I have been coaching business owners for over 20 years now with growth-oriented engagements helping to improve businesses through strategy, culture, and leadership with an acute focus on the people side. It has been very rewarding, creating client friendships and impacting the company’s and employees. Still, as I’ve gained a few more laps around the racetrack of life, I am becoming slightly more sensitive around helping those business owners transition well. Did you know that 100% of businesses transition? They transition to employees, family members, investors, or to dust, but they do transition. Here are a few additional startling statistics before I unveil the 8 Drivers for business owners to focus on long before they get to the doorway of transition.
- 95% of business owners have unrealistic expectations of their company’s worth
- 95% of business owners have operational or market issues that will impact selling their company
- Business owners leave almost 30% of their business value on the table when they transition
- 83% of business owners need to grow their businesses before they transition to meet wealth goals
- Only 12% of companies secure LOIs (Letter of Intent) for sale, and only 20% of LOIs survive the first pass at due diligence: that’s a 97.6% failure rate
These stats are alarming, and if you are a business owner, I hope they grab your attention. It is wonderful to help my clients with strategy, leadership, and culture, but ultimately, they need to transition well so that life’s investment in your company properly takes care of your loved ones. About two years ago, I incorporated CoreValue®, the #1 best-selling business consulting system for business growth (& exit). The methodology was born out of MIT, and it identifies 18 Drivers that impact the value of a business when a transition arrives. Maybe I will unpack all 18 in a later article, but with over 25,000 companies on their platform, they have identified 8 Drivers that have the greatest impact on the transition process. The 8 Drives in no particular order are as follows:
- Dominant Market Share
- Recurring Revenue
- Barriers to Entry
- Product Differentiation
- Margin Advantage
Let us spend time breaking each Driver down to understand why they are critical to your transition plan and can impact your estate by as much as 30%.
1) Growth – this Driver refers to your company’s top-line revenue number. Company’s that have a consistent track record of growth better than the competition make them very attractive. It means there is a strategy in place that is working to grow faster than the rest of the pack and means security for the buying party. It also means that your company has some special recipe that makes it desirable for a potential suitor.
2) Dominant Market Share – this Driver can be a double-edged sword. Your market is the location where you sell your products and services. Buyers of your business want to see a strong market share position to ensure company strength and resilience, but they also want to see growth opportunities. If you own 80/90% of your market, the likelihood of losing market share is higher than the opportunity to grow and gain market share.
3) Recurring Revenue – this Driver is gold! Who doesn’t want recurring revenue? Buyers will pay a premium for recurring revenue that they can take to the bank and fund other business initiatives. Many companies have a tough time building this into their business model, but if you can crack the code in your industry and market, even if it’s in smaller steps, it will be an investment well made.
4) Barriers to Entry – this Driver can potentially be the lowest hanging fruit to increasing enterprise value but takes some serious creativity. Barriers to Entry are the obstacles facing a new entrant into your business’ market. Most industries have low barriers to entry outside of capital and know-how. However, barriers can be added to your company by patenting products and processes, making it difficult for competition to replicate your exact delivery to the market.
5) Product Differentiation – this Driver is specific to your company’s products and services and is tied directly to the customer’s desire for your products and services. If you think your products and services are different than the competitors, but the customer is only willing to buy from you overprice, then you do not possess a differentiation edge. This is one area where customer surveys can flesh out your differentiators or who you learn ways to build differentiators into your products and services.
6) Margin Advantage – this Driver is challenging to prove, but if you can, buyers will be willing to pay an extra premium for your business, and it will be worth the effort to prove it. When you can show gross and net margins above the industry norms along with the logical reason behind the numbers, you will find yourself in the catbird seat. Who doesn’t want to be more profitable than the competition?
7) Innovation – this Driver takes serious discipline to build into the culture of a small business. Innovation is invaluable in creating an ongoing competitive advantage. Does your company have a proven and systematic way to drive and capture innovation at all levels and encourage innovation in every area of the business? If you do, you are more likely to be able to stay ahead of industry changes and continue to prosper.
8) Brand – this Driver refers to how recognizable your brand and business is within your marketplace that reinforces the business’ presence, supports the company’s objectives, and helps drive customer engagement. A strong brand name that resonates with your customers can add significant value to your company, especially if it’s a brand with a history of a positive reputation in the market.
Where are you on your company transition journey? Have you reflected on your exit from your company and how it will impact your life? It is never too early to pre-plan. I would encourage you to get away for a long weekend, somewhere with solitude, a new journal, good music, and your favorite beverage. Take some time to capture your journey and grade your company in these 8 Drivers. Are you excelling in them, or do you need to put some focused attention on them? If you take me up on my advice, you may be investing time in one of the most critical financial junctures of your life. Travel well.
David Olson is a management consultant at N2Growth with over 20 years of experience specializing in CEO Business Coaching delivering services related to Strategy, Sales & Marketing, Culture and Leadership. He is also a CoreValue® certified growth consultant and creator of The Culture Compass®.