For most business owners, their single largest asset is the value of their business. Today we are going to focus on how you can destroy the value that you have created in your business. Here are five ways you can destroy the value of your business:
Number One: Let Revenues and Profitability Slip
The value of your business is highly dependent on the revenues and earnings of the business, especially the expected future revenues, profitability and growth of the business. As a result, the number one way you can destroy the value of your business is to let the revenues and profitability slip. We understand that is easier said than done. Nonetheless, a relentless focus on growing your business’s revenues and profitability is probably the most important thing you can do to build its value.
Number Two: Skimp on Accounting
We have recently looked back at clients whose business did not sell at all or sold for substantially less than we initially expected. One common theme is accounting issues. The most common accounting issues include poor or untimely financial reports, not having accrual-basis financial reports, having reports which are not prepared in accordance with industry conventions and not being able to respond to potential buyers’ information requests in a timely manner. When a potential buyer encounters these issues, they find it much more difficult to analyze a potential acquisition and will usually either lose interest or heavily discount an offer.
Number Three: Be Overly Dependent on a Few Great Clients
Who doesn’t dream of having a few perfect clients? Ones that are priced right, cooperative, friendly and pay their bills on time. Those really are great clients, but a diverse clientele reduces the risk associated with your business and increases its value. When we say diverse, we mean not being overly dependent on a single client or group of clients, including those under common ownership or management, in a specific geographical area or within a specific industry or sector (e.g. HOAs). Great clients ARE great, but a diverse clientele is very important in reducing the risk of buying your business and positioning your business for a successful sale.
Number Four: Make It All About You
Let’s face it. Many lawn and landscape businesses revolve around the owner. The owner often serves as chief salesman, operations supervisor and quality control person. The owner’s name is often the name of the business too. All of this raises a serious question with potential buyers as to how the business will continue to perform after the existing owner is no longer involved. If a potential buyers perceive the business is heavily dependent on you, they will reduce what they are willing to pay or, more likely, move on to the next opportunity.
Number Five: Avoid Exit Planning
Exit planning is on many business owners’ “to-do lists.” Unfortunately, that is where it usually stays. A recent study suggests that less than half of all green industry business owners have any kind of exit strategy and only a small fraction of those actually have a written plan. Even so, business owners are much less likely to be able to sell or transfer their business successfully at a valuation that meets their expectations without having a plan in place. For many business owners, this means they will be unable to realize the value they expect and need from their business.
We have highlighted how these five value destroyers affect the ultimate value and sellability of your business. Of course, they also may be holding your business back from realizing its potential right now. The same risks a potential buyer sees in your business may affect its outlook long before you may be planning your exit. Many exits are also unplanned and result from a host of different “life events.”
Maybe it’s time you moved exit planning up on your to-do list.