Continuous Profit Improvement Makes It Easier To Sell Your Business, And Get A Better Price.
Effective systems and processes are your foundation for profit improvement through ongoing profitability analysis. And continuous profit improvement provides you a strong argument for asking and getting a higher price for your business. Because it clearly shows prospective buyers how and why you are growing earnings. Or at least, how and why you are growing gross profit if you are taking most of the increase out for your own use.
This is an important distinction because with many owner operated businesses, owners are reluctant to leave much money in their businesses. You may be one of them. So when the financial statements are reconstructed to show what the financial performance would have been if you as the owner had only paid yourself a salary commensurate with the requirements of the job, and related benefits. What remained after making that adjustment would represent the ability of the business to service debt. And/or provide a return of capital and return on capital.
Having increasing earnings based on a combination of increasing revenue, and increasing margins will give prospective buyers confidence like that a cautious man gets from wearing a belt and suspenders. And demonstrating that these combined continuous improvements are based on systems and processes and not on charisma or on your particular brilliance or charisma will increase his confidence. Increased confidence in his own ability to match or beat you operational and financial performance as the business owner will increase his eagerness to buy.
Continuous profit improvement will give the buyer confidence that the business that he buys will be worth more in a few years than it is today. Even if he adds little value to it himself, and only continues the work that you did by implementing systems and processes that you developed. Few things will be worth more tomorrow than they are today, in the absence of rampant inflation. Certainly automobiles, boats, and planes won't be. Even real estate is not usually worth more in the future, unless it is well chosen and well located real estate, that will benefit from demand exceeding supply.
And should we experience rampant inflation, your buyer will still be ahead of the game, because the business will increase in value by much more than merely the effect of inflation. Without getting into valuation methodology too deeply, any analysis involving future cash flows and discounting them back to the present will demonstrate this. Discounting higher and higher numbers to calculate present value will yield a higher value than merely discounting the first number for the same number of periods. It is just the way the advanced mathematics works.
Having gone through this myself many times, the easiest way to start is with large items. If you have a product or business line that is larger than any other start there. What can you do to improve/increase revenue. Go through the various options, and you will undoubtedly find something you can do. Now go to the cost side of the same product or business line. What can you do that is different that will either decrease unit cost, or make something better at the same cost. Remember if you are able to deliver a better product or service for the same overall cost, you have developed additional value for your customers. How can you make money from that?
Don't forget overhead or fixed cost items. They can play an important role in profit improvement. And they can also change your cost structure, and reduce your break even level. Frequently owners and managers tend to focus solely on other areas. They unthinkingly assume that fixed costs are really fixed.
Rent is a fixed cost. And rental space rarely comes in exactly the same size as you need. And it is rarely expandable in a linear fashion as you need it. So you may end up with too much or too little. If too much, is there an opportunity to rent the excess in some way without compromising your own activities? If too little can you sublet your additional requirements without having to move to new premises which may end up too large? Just because that's what's available.
You may return from
Systemize Your Business
, or you may go to
. You may also wish to review the information at
How To Value A Business
, for a perspective on valuation.