and dominance in your marketplace.
  4. Identify Hidden Liabilities: Conduct a thorough financial audit to identify and address potential issues. Hire a financial consultant to review all financial records and uncover hidden liabilities.
  5. Reduce Overextended Credit: Implement strict cash flow management to reduce reliance on credit and continue timely payments. Negotiate better terms with suppliers to improve cash flow and reduce the need for excessive credit.
  6. Settle Outstanding Vendor Debts: Prioritize settling vendor debts and renegotiating payment terms. Develop a payment plan with critical vendors to clear outstanding debts and ensure a smooth supply chain.

Key Takeaway: 

Get your ducks in a row before you consider selling your small business: know its worth through serious number crunching, highlight the gold within intangible assets like intellectual property and brand presence, and tidy up any messy financials. These steps are crucial to woo potential buyers.

Focusing on the financials, revenue models and debt, are just the beginning of building a valuable business model. 

We’re diving into the bones of what investors get truly excited about when analyzing your small business model.

You’ll need to think through your role within the business as you grow over time. 

How dependent is your business on you to survive?

Eliminate Overdependence on the Owner

If your small business were a band, you would be the lead singer. 

But what happens when that vocalist calls in sick? 

The show must go on. Just like an ensemble can’t rely solely on its frontman, neither should your company depend entirely upon you.

To avoid this overreliance, it’s essential to cultivate a rockstar management team or build operational redundancies. 

By recruiting skilled individuals capable of making sound decisions without constant direction, you create a machine that provides value – what investors truly want to buy. 

Tuning Up Your Operations

The key to any great performance is rehearsal or practice – the same goes for businesses too.

Streamlining operations by creating comprehensive guides and SOPs for each task performed ensures anyone stepping into a role will know exactly how to deliver consistent value every time.

This can mean less time spent training new hires or temporary replacements and more time focused on maintaining high-quality standards across all departments, which ultimately contributes towards improving productivity levels.

Crafting Effective Systems

Creating effective systems may seem complex, but in reality you do them everyday subconsciously.

They’re often disguised as routines:

  • Wake up
  • Brush your teeth
  • Shower
  • Get Dressed
  • Check your social media
  • Eat Breakfast
  • Check social media again
  • Get yourself off and social media and get focused again..
  • Shoes on
  • Out the door

This is the standard routine for the average working adult that needs to tweak the social media part of their MORNING SYSTEM. The key is to be conscious of your process – be mindful of the key activities you do to produce value for customers and clients.

Focus on carefully documenting your processes and use small business technology like project management, marketing (SEO Tools) , finance, and human resource tools wherever possible.

A well-composed system ensures tasks are completed consistently regardless of who performs them.

The goal is to establish repeatable processes that create value “regardless of who performs them.”

Steps to building a system in your small business:

Vigital SOP 001 SEO Friendly Blog Post
  1. Identify Key Processes and Tasks: Determine the core functions and tasks that are essential for your business’s operations. Example: A bakery might identify key processes such as order intake, baking, inventory management, and customer service.
  1. Document Standard Operating Procedures (SOPs): Create detailed step-by-step procedures for each key process to ensure consistent execution. Example: A photography studio might document SOPs for client onboarding, photoshoots, editing, and delivery.
  1. Assign Responsibilities and Roles: Clearly define roles and responsibilities for each team member involved in the processes. Example: A landscaping business might assign specific team members for tasks like mowing, planting, and customer communication.
  2. Implement Technology and Tools: Integrate software, tools, or apps to automate and enhance various aspects of your processes. Example: A retail store might use a point-of-sale (POS) system for inventory management and sales tracking.
  3. Training and Onboarding: Train new employees using the documented SOPs to ensure consistency and reduce the learning curve. I’ve used the “I do, we do it, you do it” to quickly delegate tasks to team members, and it works like a charm. Example: A tutoring center might train new tutors on teaching methods, scheduling, and progress tracking.
  4. Feedback and Continuous Improvement: Establish a feedback loop to gather input from employees and customers to refine and improve processes. Example: A restaurant might collect customer feedback to adjust menu items, service quality, and ambiance.
  5. Quality Control and Metrics: Define quality standards and implement metrics to monitor and measure the effectiveness of processes. Example: A software development firm might track project completion time, bug rates, and client satisfaction.
  6. Scaling and Replicating: Develop systems that can be easily replicated as your business grows or expands to new locations. Example: A franchise model, where a successful restaurant concept is duplicated in multiple locations.
  7. Outsourcing and Delegation: Identify tasks that can be outsourced to external experts or delegated to specialized teams. Example: A small marketing agency might outsource graphic design tasks to freelancers.
  8. Emergency and Contingency Plans: Develop plans for handling unexpected situations or crises to ensure business continuity. Example: A plumbing company might have contingency plans for addressing urgent repairs and service disruptions.

Examples of Systems-based Business Models

Franchise Model:

Study businesses like McDonald’s or Subway that follow a systematic approach to delivering value.  Look for their standardized processes, branding, and operations replicated across multiple locations.

Subscription Box Service:

Review subscription box businesses like Blue Apron or Birchbox’s approach to curating, packaging, and delivering products to subscribers regularly.

E-commerce Dropshipping:

Dropshipping businesses operate systematically by leveraging suppliers to fulfill orders and handle shipping, allowing the business to focus on marketing and customer service.

Mobile Car Wash:

A mobile car wash business could systemize by defining processes for scheduling appointments, cleaning vehicles, and managing customer records.

Remember that every business is unique, and the specific systems you implement should align with your business’s goals, industry, and customer needs.

Over time your focus should shift to efficiency and overall quality. 

Remember, keep fine-tuning these systems through regular performance monitoring.

Once you’ve mastered this stage, you can begin thinking about scale.

Scale Your Small Business Model: The Valuation Multiplier

Scalability is one of the most attractive factors of a small business’s valuation.

It represents tremendous upside potential with very little upfront investment – the stuff investors drool over.

You’ll need to execute a well-planned business model that grows consistently and expands easily when ready.

Here’s how to approach standard local business models with scalability in mind:

  • Local Service Business:

Strategy: Explore franchising or licensing opportunities to expand into new locations.

Example: A successful coffee shop offering franchise opportunities to entrepreneurs in different cities.

  • Personalized Services:

Strategy: Develop standardized processes and train employees to maintain service quality while reducing owner involvement.

Example: A personal training studio creating comprehensive training manuals for trainers to ensure consistent service.

  • Limited Product Range:

Strategy: Research market trends and customer preferences to identify potential new products or services to offer.

Example: A boutique clothing store expanding its product range to include accessories and footwear.

Avoid Overdependence on the Business Owner if You Want a Valuable Small Business:

This should be clear. When you’re being bought, your ownership rights are what’s at stake. If you are still a part of core operations and cannot be separated from the business without it collapsing, then you are the business.

Use systems and delegation to transition to a less dependent model. I’d recommend this to business owners who plan to hand their business down to future generations as well.

  • Tech Startup:

Strategy: Build a solid technical team to share responsibilities and continue product development.

Example: Bringing in experienced software engineers to work alongside the founder on product innovation.

  • Artisanal Craft Shop:

Strategy: Train and empower employees to replicate the owner’s artistic style and maintain customer satisfaction.

Example: Providing workshops for staff to learn and practice the owner’s crafting techniques.

  • Event Planning Business:

Strategy: Document processes and procedures for event planning to ensure consistency in execution.

Example: Creating a detailed event planning manual that guides staff through each step of event coordination.

  • Consulting Firm:

Strategy: Transition clients to other capable consultants within the firm to establish relationships beyond the owner.

Example: Introducing clients to other consultants and involving them in projects to build trust.

  • Family Restaurant:

Strategy: Develop a well-defined brand and customer experience that can continue without the owner’s direct involvement.

Example: Standardizing recipes and training kitchen staff to ensure consistent food quality and taste.

All businesses eventually need to find independence from their founders or ownership to appear valuable. 

Showcasing Consistent Growth for Future Revenue

Reports dashboard Google Chrome 2023 06 28 06.28

Begin by setting realistic targets based on your previous performance and smashing them regularly. 

As you and your team become accustomed to meeting goals and pushing the boundaries of your business model, you can consider expansion planning.

The Art of Expansion Planning

Your plans should be comprehensive yet flexible enough to accommodate changes in the marketplace. 

A well-articulated strategy communicates foresight and flexibility. You’ll need to both adopt and innovate over time, and you should input systems that ensure this regularly.

3 Steps to Expansion Planning

  1. Market Research and Analysis:

Identify underserved markets, assess demand, and analyze the competition to find your market strength.

  1. Financial Assessment and Resources:

Evaluate your financial story, secure funding, and allocate resources for scaling operations.

  1. Strategic Implementation:

Develop a clear launch strategy. Adjust operational processes, and execute expansion plans systematically.

Necessary Resources – More Than Just Money.

Financial resources, human capital, and technology infrastructure make up the backbone of your business operations. If these fail, your business fails.

Maintain these properly throughout the expansion. Try your best to stick close to your budget and plans but don’t be afraid to be flexible when needed. 

Growth is great but survival will always be more important.

Find ways to measure operational efficiency using metrics like; revenue per employee and regularly reviewing your marketing/sales revenue efficiency or ROI of growth systems. 

Maintaining Operational Efficiency During Scaling Up Process – Crucial Yet Overlooked.

Don’t wait to measure your operational efficiency. This tells you when to optimize or adjust broken business systems. 

Channel CAC Model Censored SaaS Marketing Budget

Here are some calculations to keep handy while evaluating your business value.

  • Labor Productivity Ratio:
    • Calculation: Output / Labor Hours
    • Measures of how efficiently labor is used to produce goods or services.
    • Example: A bakery produces 100 loaves of bread with 20 labor hours, resulting in a labor productivity ratio of 5 loaves per labor hour.
  • Inventory Turnover:
    • Calculation: Cost of Goods Sold (COGS) / Average Inventory Value
    • Measures how efficiently inventory is managed and sold over a specific period.
    • Example: A retail store with $200,000 in COGS and an average inventory value of $50,000 has an inventory turnover of 4 times yearly.
  • Operating Expense Ratio:
    • Calculation: Operating Expenses / Total Revenue
    • Evaluates the percentage of total revenue used to cover operating costs.
    • Example: A consulting firm with $50,000 in operating expenses and $150,000 in total revenue has an operating expense ratio of 33.3%.

Don’t stop at measurements. The minute you see something off, take action.

Leverage industry benchmarks to add context to your numbers. Also, consider using these calculations as goal parameters for your organization.

When you continuously focus your operations around delivering better value every day, you begin to build an enterprise ANY investor would buy. 

Key Takeaway: 

When selling your small business, remember that growth isn’t just about numbers. Demonstrate scalability by consistently hitting targets and planning for expansion. Remember, it’s not all about money; human capital and technology infrastructure are also key. Maintain operational efficiency during scaling up to ensure an attractive investment proposition. Lastly, plan strategically for a smooth transition post-sale.

Balance Regulatory & Compliance Requirements

The SEC is aggressive. And most investors would rather stay clear of their radar. 

Businesses that operate outside the lines, no matter how profitable, only generate negative attention in the end. 

Queue the story of Sam Bankman-Fried.

It’s not just about ticking boxes; it’s an integral part of due diligence that potential buyers scrutinize.

A spotless compliance record enhances your business valuation, while any missteps could deter prospective buyers and knock down your asking price.

You may not prevent them all throughout your ownership, but you should quickly respond to regulatory queries. 

The Ripple Effect of Regulatory Hiccups on Selling Your Small Business

Regulatory issues can spoil all the fun if discovered late in negotiations. 

Think data privacy violations leading to hefty fines and tarnishing reputations faster than you can say “GDPR”. 

Conversely, showing off stellar adherence to regulations such as HIPAA for healthcare, SaaS companies for GDPR demonstrate a clean asset.

Proper licenses and permits? 

Look, you need to be running a legit show. Period.

There’s no resale value in criminal operations. 

Different industries come with different rule books. 

You may need to identify the proper professional assistance for heavily regulated industries.

What works for tech start-ups won’t necessarily work for e-commerce platforms or marketing agencies. 

Luckily enough, some legal advisors eat industry-specific regulations for breakfast. 

Identify the Right Professional Assistance: Your Secret Weapon for Selling a Small Business

Building a small business, you can sell is a long-term strategy. You need to implement risk management in your operations before you scale.

Scaling often trips hidden legal, financial, and accounting wires. You’ll need help identifying where these hide if you’re a novice entrepreneur. 

Hiring a professional ensures you have key council as you formalize an expansion strategy. 

Consider adding these professionals to your inner circle of advisors as you expand.

  • Lawyer or Legal Counsel:
    • Advises on legal matters, contracts, intellectual property, and regulatory compliance.
  • Accountant or CPA:
    • Manages financial statements, taxes, bookkeeping, and ensures compliance with tax regulations.
  • Business Consultant:
    • Provides strategic advice, market analysis, and helps optimize business operations.
  • Human Resources (HR) Consultant:
    • Assists with employee management, HR policies, recruitment, and compliance with labor laws.
  • IT and Technology Consultants:
    • Helps with technology infrastructure, cybersecurity, software implementation, and digital strategy.
  • Marketing and Advertising Agencies:
    • Provides expertise in marketing campaigns, branding, digital advertising, and social media.
  • Financial Advisor or Planner:
    • Offers guidance on investment, retirement planning, and managing business finances.
  • Insurance Broker:
    • Assists in selecting appropriate insurance coverage for the business, employees, and assets.
  • Public Relations (PR) Consultant:
    • Manages media relations and press releases to build a positive public image.
  • E-commerce or Logistics Specialist:
    • Assists with online sales strategies, fulfillment, and supply chain management.
  • Real Estate Agent or Commercial Property Advisor:
    • Helps with leasing, purchasing, or managing business property or office space.
  • Environmental or Sustainability Consultant:
    • Advises on eco-friendly practices, waste reduction, and sustainable operations.
  • Health and Safety Consultant:
    • Ensures compliance with workplace safety regulations and provides risk assessments.
  • Translator or Language Services:
    • Assists with communication in different languages for international expansion.
  • Mergers and Acquisitions (M&A) Advisor:
    • Provides guidance on buying, selling, or merging businesses.
  • Cybersecurity Consultant:
    • Assesses and enhances data security measures to protect against cyber threats.
  • Facility Management or Maintenance Services:
    • Ensures proper maintenance and management of business facilities and equipment.

You may need a chief of staff to help with the recruiting and vetting process as you build your expansion team, but remember you should always go with personnel you can trust.

Don’t be afraid to explore your network for specialists, professionals, experts and thought leaders.

Choose who best aligns with your goals and values. 

FAQs

How can I sell my small business fast?

Boost your chances of a quick sale by improving financial health, demonstrating scalability, and ensuring regulatory compliance. Engage professional assistance for efficient handling of the process.

How much would a small business sell for?

The selling price depends on factors like revenue, assets, industry standards, and market conditions. A proper business valuation is crucial to determine an accurate price.

How do I sell my small business myself?

Selling yourself involves valuing your business accurately, preparing all necessary documents, marketing it effectively to potential buyers, and negotiating terms. Legal advice is recommended during contract finalization.

How easy is it to sell a small business?

Selling a small business can be complex when conducting valuation assessments and preparing financials and contracts. However, with professional help, it becomes manageable. 

Finding a market for your business can also be challenging. But with listing sites like bizbuysell.com or Flippa.com, you can be in the market in a few hours.

Conclusion

Building a valuable business is the first step to selling your small business. It’s not just about numbers in the end but how well you develop the intangible assets that make your business attractive.

Clean financials are a must. Well-documented financial management practices established early can boost buyer confidence and pave the way for a successful sale.

Businesses that aren’t overly dependent on their owners are more attractive. As an owner, find ways to systemize what you do for the business, then build a team to manage that system in your absence..

Scalability is gold! Consistent growth and clear expansion plans hook buyers immediately.

Don’t neglect the regulatory compliance side of things, either. Create a routine around these annual governmental check-ins to ensure compliance.

Hiring professional help can make the process smoother. Brokers or advisors can guide you through complex tasks and allow you to adopt their systems to save you time and ensure success.

Begin with the end in mind. Whether or not you want to sell you business, start by building a model that can be sold to ensure you have options later on in life. 

Anything can happen; you’ll want flexibility with your options. 

“Remember, in the symphony of business, the harmonious blend of intangibles, financial finesse, scalable dreams, and expert guidance composes the grand crescendo of a successful sale. Play your notes wisely, for they hold the key to a harmonious exit.”

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