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Effective senior managers recognize the paramount importance of robust systems and processes in driving the long-term health, growth, and value of our company. The success of any organization largely lies in its ability to streamline operations and ensure a structured approach to its activities. By providing clear processes and structures, you enable your teams to operate with precision and efficiency, resulting in increased productivity and better outcomes.  You also take a BIG step towards reducing the company’s dependence on you, or any other key individual for that matter. Consider this scenario: imagine being at the helm of a thriving sausage manufacturing plant with a devoted following. Your products are renowned for their unique quality, the result of a highly proprietary process for blending the ingredients, which only you know. This dependence can be perilous, making you the sole keeper of the company’s success. You may be able to identify with the challenges of being confined within your own companies due to the lack of well-documented processes. To ensure the sustainability and growth of your organization, you must prioritize the documentation of crucial processes. Starting with the top 1-2 processes in each functional department, challenge your managers to engage in a simple reverse engineering exercise to meticulously document each step. Though the task may seem overwhelming, initiating the process today will pave the way for future freedom. It is especially essential to capture the steps of each training process, ensuring seamless replication as you expand your team. Encouraging innovation and fresh ideas is vital, but you must not lose sight of the essence that brought you success in the first place, your underlying value proposition. By teaching, training, and holding your team accountable for adhering to these processes, you safeguard the integrity of the core business practices. Centralizing the storage of processes documentation further strengthens your organizational backbone. Whether in a shared drive or a departmental resource portal, accessibility is key. User-friendly software facilitates smooth navigation, empowering employees to follow the right procedures effortlessly. Embracing these straightforward actions today will significantly enhance the overall health of your systems and processes. Slow but steady Incremental progress is acceptable, as long as you commit to consistently taking steps towards a healthier, simpler, and more valuable company. This focus on process development and documentation not only elevates the satisfaction of running the businesses but also bolsters profitability and gives you the invaluable gift of time freedom. In conclusion, well-documented processes are the bedrock upon which successful businesses are built. As you take strides towards systematization, you pave the path for growth, efficiency, and ultimately, a more valuable enterprise. If you seek further guidance on this journey, I encourage you to explore the possibilities of “The Definitive Guide to Standard Operating Procedures” and remain open to seeking support and advice to drive your organization to new heights.

In order for a you to create a business that is growing/dynamic and, at the same time provides the freedom that you have earned, it is critical for you to be able to extricate yourself from the constant involvement in “day to day” issues. However, it also remains very important to maintain a visible presence as the founder and leading force.  In many cases, the clients established their relationship with the company through you and the relationship endured because of the confidence and trust with you.  So, maintaining enough visibility is important to preserve the goodwill that you have built without being prisoner to it. Here are a few simple suggestions for staying visible even after you have stepped back. Establishing a Visible Founder Presence: Balancing delegation with a visible founder presence contributes to the continued success and growth of your business, especially when you focus on areas where you excel.

Let’s begin with a little exercise in imagination. Picture yourself as a child, completely reliant on adults for your survival. As an infant, you couldn’t communicate through words, yet you were a master at getting what you needed. Your go-to strategy was crying, and it worked like a charm. The adults understood your message, and you received food, attention, and even a nap. The louder you cried, the better your chances! Now fast forward to your adolescent years. You still have the same basic needs, but crying every time you require something would be pretty embarrassing, wouldn’t it? Instead, you’ve learned to express your needs through conversation and active listening with your parents. Communication becomes key to obtaining what you want and require in life. Now, imagine yourself as a fully grown, middle-aged adult. Do you still depend on your parents to provide for you? Probably (hopefully) not. Hopefully, the lesson here is clear: what worked for you in one stage of life may not work in another. In other words, what got you to where you are today won’t necessarily get you to where you want to be in the future. This same principle applies to businesses. Just as individuals progress through predictable life stages, businesses also go through their own lifecycle stages. Dr. Ichak Adizes, a renowned business consultant, outlines these stages in his book, “Managing Corporate Lifecycles.” The stages include Courtship, Infancy, Go-Go, Adolescence, Prime, Stability, Aristocracy, Recrimination, Bureaucracy, and Death. As a business owner, it’s crucial to grasp the concept of “business life cycles.” Many entrepreneurs I work with fail to realize that as their businesses evolve through these stages, their management style and structure must also adapt accordingly. The result is usually frustration and stagnation. Let’s look at an example: during the Go-Go stage, characterized by high growth.  In this stage, business owners need to be proactive, doing whatever it takes to propel their businesses forward. On the other hand, in the Prime or Stability stage, where the business is established, stable, and profitable, a different leadership style is required for successful management. Business owners must recognize the stage their business is currently in and adjust their leadership and management accordingly. Dr. Adizes writes, “Whenever an organization transitions from one lifecycle stage to the next, difficulties arise. In order to adopt new patterns of behavior, organizations must abandon their old patterns.” I frequently encounter leaders in organizations who hinder their own progress by persisting with outdated approaches. Unbeknownst to them, they become bottlenecks, impeding their organization’s growth. Different stages of a business may also require that different personalities to take the lead. While the initial stages demand strong entrepreneurial leaders to carry the business forward, later stages necessitate stepping back and allowing others to assume key positions. The best leaders don’t feel threatened by this.  They embrace it.

When it comes to financing the growth of your business, you may find yourself facing a difficult choice between the lesser of two evils. Selling shares in your business can provide an immediate cash injection, but it means giving up some of your valuable equity stake. Borrowing money from a lender, on the other hand, can be costly to repay, can limit your growth, and often requires that you provide a personal guarantee.  However, there is another option: customer financing. This approach involves incenting your customers to prepay for some or all of your product or service, providing you with the necessary working capital to drive growth. This method can be a great alternative to selling equity or taking on debt as it gives you access to cash without having to sacrifice ownership or pay interest.  How Premonition Got Its Customers to Fund the Growth of His Business  In 2015 Brad Lorge founded Premonition, a technology company that provides logistics software to streamline delivery operations for large enterprises. While working with big businesses brought in good revenue, large enterprise customers were slow to make purchasing decisions, and when they did decide to buy, getting them up and running was slow and costly.   Rather than the traditional approach of financing a software start-up (rounds of dilutive funding), Lorge asked his customers to prepay. Having customers pay in advance allowed Premonition to utilize the cash from their customers to fund its growth.   By March 2022 Premonition had grown to $3 million in Annual Contract Value (ACV) when Shippit acquired it for $20.5 million—an implied valuation of just under seven times ACV. Better yet, because they used customer financing, Lorge and his partners still owned 80% of the equity in the company when they sold it.  Customer financing can be a powerful tool for business owners looking to raise money without giving up equity in their businesses. If you’re considering asking your customers to prepay, like Lorge, start by thinking about what type of incentives might be valuable to them.  Here are a few ideas:  Productize Your Service  If you offer a service, another strategy for getting customer prepayments is to consider productizing it. Your services can be productized by standardizing and packaging them as a product with a defined scope, price, and deliverables. It is essentially a predefined service that is delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing. Examples of productized services include website design packages, social media management plans, and content creation bundles.  The goal of productizing a service is to simplify the sales process, increase efficiency, and provide a predictable customer experience.  It also makes the service more tangible and by creating a standardized offering, you can reduce the amount of time and effort required to close a sale as well as minimize the need for customization.  Best of all, when it comes to products, we are accustomed to paying in advance (e.g., you expect to pay for that box of cereal at the grocery store before going home to dig in). Therefore, if you package your service offering into a product, your customers will be more inclined to pay up front for some or all of your offering.   Productizing your services or asking customers to prepay can be effective ways to obtain the cash your business needs to grow while keeping a tight grip on your equity and avoiding the obligations of a hefty loan. 

When it comes time to sell your business, will it command a value that is at the high end of the multiple range or closer to the low end. Often times, the answer will be determined based on how well you addressed the other value drivers that savvy buyers/investors look at when valuing a business. Most small and medium sized businesses operators focus the majority of their attention on improving financial performance. This is entirely understandable as profitability and cash flow are the primary KPI’s for many businesses. However, if you are looking to build maximum value in the business, you must broaden the focus to address a wider range of value drivers.  In recent years, undertaking a “sell side” Quality of Earnings study has become a popular exercise to help companies prepare for an effective sales process. While this is helpful, it really does not go far enough if you want to optimize the results. That requires a more comprehensive exercise that takes a deep look at all of the key value drivers. At Value Acceleration Partners, we call it a Quality of Value Audit. So, what are these value drivers. In my experience, there are at least eight: Let’s take a look at each one of the drivers individually. Driver #1 – Company Culture Let’s start with perhaps the most basic issue of all, your company’s culture.  This refers to the values, beliefs and behaviors that determine how your company’s employees and management interact, perform and handle business transactions. This area is often grossly under-appreciated or ignored. Even the companies that profess to focus on it often just go through a highly visible exercise to define it and then basically put it in a drawer and it is soon forgotten. Building a durable company culture that significantly impacts performance requires a day in and day out commitment. It is hard, but worth it! Objective An easily explained set of core values that are used to govern decision-making and behavior, as well as defined themes that are easily explained, understood and embodied by management. Key Questions Where The Answer Should Be “Yes” Driver #2 – Management Breadth In the eyes of a potential buyer, one of the biggest risk factors and potential value killers is the degree to which the business in dependent on the principal. In extreme cases, this factor alone can make an otherwise profitable and successful business virtually unsellable. Often a business owner/operator takes great pride in the fact that he/she knows every customer personally and they turn to him/her on issues. In reality, this means that the company is deeply dependent on you as the Rainmaker for the business and that creates significant risk. Objective A management team that is clearly demonstrating the ability to effectively direct all key areas of the business without deep involvement of the principal(s). In addition, it important to have an appropriate long term incentive plan designed to retain the key managers for the long term.  Key Questions Where the Answer Should Be “Yes” Driver #3 – Value Proposition Durability Creating true differentiation in the products and benefits your company delivers to its customers is a critical component of building value in your business. This is especially important in the eyes of your prospective buyer. Warren Buffet, arguably one of the great buyers of businesses of all time, points to the presence of a true “competitive moat” as a key issue that he looks at when evaluating a company. While not easy to achieve in many industries, it is possible, and figuring it out offers great benefits: Even companies that sell commoditized products have the ability to build a moat by wrapping valuable services around it. Your product does not just have to be the physical unit. Objective You want/need a value proposition that provides a strong “moat”, barriers to entry, a recurring revenue stream and long term sustainability. Key Questions Where The Answer Should Be “Yes” Driver #4 – Recurring Revenue Model Perhaps the biggest driver of positive value on a business is the degree to which the business model provides recurring revenue. In fact, a strong recurring revenue model can mitigate the many of the other risk factors. A recurring revenue model offers several important benefits: The type of recurring revenue also makes a difference. For instance, recurring revenue that comes from selling a consumable is not as valuable as selling a subscription. Having guaranteed contracts is even better. The bottom line…companies with recurring revenue business models are valued at a meaningfully higher multiple than those without such models. Objective A business model that provides for meaningful recurring revenue that can sustain above average growth that can be accurately projected. Key Questions Where The Answer Should Be “Yes” Driver #5 – Operational Scalability Operational scalability is your business’s ability to scale its organization, business model or system to cope with significantly increased demand for your products and services.   While your brand’s strength, value proposition, management depth, etc. are important in assessing a business, ultimately, a buyer is investing in future cash flow. And that is largely driven by the growth potential of the revenue stream and the margins that will be generated from it. Bigger revenue streams generally command higher earnings multiples in a sale. So, it is important to think deeply about the real growth opportunities in your business. Often times this means taking a step back in order to take multiple steps forward. It is hard to give up the revenue from a product or service line but sometimes that is exactly what is needed to accelerate growth. The ability to operationally scale, and to do so at improving margins, is a critical part of the equation. Your company has to be ready to scale and this can be challenging. The landscape is littered with companies that outgrew their capability to absorb the growth, usually due to poor planning. Strong top line growth, combined with strong processes, combined with improving margins is the holy grail of maximizing value in your business. Objective Your business should offer a demonstrably scalable operating environment that includes well defined and well documented processes that can be relatively easily scaled as well as effective processes for onboarding/training the personnel required to scale

Stagnation is a business killer. To ensure sustainable growth, you must continually assess and refine your processes. If it ain’t broke, make it better! Keeping the same strategies simply because they are familiar, and work reasonably well, really limits the potential for greater success.  To ensure your organization’s longevity, leaders should make a habit of questioning why processes are done certain ways. Examining and improving productivity is key to maximizing margins while avoiding blanket cost-cutting strategies that could put the company in jeopardy. By constantly asking ‘why’ you can identify and fix costly bottlenecks and inefficiencies.  Many businesses are usually under intense pressure to reduce costs, often starting with headcount. However, cutting workforce without redesigning processes can be the start of a vicious cycle that only speeds up an organization’s demise. Reducing expenses by laying off employees may reduce overhead initially; however, this leaves remaining staff with more work while eventually jeopardizing quality control. With a shrinking labor pool, it is important to look to increase efficiency first. Failing to update workflows and processes can cause frustration among employees, leading to low morale – even prompting turnover in an already tight market. To avoid this detrimental cycle it is essential to take the time to reevaluate standards of work; ask questions about why things are done the way they are and identify ways that make operations simpler yet more effective. Of course, all of this is easier said than done. Re-engineering processes effectively requires specific expertise. Look internally or externally for people that have the Six Sigma or Lean Manufacturing experience that is needed to map out every nook and cranny of an organization, uncovering areas where improvement can be made – from streamlining existing operations to identifying tasks which no longer add value. This type of process mapping can be painstaking but it is critical to the improvement process. It is hard to identify improvement opportunities until the team has a clear view and consensus of how things are currently done. Investing in process improvement is essential for any business striving to create an environment conducive to growth. You can easily reap the rewards of these improvements through several different options – from outsourcing consultants who specialize in mapping and streamlining processes, hiring staff dedicated for this purpose or tasking existing employees with managing and optimizing operations. No matter which strategy you choose there are no risks associated with pursuing progressive solutions that will help your organization succeed!

Asset Sales When it comes to selling a company, it is critical for buyers and sellers alike to understand the distinction between asset and stock transactions. In an asset sale, the seller relinquishes ownership of their assets while remaining the legal owner of the business.  In contrast, in a stock transaction they are selling equity in the organization. Both options come with advantages and disadvantages that should be weighed according to each situation’s unique needs – helping maximize returns on both sides of the negotiation. An asset sale can present an advantageous opportunity for buyers: they can acquire individual assets and liabilities at fair market value, with the tax basis stepping up from original investment.  Additionally, purchasers have full discretion to determine which liabilities are assumed versus left behind with seller.  By limiting potential unknown liabilities, the buyer can spend their time, money and resources more efficiently which usually results in a faster, lower cost transaction. An asset sale may not be the ideal solution for everyone, as it can lead to a double taxation on sellers if their assets have appreciated in value. This resulting cost of transferring ownership means that buyers and sellers must work together to ensure any contracts with customers/suppliers are renegotiated accordingly. In turn, this could result in higher purchase prices from buyers. When an asset sale takes place, the seller needs to make sure all assets purchased are liquidated and liabilities settled. Additionally, unlike a stock sale, minority shareholders who refuse to sell their shares can be forced into accepting the terms of this type of transaction. Lastly, with respect to securities laws and regulations – usually no compliance is required from either buyer or seller which makes it simpler than other alternatives available in corporate finance transactions. Stock Sales A stock sale allows for seamless, quick transfer of ownership and cash to the seller’s shareholders. This type of acquisition involves minimal negotiation beyond that which is already agreed upon in terms set forth by both buyer and sellers – making it a popular choice among those wishing to complete a transaction quickly. The benefits are significant; less red tape gets transferred assets into the hands of buyers faster while allowing them to bypass costly taxes often associated with such transactions. When acquiring stock, buyers can’t get the full benefit of a step-up in tax basis. That’s because they don’t own legal ownership to the acquired assets and must take on all liabilities.  This is no way to pick or choose which liabilities stay. If there are liabilities that the buyer is not willing to assume, one option is to execute separate agreements that give them back to sellers. One potential complication in a stock sale is that shareholders have the option to hold on to their shares, which can unfortunately prolong transactions and result in substantial added costs. Additionally, when dealing with a large number of shareholders securities laws must be adhered to in order for an acquisition to proceed; this further complicates matters as it also increases risk due unforeseen uncertainties presented by the sale. Purchasing an LLC, sole proprietorship or partnership can’t be done through a stock transaction; however, their owners are able to sell interests like partnerships and memberships instead of the company’s assets. With multiple deal options available, it is crucial to find the right one that best fits your needs. To ensure optimal outcomes and minimize potential risks, enlisting professional M&A experts can be an invaluable asset.  They possess in-depth knowledge on these transactions with proven results for reaching successful agreements. This can be costly but is usually worth it.

The increase in interest rates over the past year is wreaking havoc on business valuations and the ability to get deals done.   So, if you are a potential seller of a business over the next few years, it is more important than ever to take the steps necessary to optimize enterprise value.  Failure to do so will likely result in a very disappointing outcome. The biggest way that rising interest rates impact company valuations is through their effect on discounted cash flow models. These models are a popular valuation tool used by investors to determine the intrinsic value of a business. They use a company’s projected cash flows and discounts back to present value, using a discount rate to account for the time value of money. As interest rates increase, the discount rate used in these models also increases, leading to lower present values and reduced company valuations. Another big factor is the impact of rising interest rates on the cost of capital for companies. The cost of capital is the required rate of return that lenders and investors demand in exchange for providing capital to fund a transaction.  As interest rates increase, the cost of capital also increases, making it more expensive for companies to raise capital through equity and debt financing. This makes it more difficult for an acquirer to hit their target return on investment which, ultimately, leads to a lower valuation and offer for the business. Finally, another and more indirect way that rising interest rates impact company valuations is through their effect on consumer sentiment. As interest rates rise, consumers may have less disposable income to spend, leading to lower demand for goods and services. This can impact the outlook for revenues and profits, leading to lower valuations. In light of the potential impact of rising interest rates on company valuations, businesses that plan to sell in the next few years need to focus on getting ready now. This means taking the obvious steps to improve financial performance, strengthen their balance sheet, and reduce their reliance on external financing.  However, it really goes beyond make sure the financial house is in order.  These businesses should explore ways to strengthen their value proposition, diversify revenue streams and reduce reliance on key personnel, clients and suppliers.  These are all factors that can either enhance or kill value in a business. In summary, rising interest rates can have a significant impact on company valuations, leading to shrinking valuations and reduced investor interest. It is more important than ever to make sure your business is positioned to command an EBITDA multiple on the high end of the range, rather than the low end. To gain insight into where your company scores and compares on the eight key factors that impact the value of a business, click here.

In today’s highly competitive business environment, understanding customer and employee satisfaction is crucial to the success. One very popular method of measuring satisfaction is through the use of the Net Promoter Score (NPS), a metric that has become increasingly utilized since its inception in 2003. In this post, I will discuss the history, methodology, and effectiveness of the Net Promoter Score, as well as how companies can use it to keep their finger on the pulse of their clients and employees. History: The Net Promoter Score was introduced by Fred Reichheld, a partner at Bain & Company, in an article published in the Harvard Business Review in 2003. The idea behind the NPS was to provide a simple, yet effective way of measuring customer loyalty and satisfaction. Reichheld believed that by asking a single question, “How likely is it that you would recommend our company/product/service to a friend or colleague?” on a scale of 0-10, companies could identify their most loyal customers and improve their overall customer satisfaction. Methodology: The NPS is calculated by subtracting the percentage of detractors (customers who respond with a score of 0-6) from the percentage of promoters (customers who respond with a score of 9-10). The resulting score ranges from -100 to +100, with a higher score indicating a higher level of customer loyalty and satisfaction. Effectiveness: Reichheld found that the results from this one simple question was actually more predictive of future growth than longer, more complex surveys.  It has been shown to be effective in predicting customer behavior, such as whether a customer will make a repeat purchase, refer friends and family, or leave a negative review. The simplicity of the NPS also makes it easy for companies to repeat the survey and to track changes in customer satisfaction over time and make improvements accordingly. Additionally, because the NPS is based on a single question, response rates tend to be higher than with longer, more detailed surveys. Not Just For Customers: In addition to measuring customer loyalty and satisfaction, companies can also use the NPS to gauge employee satisfaction and loyalty. By asking employees the same question, companies can identify areas for improvement and take steps to improve employee satisfaction, which can in turn improve customer satisfaction. In this way, the NPS can be used as a tool to keep a finger on the pulse of both clients and employees. The NPS has become an indispensable tool for companies looking to consistently measure customer and employee loyalty and satisfaction levels. In today’s highly competitive environments, you really cannot afford not to stay very close to what your customers and employees are thinking.

You know gross margin impacts your profit, but have you considered the impact it has on the value of your company? When assessing your company’s value, acquirers and investors will often scrutinize your gross profit margin. As you likely already know, gross profit margin is the difference between a company’s revenue and its cost of goods sold (COGS). While the Cost of Goods Sold (COGS) calculation does not typically include general operating expenses, it should include direct labor expense associated with producing and delivering the product or service.  A lot of businesses don’t do a particularly good job in allocating labor properly and this can come back to haunt them when they go to sell.  Often times an acquirer will attempt to go back and make these adjustments themselves to gain a better understanding of profitability.  If significant adjustments are called for, it will almost always negatively impact their determination of value. A high gross profit margin is a crucial factor for investors and potential acquirers as it can indicate that a company has established pricing power through marketing differentiation and possesses a competitive advantage and a strong competitive moat is an indicator of a company’s long-term sustainability.  In addition to providing indication of pricing power, an improving gross margin trend gives insight into the degree of operating margin that exists in the business.  Attractive operating leverage often exists in manufacturing businesses that have significant excess capacity. Conversely, when a company’s gross margin shrinks, it indicates to investors that the company may be competing on price. This is typically a sign that the business lacks a unique value proposition or marketing differentiation and that competing on price is the only way to attract customers. 24 vs. 6 Times Earnings To illustrate the impact of gross margin on a company’s value, let’s compare two companies: Apple and Dell. Apple has a strong competitive advantage and a healthy gross margin, whereas Dell’s competitive moat is weaker and its gross margin is lower. In 2022 Apple’s average gross margin was 43%, compared to just 23% for Dell. Apple has a highly differentiated brand and controls the buying experience through its Apple Stores. Additionally, Apple has invested in a range of high-margin subscription offerings, such as Apple TV and Apple Music. The market is willing to pay more than 24 times Apple’s 2023 earnings forecast, and the company has a market capitalization of over $2 trillion. By contrast, Dell offers commoditized technology products, which puts them in a weaker competitive position, requiring them to compete on price and resulting in a lower gross margin. The market is only paying around six times Dell’s 2023 earnings estimates, giving it a total market capitalization of around $30 billion. Just as gross margin impacts the world’s largest publicly traded companies, it also impacts smaller businesses. Ron Holt started Two Maids & a Mop, a residential cleaning company, in 2003. Holt ran a lean business and enjoyed healthy gross margins and a net profit margin of around 30%. Holt invested his earnings in differentiating his business from mom-and-pop cleaning services. He built a network of 12 locations across the southern U.S. and had plans to expand across the country. Holt was curious about franchising as a business model and attended a Las Vegas conference where he had a chance encounter with Subway founder Fred DeLuca. Subway had more than 40,000 locations around the world at the time, so Holt asked DeLuca for his expansion advice. Armed with DeLuca’s advice, Holt grew Two Maids & a Mop from 12 to 91 locations and $40 million in revenue without seriously compromising his gross margin. In 2021 Holt sold his business to JM Family Enterprises for over ten times EBITDA. Taking Action Apart from raising prices or reducing input costs, an often overlooked approach to improving gross margin is to invest in carving out a point of differentiation for your business in the minds of your customers. When your customers see your business as unique, you are less likely to have to compete solely on price. Charge a premium for a differentiated product or service, and you’ll beef up your gross profit margin—and the value of your company.