Internet Radio Show: 21st Century Entrepreneur | How to Become An Effective Leader | Aired Friday, February 13, 2015 at 12 NOON
This Friday February 13 we will be airing another episode of “21st Century Entrepreneur” which is an Internet radio program aimed towards educating business owners and their advisors on how to make their businesses more successful and profitable. It is a show hosted by JC Maldonado who is the CEO of BizGro Partners, a Business Development Firm that helps small and midsize companies grow, expand, and transition. This week we will discuss how entrepreneurs can become better leaders. Our guest will be Larry Sharpe who is an experienced entrepreneur and the CEO of Neo-Sage Group Inc. Larry provides corporate training, executive coaching, and management consulting for professionals in many industries including: finance, technology, media, REAL ESTATE, luxury, government and healthcare. He has trained and coached hundreds of entrepreneurs, executives, sales people and customer service reps from dozens of companies all over the world. In addition, Larry has been an interim senior executive for companies in times of crisis; filling a senior post and helping them find a replacement. He is also a professional speaker and has spoken at dozens of venues to a wide range of audiences throughout the US, Europe and Asia.
Below is a blog discussing methodologies of increasing a business’s enterprise value which is one of the key leadership responsibilities of an entrepreneur. Finally, last week we interviewed Craig Waldman, an expert on technology and how a small business can use technology to grow a company. To hear a recorded version of this show, click on 21st Century Entrepreneur Archives.
Six Ways to Immediately Increase Your Business’s Enterprise Value
In one of our past blogs we described the elements of business valuation and what comprises a business’s enterprise value. We stated that business enterprise value consists of earnings plus goodwill transferability. We defined earnings as the income of the business which includes owner’s salary, perks, and net profits he/she takes home. We also stated that earnings will typically define the price a business sells for because a business, when sold, will typically trade for a multiple of earnings. We also defined goodwill transferability as the ability to transfer one’s earnings to a third party buyer and that any risks associated with the prevention of such transfer would affect the terms of a business sale transaction; terms, in this regard is simply the amount of money a seller gets upfront as opposed to how much of the purchase price is conditional or paid over time in the form of a promissory note held by the seller. Today, we will give you six strategies on how to increase your business’s enterprise value today. Three of these elements can increase your business’s earnings, and therefore improve the price you receive if you were to sell the business, while three of the elements improve the goodwill transferability of your business which can increase the amount of money you receive upfront in a deal.
Grow your Sales- (Improvement of Earnings)
The first way to increase your earnings is to simply increase sales. Without a sale made at a profit, nothing happens in business. In this environment it is important to take a proactive approach to procuring new customers. Today, the sales cycle is longer and the competition is fierce in most industries. For most businesses, it is dangerous to rely on past relationships and current customers to drive new sales. Most businesses must have a system for generating qualified leads in its target market if sales are going to move upward. A business also needs a strategy for closing business with qualified leads. Leads without a closing methodology are useless. Of course, closing strategies without qualified leads are equally worthless.
Increase Gross Profit- (Improvement of Earnings)
A second approach to increasing earnings is to increase the profit you make on the sales you already generate. There are 3 ways of increasing your gross profit. First, you can increase your prices. It amazes me how infrequently businesses increase their prices. This usually transpires out of fear of losing a customer. However, if you are giving good service to your customer, reasonable price increases are rarely noticed and even if they are, it will rarely cost a business its happy customers. In fact it may drive away bad customers who put a strain on the business and should probably be eliminated. Second, you can decrease your cost of goods by doing bulk buying with your vendors. This approach is available to many product based businesses and can serve as an effective method of driving down cost of sales. Finally, you can take advantage of discounts on pricing that derives from early payments. Most vendors give their customers incentives to pay early. These incentives are given in the form of price discounts that can help drive the profit a company is making on its sales.
Get your financials in order- (Improvement of Earnings)
A third approach to increasing earnings is to simply demonstrate more earnings on your financial statements. One of the challenges with small and midsize companies is the way books and records are managed. The purpose of financial statements and tax returns is to minimize tax liability and this becomes the accounting professional’s main function. However, when it comes time to sell, a buyer, along with banks and investors want to see books and records that clearly demonstrate earnings; this will create an enhanced perception of the business’s enterprise value and motivate a buyer to pay a higher multiple of earnings as a price. A business owner should consider reporting all sales and avoid hiding profits in the way they book inventory if they want to sell the company or raise money. Producing reviewed or audited statements is also a route an owner should consider.
Strategy # 4
Eliminate all concentration issues- (Improvement of Goodwill Transferability)
Concentration issues simply means when a business has too many sales with one or two customers (customer concentration), one or two key suppliers supplying all the goods (Supplier Concentration), one salesperson that has most of the relationships (Salesperson Concentration), or one product/service generating most of the sales (Product Concentration). These forms of concentration pose risks to a potential buyer purchasing the business because if something were to go wrong and the business was to lose the key supplier, the key customer, the key salesperson, or the key access to a product, the business could suffer and the new owner would not enjoy the income of the previous owner(s). Hence, how concentration affects enterprise value is through the terms a buyer would offer a seller. Typically buyers would make a deal that would make part of the price contingent on stabilizing these concentration risks which would place the seller in a position where he would receive part or all of the purchase price overtime, as opposed to upfront.
Strategy # 5
Make sure sales trends are going upward- (Improvement of Goodwill Transferability)
Upward trends in sales make 3rd party buyers and investors comfortable with the business. If the business has customers that are ready to depart, a 3rd party buyer will never inherit the income realized by the business in the past. Sales trends influence how much risk a buyer will take and how much upfront money he will pay for a business.
Strategy # 6
Make sure you are not the business- (Improvement of Goodwill Transferability)
When the owner(s) perform all the major functions of a business, it is very difficult to transfer the business’s goodwill (its income producing ability) to a 3rd party buyer unless that buyer has the same exact skill set as the owner. Businesses with little to no infrastructure are always difficult to sell, and even if these businesses are sold, the owner will have to stay in the business long term if the customer relationships are going to be transferred to a buyer. By contrast, if a business has management in place that is separate from ownership, that business will command better price and terms in the market and possess higher enterprise value.
If you have more interest in implementing the above mentioned business value enhancement strategies, feel free to contact us at email@example.com.