The Five Things That Can Quietly Reduce the Value of Your Business

Most business owners have a pretty good idea of what makes their company successful. They know their revenue, their customers, their employees and, usually, exactly which piece of equipment will break five minutes before a long weekend. But knowing what makes your business successful is not always the same as knowing what makes it valuable to a buyer.

The Exit Planning Institute’s Value Acceleration Methodology focuses on building a company that is both attractive and transferable, with strength in human, structural, customer and social capital. Unfortunately, there are several value killers that can develop quietly over the years. Individually, they may seem manageable. When it comes time to sell, however, buyers tend to notice them rather quickly.

1. The Business Depends Too Much on You

Being indispensable sounds flattering until you try to sell the company.

If every important decision, customer relationship, pricing exception and operational problem eventually finds its way to your desk, you may own a successful business, but you have also created significant owner dependency.

The Exit Planning Institute notes that a business heavily dependent on its owner may not reach its full value potential because much of the value effectively leaves when the owner does.

Buyers want to know that the company can continue operating successfully after your name disappears from the parking space. Developing managers, delegating authority and documenting responsibilities can make the business substantially more transferable.

Your goal should be to become important, but not required for every Tuesday morning to function properly.

2. Too Much Revenue Comes From Too Few Customers

Having a fantastic customer is a wonderful thing. Having one customer responsible for a huge percentage of your revenue can be considerably less wonderful.

Customer concentration creates risk because a buyer immediately asks, “What happens if that account leaves?”

A company generating $5 million in revenue with dozens of dependable customers may be viewed very differently from a $5 million company where one customer represents 40 percent of sales. Customer concentration is a common issue affecting business attractiveness and exit readiness. Diversifying your customer base takes time, which is precisely why this should be addressed years before a sale, not three weeks before meeting prospective buyers.

3. Your Financial Records Require a Guided Tour

Business owners frequently run companies with perfectly legal expenses, discretionary spending and owner-related costs mixed into the financial statements.

That does not automatically create a problem. The problem begins when nobody can clearly explain what is what.

Buyers want financial statements that are consistent, defensible and easy to understand. If determining your actual earnings requires twelve spreadsheets, three explanations and your accountant saying, “Well, technically...,” expect buyers to become cautious.

Clean books, documented adjustments, reliable reporting and sensible financial controls make due diligence easier and increase confidence. And confidence matters because uncertainty usually gets translated into a lower offer or less favorable deal terms.

4. Your Company Runs on Tribal Knowledge

Every business has that employee who knows where everything is, remembers every customer preference and understands the mysterious process nobody has written down since 2007.

That employee is valuable. The absence of documented systems is not.

Structural capital, one of four intangible capitals, includes the strength and transferability of a company’s systems, processes, strategy and financial structure.

Buyers place greater confidence in businesses where processes are documented, repeatable and scalable. Sales procedures, customer onboarding, purchasing, inventory management, HR practices and operating routines should exist somewhere other than inside someone’s head.

Preferably not in a binder labeled “Important Stuff” either.

5. Your Key Employees Have No Reason to Stay

A buyer is not simply acquiring revenue and equipment. In many businesses, they are acquiring the people who know how to produce that revenue. If your best employees can walk out immediately after closing, the buyer sees risk.

Strong human capital means having capable employees and leadership who can execute independently of the owner. Consider whether key people have competitive compensation, meaningful responsibilities, appropriate incentives and a clear reason to remain with the company through a transition.

A strong management team does more than make your life easier today. It can make your company considerably more attractive tomorrow.

Value Is Built Before the “For Sale” Sign Goes Up Exit planning is not something that begins when you decide to sell.

After all, discovering what reduces the value of your business is useful. Discovering it before the buyer does is considerably more profitable.