So much of what contributes to the value of your company begins within. Whether you view your business as a well-oiled machine or you believe that a few wrenches have been thrown into your systems, it’s important to continually evaluate the nuts and bolts of your company’s operations if you want to ensure that you are maximizing value.
Examining and evaluating operational factors can greatly increase the true value of your business. Here are the top five ways you can manage your company’s operations to maximize value:
1. Build the right management team to eliminate employee or owner dependency.
Part one of this series about maximizing the value of your business explained how important people are to your company, and part two builds upon this principle. A company’s dependence on any one person is a significant detractor of value. Many times, I come across companies in which the owner wears multiple hats, such as being the leading sales person, helping prepare the financial statements, negotiating all contracts, hiring and firing all employees—the list can go on and on. Unfortunately, this situation is not ideal for most acquirers. In a buyer’s mind, if you remove that one person whom the company depends on, the business is more likely to fail. Trust me; no one is going to take a chance and find out after the purchase, so the purchase price will always be adjusted downward to take into account the risk involved.
To alleviate this issue, the best approach is to hire a best-in-class management team to operate the business, share in the strategic vision of the company and execute the plan in perfect harmony, with each person focused on his or her specific area of expertise.
2. Diversify vendor and customer bases to eliminate concentrations.
This is the “too many eggs in one basket” scenario. Similar to the first point in this list, you shouldn’t be held hostage by any one or two vendors or customers. A concentration is typically present when a vendor or customer represents more than 10 percent of the total purchases or revenue. If you are in this situation, you need to work diligently to find other suppliers or customers to help diversify your vendor or customer bases. You may have multiple sales people focused on the majority customers, for instance, but it may be more valuable to the company to focus on generating new leads. Furthermore, consider adding protections to your contracts to avoid business interruption in the future, such as longer terms, minimum purchases or penalties in the event of business interruption.
3. Eliminate idiosyncrasies from the business.
As with the second point, oftentimes, I see a vendor or customer with special terms, generally because it is the largest vendor or customer or because it was one of the first vendors or customers to transact with the company. In some cases, certain employees may even have special arrangements. My advice is not to completely eliminate these special terms or arrangements. Instead, it is to raise awareness that idiosyncrasies can reduce the value of your business, and, wherever possible, they should be avoided or eliminated.
4. Build a scalable model.
This may be the most important aspect of all the operational factors. Developing routine processes and procedures throughout each point in your business cycle is critical to your success, but it also tremendously increases the value of the company. Why do you think McDonald’s is so wildly successful? It’s not because it has the best burger in the world! It’s because it’s consistent. I’ve had a Quarter Pounder in seven different countries, and it always tastes the same and takes the same amount of time to prepare. Clearly, McDonald’s has created efficient and effective processes to ensure every employee at every stage of the business knows exactly what he or she needs to do.
Take the time to develop flowcharts or procedure manuals for each significant process within the business, and stress the importance of following these procedures on a consistent basis. I can assure you that it will not only increase the value of your company, but it will improve efficiency and increase your bottom line if done correctly.
5. Increase profitability wherever possible, but not at the expense of quality.
I was reluctant to include this point because it could be misconstrued, but I think it’s worthy of mention. It’s always important to keep a close watch on profitability, but you can’t always let that one factor drive decision-making. The quality (and, similarly, consistency) of your product or service is just as important as the cost to the company, unless your business is branded as being the low-cost provider. If that is your core mission, then quality will take a back-seat, and that is possibly the right answer for your company. Otherwise, ensure that your product or service remains true to your brand and reputation before choosing a cheaper alternative to your raw materials, service centers, employees’ skill levels, etc.
Evaluating your company’s operations and making adjustments accordingly can not only maximize the value of your business, but it also has the potential to create efficiencies and advantages that will contribute to the value of company’s end products and goals.
For more information about how you can add value to your business, check out part three of this series that discusses how to add value to your business in the area of legal issues.
Access the other pieces in this series:
Hanny Akl is a Member of Warren Averett and leads the Firm’s Transaction Advisory Services practice, which focuses both on buy-side and sell-side transactions along with advising owners on creating value within their businesses. Click here to contact him directly.