Organizing Financial Performance for the Sale of Your Business

In  continuation of our series on the Value Builder System, we’ll discuss the importance of your business’ financial performance. The buying and selling of businesses comes down to a common bottom line: will this transaction make me money? By organizing and legitimizing your books before the sale, you are helping all parties have peace of mind and confidence in a successful transaction.

As the seller, you have poured countless hours and resources into your business. Now, buyers are looking for you to prove that their investment is going to be a good one. Setting up your financial performance in the most positive light you can manage is a critical piece of a successful transaction.

What can you do to be prepared?

Begin Gathering Your Documents

Count on the required records going back anywhere from three to five years. Before you ever begin fielding offers, you need to have gathered your documents into a safe place, in both digital and hard copy form. As new financial statements and profit/loss statements are completed, add them to the files.

Buyers may also ask for a pro forma document, wherein the seller predicts (with the help of his/her financial advisors) the value of the business. You can also offer an observation period, during which the buyer can monitor cash flow over the course of a few weeks. This is especially valuable if your business keeps a relatively consistent level of customers all year.

The Lamanna Alliance, a business and financial advisory company, recommends preparing the following four documents before beginning the sale process:

  1. Balance sheet, where you show the company’s assets, liabilities, and ownership assets
  2. Income statement (profit/loss statement), which shows all income, profits, and loss for a fiscal year.
  3. Statement of cash flows, which shows all cash flow in and out, as well as investing activities
  4. Changes in the financial history of the company over the last 3-5 years

Accurate and Fair Valuation

What is it about a small business that can make it so appealing to a potential buyer? It all starts with an accurate and fair valuation. Buyers want a business that is worth more than the sum of its parts, but that has the parts necessary to run well. That includes everything from experienced employees to necessary equipment. Combine that with an established customer list, and you’re looking at a company that’s going to sell rather well to the right buyer.

Neglecting to portray all of the value that your company would bring means leaving money on the table. In order to accurately and fairly portray that value, you must invest in a third-party appraisal. According to Biz Fillings: “Guessing at the value of your business is likely to result in either a price that’s unrealistically high and turns off many potential buyers, or a price that’s unnecessarily low and keeps you from cashing out at full value.”

These appraisals are done by CPAs with specialized training specific to business appraisals. They are able to quantify the different assets that your business has to offer, then condense these numbers into a single figure that helps both you and the seller understand what’s at stake. Appraisers are also responsible for providing detailed reports as to how they got that figure. Allowing an unbiased third party to calculate your final value gives both you and the buyer peace of mind that everyone is coming to a fair financial agreement.

Set the record straight before you sell your business by evaluating your financial performance. Invest in an appraiser to see the true value of your company’s assets and give the seller confidence in the deal. While it may seem like extra time and effort today, it will pay dividends in the future.

Evaluate Your Business with the Value Builder System

Running your own business is a challenge, but it can also be very exciting. It presents opportunities and obstacles that you can’t plan for. Every journey in business ownership is different, but one frustration seems to resonate universally: no matter how long or hard you work, sometimes it feels like your efforts aren’t paying off.

While this feeling is discouraging and disappointing, you don’t have to stay stuck in the rut. Taking actionable steps to evaluate and change the way you do business can get you back on track, reinvigorating you and motivating your employees.

The key to unlocking your potential is building value in your company. You can’t build what you don’t know, though. Understanding the complex facets that build the foundation of business success starts takes work and it takes a certain amount of humility. Ego has no place in honestly reflecting on your business, as it can often cloud your judgement and cause you to overstate you successes.

It’s best to start with a third party that can evaluate your company practices under an unbiased microscope.

What is the Value Builder System?

The Value Builder System is an online assessment that evaluates key indicators of company value in eight key areas. Through analysis of over 40,000 businesses, the leaders at Value Builder Systems found that companies with a Value Builder Score of 80 or more received offers that are 71% higher than those of the average business.

What Are the 8 Key Drivers of the System?

Financial performance: Your history of producing revenue and profit combined with the professionalism of your record keeping.

Growth Potential:Your likelihood to grow your business in the future and at what rate.

Switzerland Structure: How dependent your business is on any one employee, customer, or supplier.

Valuation Teeter Totter: Whether your business is a cash suck or cash spigot.

Recurring Revenue: The proportion and quality of automatic, annuity-based revenue you collect each month.

Monopoly Control: How well differentiated your business is from competitors in your industry.

Customer Satisfaction: The likelihood that your customers will re-purchase and also refer you.

Hub & Spoke: How your business would perform if you were unexpectedly unable to work for a period of three months.

Resources and Articles for Implementing the System

Check back frequently for updates!

Financial Performance

Organizing Financial Performance for the Sale of Your Business

Growth Potential

Switzerland Structure

Vendor Diversification: Less Risk, More Reward

Taking the Eggs Out of the Basket: Diversifying Your Customer Base

Valuation Teeter Totter

Is Your Business a Cash Suck or Cash Spigot?

Recurring Revenue

Monopoly Control

Customer Satisfaction

Hub & Spoke

Is Your Business a Cash Suck or a Cash Spigot?

When it comes time to sell your business, you’ll receive a check. This check is the icing on the cake of all the blood, sweat, and tears that you poured into your business during your time as the owner. The buyer, on the other hand, is going to be writing two checks: the one that pays you, and the one that sustains the business after you’re gone.

If the cost of running your business is low, that typically means more money in your pocket. The flip side is that if the buyer sees the need for more capital than they have, it’s coming out of your check. Even buyers who want to offer you more money aren’t in a position to do so if they won’t have enough to stock inventory, pay employees, and keep the lights on.

If you want to avoid this fate, it’s important to know what your business is worth to a buyer when you’re ready to sell. That’s where the ValueBuilder valuation teeter-totter comes into play.

The Valuation Teeter-Totter

A teeter-totter is simple science in action. It consists of a pivot point attached to a long plank that is meant to tip in favor of the heavier end. This little playground toy is the perfect metaphor for your business.

On one end is the value of your business- what it brings to the table and how much it is capable of making the owner. On the other end is the cost of your business, including payroll, utilities, vendor invoicing, taxes, insurance, and all of the little things that go into helping your business run.

Your goal as an eventual seller is to ensure that the teeter-totter stay tipped in your favor. Keeping the value worth more and the cost of operation less is the key to selling your business at the most profit to you.

Cash Suck or Cash Spigot?

As the time to sell your business approaches, there is one question that you must ask yourself to determine if now is the right time: Is your business a cash suck or a cash spigot?

If you find yourself short on bills, short on cash, and short on patience with the everyday happenings of your business because you’re not bringing in enough profits, your business is a cash suck. It’s sucking cash out of your pocket without giving back enough in profits to repay your efforts.

If you are comfortable, make enough in sales to pay all your bills and yourself, and are continuing to experience sustained, level growth, your business is a cash spigot. It is pouring value onto one side of the teeter-totter, making your business more valuable in the eyes of the seller.

More value means that your life’s work is putting money back in your pocket, and that’s a good position to be in.

Vendor Diversification: Less Risk, More Reward

What happens when your reliable supplier becomes less reliable? When your supply chain experiences natural disaster, economic issues, or political strife, you’re stuck with no stock and a horde of customers expecting their products to come in. Supply chain diversification reduces the risk of your company suffering along with your supplier.

It’s not just a good idea to mitigate your risk either– There’s a lot of reward that comes from diversifying your supply chain. Companies that switch it up often and commit to supplier diversity can reap up to 133% greater return on investment than those who stick with the same vendors year in and year out.

In a recent article from Diversity Best Practices, Member Research Analyst Lindsey Clark said, “On average supplier diversity programs add $3.6 million to the bottom line for every $1 million in procurement operation costs. The high return on investment is undeniable… A positive ROI that boosts socially conscious reputation should push supplier diversity to the forefront of business strategy.”

As if that wasn’t reason enough, here are three more reasons that diversifying your vendors is a necessary and smart move for your business:

It’s cost effective

Oftentimes, vendor diversification can even save you money! When you put the word out that you’re searching for suppliers to diversify your vendor list, you’re going to get incredible offers from businesses looking for networking and sales opportunities. While true that the research and interviewing phase of the process will cost your company time, the dividends it pays in the future more than make up for it.

It helps other small businesses

If you’re a small business owner, you understand how difficult it can be to compete with big box, bulk sale stores. America was built on entrepreneurs just like you, and giving back to that community supports the American dream. Making a commitment to diversify your supply chain shows small businesses in your community (and around the world) that you’re supporting their efforts. In turn, other businesses may soon seek you out as a partner and networking connection.

Product innovation is passed on to your customers

When competition is the key to getting sales, innovation blossoms. Monopolistic companies know that the bulk of buyers are going to continue purchasing their products because it’s easy, cheap, and convenient. What it lacks, though, is the quality and uniqueness of small business talents. Finding the right balance between easy and innovative means that you are able to pass those benefits on to your customers.

Vendor diversification gives you and your customers the chance to sample what the industry has to offer. The current investment in research and development of the perfect vendor list is going to pay off with increased ROI and the knowledge that you are pouring some love back into the small business world.

Why Is Cash Flow Important For Small Businesses Anyway?

Every small business owner worth their salt knows that keeping a constant eye on their cash flow is an important part of keeping their business running… What they may not know is that striking the balance between growth and sustainability is the key to business longevity.

Defining Negative and Positive Cash Flow

Cash flow in a small business refers to both sides of the sales equation:

  • Cash coming in from customers and clients who are purchasing the product or service you’re selling.
  • Cash leaving your business through monthly bills, such as rent payments, payroll, inventory, and payment of vendors.

The way that these two sides interact with one another determines whether or not you are dealing with a negative or positive cash flow. If you have more money coming in every month than you do leaving the business, you have a positive cash flow. The opposite is true if you have a negative cash flow.

Cash is King

When it comes to small business cash flow, having enough money to cover expenses is the best way to stay in business. While capital loans can come through in a pinch, it’s going to be impossible to pay your debt back without positive cash flow. In fact, 82% of small businesses that fail cite negative cash flow as the reason they closed their doors.

When considering your cash flow, you must also take into account your liquidity. This is anything that could immediately be turned into cash without losing any value. Examples of this would a company savings account that holds your cash reserves.

This liquidity allows you to cover short-term (typically less than 12 months) expenses. If your cash flow is not covering your obligations, you can liquidate assets to boost your cash flow. Accounting for any liquidity that you have can help you create a clear picture of your ability to cover expected and emergency expenses.

Surviving Seasonality with Scalability

Many businesses have the misconception that increasing sales is going to solve their cash flow issues. A huge growth in sales presents its own set of problems. It might seem that bringing in a lot of accounts payable all at once is a good thing, but buying inventory, getting customers to pay their invoices, and bringing in additional employees to handle the boom is going to cost a lot of money upfront.

Seasonality, in which a particular event, holiday, or time of the year causes your business to fluctuate in sales, is particularly hard to manage, especially when a business is just starting off.

A two month late invoice means two months where your cash is tied up in paying for your client’s order. That’s money you don’t have to keep the lights on or your rent current.

How can small business cash flow survive the lean times?

Micromanage your spending. Every dollar that is leaving your business is taking away from an already thin profit margin. Know where every penny in your business is going and cut costs where you can. Avoid relying on short term loans, and begin to build up cash reserves to help you survive when business is slow.

Additionally, analyze your cash flow over a few months.

Are there clients who are constantly a month behind? Account for that in your cash flow statement.

Are the summer months going to cost you more in cooling costs? Account for that in your cash flow statement.

While managing your cash flow is not a perfect science, you can begin to see patterns emerge that help you better plan for the ups and downs of being a small business owner.

Taking the Eggs Out of the Basket: Diversify Your Customer Base

Ever heard the phrase “don’t put all your eggs in one basket?” In the business world, we adhere to this through a process called customer diversification. In short, it involves making less than 15% of your total sales with one client, spreading your metaphorical “eggs” into several different “baskets.”

Relying on a single, huge sale on a regular basis seems like an easy way to pull in a profit. It simplifies invoicing, you’re always prepared for the order, and you have the chance to really focus on relationship building. But if you don’t diversify your customer base, you’re at risk of losing everything in one fell swoop. When your client partner suffers, so do you.

So, what’s at stake when you depend on a single client or a couple of clients to pay your bills each month?

Lower profit margins are a major possibility.

When one client is purchasing large orders, they often feel entitled to bulk discounts, free shipping, or service bonuses that you probably wouldn’t offer if you weren’t afraid of losing their business. Major clients know when they’re paying the bills and will ask for pricing concessions that result in net loss.

You suffer when they do.

If your client’s company takes a revenue downturn, your revenue is going to be affected too. Vice versa, a company that suddenly has a major spike in revenue is going to be more demanding of your ability to output goods or services. You’re going to want to give in to this pressure because they’re the ones keeping your lights on. Being hyper focused on the ebbs and flows of a business that you don’t even own is frustrating, to say the least.

You may be neglecting other sales opportunities.

In your pursuit to funnel all resources into your major client, you could miss out on other lucrative options. When you can depend on one customer, you’re probably not pouring a lot of energy into finding different clients to add to your sales roster. But once you’ve got the ball rolling on a regular, large client, you should start to flex your business muscles and seek out new opportunities. After all, that is how you’ll grow your revenue stream.

If your business is starting to feel a little stagnant, or you notice that you’re depending on a couple of people’s orders month after month to pay the bills, it’s time to diversify your customer base. That’s not to say that you shouldn’t continue giving your loyal clients love, but spreading out your sales sources ensures that if your proverbial basket tips, it won’t spell the end of your business.

What is Your Net Promoter Score?

Referrals are a critical part of running a small business. Word-of-mouth, online reviews, and casual recommendations add value to your company. In a world where scamming and conning run rampant, humans have developed the natural inclination to seek the opinion of trusted friends, family, and reliable online sources when making a decision.

Knowing where you stand when it comes to a customer’s willingness to promote your business can help you engage new customers and seek new ways to market to your existing customer base. That’s where your Net Promoter Score becomes an invaluable metric.

What is a Net Promoter Score

Often shortened to NPS, your Net Promoter Score gives you an idea of how your customer feels about your business or product overall, instead of focusing on a singular transaction or interaction. It exists on a scale of -100 to 100, split into categories of “Detractor,” “Passive,” and “Promoter.”

The true value of the NPS is setting a benchmark that creates opportunity to problem-solve for your company in real ways.

Calculating Your Net Promoter Score

The first step in calculating your NPS is surveying your customers. These surveys are simple, generally asking your customers to rate their likelihood to recommend your company to friends and family on a scale of 0-10. Many businesses also ask why the customer gave the rating that they did, as it increases your ability to act on perceived problems that customers have with your business.

Promoters

Promoters are those who rank at a 9-10 in the survey. These are most likely to refer their friends and family to your business and are enthusiastic about your products/services. They typically constitute up to 80% of all referrals that your company receives.

Passives

This group, which ranks at a 7-8, is easily swayed by competitors, feeling no real loyalty to your company. When referring your business, they may qualify the recommendation by stating that they personally were okay with the transaction, but aren’t sure if they would patronize your business again.

Detractors

At the lowest end of the spectrum, we find the detractors, with scores from 0-6. These customers perceive some issue or roadblock in their interactions with you, are likely to not work with your company again, and have the potential to damage your business through negative reviews.

To calculate your net promoter score, simply subtract the percentage of Promoters from the percentage of Detractors. This number can be negative or positive, with larger numbers indicating higher customer satisfaction.

For example, if 15% of your customers ranked as Detractors and 50% ranked as Promoters, your overall NPS would be +35. On the flip side, if 60% of your customers ranked as Detractors and 20% ranked as Promoters, your NPS would be -40.

Using Your Results

Large, successful businesses calculate and use their NPS to continually grow their customer base and bring in new customers over time. While customer loyalty is the lifeblood of any small business, bringing in new customers is necessary for sustained growth.

Think of some of your favorite brands and what their NPS might be… Here are some of the results:

  • Netflix: +68
  • Starbucks: +77
  • Amazon: +62
  • Airbnb’s: +74
  • Tesla: +96

These high scores support the success of these companies, which continue to attract new customers and retain old customers consistently throughout their years in business.

Your net promoter score may reveal surprising insights into your business. Knowing how to proceed in an effort to improve this score is the mark of a sustainable company.

Managing the Cash Gap for Small Business Owners

In the small business world, even a temporary cash flow shortage can result in major problems. With razor-thin margins and the constant financial demand of running a business, it should come as no surprise that 29% of small businesses close due to running out of cash. A whopping 60% say that cash flow contributed in some way to their closing.

While it’s the frightening reality of being a small business owner, there are steps that you can take towards managing your cash gap. This helps you plan for the lean times and overcome potential pauses in your income.

Defining the Cash Gap

From the moment that you pay for your inventory until it’s sold, you’re dealing with a cash gap. In order to keep your small business open, this cash gap must be filled with either financing or your cash cushion that you’ve established.

These cash gaps can be exacerbated by any number of things, including drops in sales, an unexpected repair, customers that pay late on their invoice, and the seasonal nature of your business. When these expenses begin to compound on each other, real problems with cash flow begin. Small businesses often seek out short-term loans during these situations, but high interest rates and big payments can leave you strapped for funds.

Managing the Cash Gap

Creating a sustainable plan of action for dealing with your cash gap could save your business in a worst case scenario. Try these tips for establishing your cash gap solution:

Maintain a Cash Flow Statement Every Month

As with all financial planning, you must have a clear view of your monetary situation before you can start making major changes. Start with a cash flow statement at the end of each month. Keep track of how much money came into your business, how much was spent on your  business, and how much profit you had at the end of the month. This can help you understand where your major cash gaps might be in a month, and allow you to plan for those times.

Avoid Unpaid Invoices

Unpaid invoices for B2B sales is a major issue with small businesses, especially when those invoices are consistently late. The first step in avoiding this problem is getting familiar with the person who pays you within the other business. In doing so, you have a frontline resource to finding out what the problem is in case of delays.

You should also clearly establish when and how invoices will be paid. Many businesses nowadays forgo the paper check and opt for payments through an invoicing service or direct deposit. If that’s the case, set clear rules for when payments should be sent, keeping in mind weekends and holidays.

For example, a payment sent to your account on a Friday may not hit your account until Wednesday or Thursday of the next week, whereas a payment sent on a Monday could hit your account on Wednesday of the same week. Instead of setting a due date, consider a rule like “the last Monday of every month.” This can help ensure that you get your money in the most timely manner.

Create a Cash Cushion

It’s hard enough for a small business to pull a profit, and for some, the idea of establishing a savings account is laughable. That being said, it is an absolute necessity to have a rainy day fund for those times that something goes wrong. Even if it’s just a few thousand dollars, keeping cash aside can prevent you from seeking additional financing for something like an HVAC repair or a seasonal slump. It can also allow you to seek out investment opportunities that you would not have access to otherwise, such as special promotions on inventory that you typically purchase for full price or participation in a local marketing endeavor.

Being the owner of a small business is a rewarding and exciting experience, but a lot of frustration and fear can come with it.  Finding ways to manage the cash gap can help you reap the rewards of your business without the anxiety of worrying about how you’re going to pay your rent next month.

4 Ways to Improve Customer Experience

We all know the Golden Rule: “Do unto others as you would have them do unto you.” While this adage may seem like something cliche we learn in elementary school, it’s really a great place to start when crafting your customer experience strategy. If you were purchasing your product or service, how would you want to be treated?

The Value of Customer Service

In an increasingly digital world, where human interactions often go by the wayside for the sake of convenience and efficiency, customers are seeking out businesses that make them feel good about their experience. Creating a positive customer experience, whether you conduct your business online or in-person, is critical to the sustained health of your company. No matter how incredible your product or service is, people want to be treated well. Neglecting that fact can lead to major trouble.

If you’re trying to think of creative ways to boost your customer experience, start with these easy tips:

Begin with empathy in mind

When speaking to people about your business, or when listening to their comments or concerns, step outside of your own perspective and see what they’re seeing. Are you treating them like they’re human, or just another sale? Are you listening with intention, or are you waiting to get a word in? Letting people know that they are valued and heard creates incredible bonds between you and your customer base.

Be passionate about your business

People are social animals, ones that feed on the emotions of those around them. If you are enthusiastic, passionate, and positive, customers are more likely to act in turn. You can’t “phone in” warmth and excitement. You must genuinely be in love with what you do and the people that engage with your product.

Solicit feedback and act on it

Too often, feedback is asked for, but businesses chalk up negative comments to picky customers. Remember: Without those picky customers, your business is not sustainable. Once you get feedback that offers suggestions or negative reactions, actively work with your team to decide what the next step is in fixing the problem, and communicate that with your customers.

For example, if you sell homemade wrist watches online, and customers have commented that the strap tends to break after being exposed to water, the answer is not, “Well, don’t expose it to water.” The onus is on the business to fix the problem, or continue to deal with upset buyers. Only one of those options can keep your business open.

Invite your customers to take part in the product or service’s journey

Be transparent about sources, methods, and the team that you work with to deliver the goods. In doing so, two things happen: People trust that you’re telling them the truth about what they’re buying, and you give a face to your company. It’s easy to be rude and distasteful to a company that exists solely behind a screen. Creating a genuine voice can help your customers remember that you’re just regular people trying to solve a problem, not a faceless entity who intentionally set out to get their money for a subpar product.

Perhaps most importantly, a positive customer experience absolutely depends on your ability to take criticism in stride. That doesn’t mean creating a script that walks you through solving a problem or ignoring negative feedback. Instead, it means being open, honest, and authentic about your want to help build bonds between your business and your customers.

How Do Brick and Mortar Stores Thrive In The Age Of Amazon?

Adaptation in the Amazon age can seem to be a behemoth of a task. With Amazon pulling in $1 billion in sales on its best day last year, for a whopping $141.92 billion in total sales in 2018, brick and mortar stores are left shaking in their boots. Even giants like Wal-Mart are struggling to compete, and have adapted their game plan to offer services like grocery pickup and free home delivery.

Although online vendors and brick and mortar stores both provide immense benefits to their customers, lately the latter have struggled to compete, and finding the right ways to market them is key to surviving. Your physical space offers a genuine human connection and the opportunity to make a name for yourself within a community. Take advantage of these unique circumstances.

Don’t be afraid to sell online, including through Amazon

You know what they say: Keep your friends close and your enemies closer. Use a combination of marketing through your physical store, a third-party marketplace like Amazon, and your own website to push your product into the collective consciousness of those seeking the solutions your business offers. This multi-pronged approach is your best bet for bringing in revenue.

Offer the warmth and attention that Amazon can’t

Brick and mortar store owners have a unique opportunity when it comes to forging strong, personal connections with the people who walk through their doors. Whether you’re a local clothing boutique or a fishing gear retailer, you get to have conversations and share opinions about your products that Amazon will never be able to replace. Sure, online reviews bring back repeat customers, but warm and genuine conversation that helps a customer choose the products that are best for them is a marketing tool that Amazon doesn’t have in its arsenal.

Brick and mortar is instant, Amazon is not

Amazon is convenient, but there’s something to be said about instant gratification. When shoppers walk into your store, it’s because they’re not willing to wait 2-3 business days to receive the product they are looking for. Use this as an opportunity to upsell and promote products. Impulse purchases are real– There’s a reason stores put the candy bars by the checkout line.

Find your product niche

In 2018, Etsy was up 20.4% in sales from the previous year, with total revenue reaching an all-time high of $132.39 million. Why? People are willing to pay more for handmade, artisan goods that appeal to their particular tastes. For example, this Sherpa pullover costs only $22.94 on Amazon, but the exact same brand and product costs $39.99 on Etsy because it comes with a monogram. Capitalize on your product niche and market to the kinds of people that you know are willing to buy it.

Keeping the doors of a brick and mortar store open in the online era is hard work, but it isn’t impossible. The secret to success lies in your ability to treat people like people, not just another shopper. It’s a tool that can form strong bonds and create a thriving repeat customer base that seeks out your unique products and helpful insight. That’s something Amazon just doesn’t have.