A few weeks ago I posted a video posing the question “Are you building a sellable business?”, which helps you identify things you should be doing to make it possible to sell your business, even if you don’t have any plans of doing so (there are actually quite a few benefits of doing this).
Today, I want to give you three things you can be doing to make your business more valuable.
Building a valuable business isn’t just about having a great product or huge revenues.
In fact, any founder who has a price tag on their business should ask themselves the same question any smart buyer would ask. “Would it be cheaper to build this business from the ground up?”.
In most cases, it would be far cheaper to build a similar business from the ground up, so now you just need to figure out the ‘convenience fee’ that one would be willing to pay on top of what it would cost to build that business in order to arrive at a fair value.
Unfortunately, this number is often far lower than most founders think their business is worth.
However, there are a few things you can do to make your business nearly impossible to rebuild and will allow you to fetch the price you want for your business.
First, you must understand why a buyer would purchase your business, and there are two main reasons:
1. The new buyer’s skillsets and resources can add significant value to the business from day 1. For instance:
– an experience e-commerce buyer who can easily add e-commerce to an existing retail business
– using economies of scale to reduce overhead (i.e running two businesses out of one warehouse)
– vertically integrating the supply chain to increase profit margins
2. The new buyer loves the business and cannot build it from the ground up for less than they can buy it.
In reason #2, the business has been able to add significant value to the business by doing at least one of these three things:
1. Create Proprietary Products or IP
The biggest factor that would make your product more difficult to build from scratch than it would be to buy is if it’s literally impossible to re-build.
Trademarks, patents, exclusive rights agreements, and IP are just a few ways you can significantly increase the value of your business by making it impossible to recreate without them.
If you don’t own any of these, you can make it difficult to rebuild by investing in or creating trade secrets, strong (even if not exclusive) supply chain partners, and simplified processes.
2. Build a Brand Connection with Customers
Great brands are never build overnight. They require a deep investment into building relationships with customers over time through the value you provide them.
The flip-side of that statement is that those relationships can rarely be torn apart overnight.
This means once you establish a true brand connection with a customer, you essentially own that customer for as long as you continue to provide value.
Additionally, ,this brand connection usually comes along with large, active audiences on social media as well as engaged email and SMS lists. These provide a direct connection to your customers at any time, which is what every business wants.
These benefits of building a brand connection with your customers make your business nearly impossible to compete with or recreate, and thus make it far more valuable.
3. Grow Recurring Revenue Streams
At the heart of every business valuation is net profits. And to the degree that you can reduce the risk or uncertainty of where those profits will come from, you can significantly increase the value of the business.
Perhaps the most meaningful way to reduce that risk is to generate predictable, recurring revenue streams in your business.
And while some customer churn can be expected each year, as long as the new owner has a plan to outpace customer churn with growth, they can be pretty certain of the minimum future profitability of the business.
Of course, the holy grail of building a valuable business is a business with proprietary products or IP, a strong brand relationship with its customers, and a recurring revenue model. But if you can’t get all three, work to get at least one of those fine-tuned, and you’ll be on your way to building a valuable business.