If you are anything like me the question, “What is my business worth?”, crosses your mind periodically. Speaking for myself, I know that this is my retirement, my savings, 401k and everything else. So it is logical to ask the question.
However, I have found that asking the question is much easier than finding the answer.
What we fear
The desire to understand the value of our business stems from the same place our fear of failure comes from. Just as much as we do not want to lose our business, we fear the possibility of the business not being worth enough at the end of our careers.
I know several of the local cabinet shops in my area and happen to be friends with many of the owners. A few years ago one of those owners was nearing the end of his career and decided to sell his assets and liquidate to retire.
We have all been to an auction and, as you can imagine, nothing went for a premium. In fact, when the dust settled the auction brought about $45,000. While that is a nice chunk of money, I can imagine it was not enough to fund his retirement.
I know this happens all across our industry and I assume it does in others as well. So rather than talk about business valuation, multiples, FFE, EBITDA and all the other financial terms used in valuing a business, let’s focus on the principles that enable us to build a business that can be sold or handed down, either way providing us the owners with the financial security we deserve for all the years of hard work.
creating a valuable business
During a recent interview for The Push Thru Podcast, I talked to an owner of Lewis Cabinet in Utah and he made a profound statement that led to me writing the article. He said, “Your company is only as valuable as what it does while you are not working in it.”
Stop and let that statement soak in for a minute. If your business does not function without you then it is only worth the value of the assets.
So what are some things that can assure me of having a business with value at the end of my career, one that works without me?
5 Keys to Creating a truly Valuable Business
Start by firing yourself, every day.
SOP’s are are your MVP.
Outsource your bottlenecks.
Reinvest and stay current.
Start by firing yourself, every day
In that same interview I mentioned earlier, Beau Lewis said he tries to fire himself each day. If you read between the lines it makes a lot of sense to have this mentality.
If your business is only worth what it does without you in it, then the preface to that is that you fire yourself from all those activities that are keeping you from working ON your business not just IN it.
So, how do you fire yourself?
You have to start somewhere so pick something that you know you do not need to be doing and fire yourself from ever doing it again. Maybe it is something trivial like running the table saw or delivering cabinets. Regardless of what it is, find something and fire yourself now. Thats right, delegate or die.
I know what some of you are saying. “How am I supposed to fire myself when I can’t get off the shop floor for more than a few minutes as it is?”
All I can say is that 2 years ago I was in your shoes. I could not take a half day much less a vacation. This year I took several vacations and have the business in a place where it can function on a day to day business without my constant interjection.
By firing myself from shop activities I learned about how to build an A-Team in the process. I encourage you to try this ASAP and once you actually do it, once you fire yourself for real, you will realize that you are adding a long term value to your business.
SOP’s are your MVP
When you truly realize the importance of SOP’s (Standard Operating Procedures) it will no longer be a problem to start creating them. For an in depth look at how our cabinet component company develops SOP’s read my article on Standardizing Systems.
The importance stems from our first point about firing yourself. Strong SOP’s allow you to delegate the task to somebody else, even someone better suited for the task. If someone else can learn the exact process, then you can truly fire yourself.
The most important function to SOP’s, however, are they make the entire system trainable so that it is not dependent on just one person. It will also give you the flexibility to cross train effectively.
In our company, all the employees participate in the SOP’s. Every week each employee works on the SOP’s for their area for 15 minutes. That does not sound like much but if expand that out to a yearly basis and that translates to a couple hundred hours every year. SOP’s will allow your company to run on a day to day basis without you which is going to give an exponentially higher value on your business
Outsource your bottlenecks
Part of getting a higher value from your business is having higher sales. If you are like many businesses, then getting more sales is not usually the problem. The problem usually comes in getting the finished product out the door.
In steps outsourcing.
Every operation has a bottleneck. You may not know what the true bottleneck is in your operation but I assure you it is there. In most operations I would guess that the bottleneck lies in the milling and manufacturing of parts. So find an outsource partner and let a specialized manufacturer handle your cabinet components.
Outsourcing components has become easier and more realistic because of lower shipping costs, automation, and online ordering. I urge you to find a company that you are partners with and not just another cabinet shop filling the capacity of their own machines.
Financial transparency is quite possibly the hardest thing to do as an owner of a business. I think it is a natural response to the competitive environment we operate in. We don’t like to share information with our employees for the fear that they will misinterpret and start a rumor mill within the company.
I started being transparent with my employees about 2 years ago. It was a slow process but I started sharing my numbers because, outside of cost of goods sold, the employees make up the largest number on the profit and loss statement. So to me, it only made sense to share the numbers they were collectively creating.
I will tell you from experience that my first attempt backfired because I dumped way too much information in an attempt for them to understand how the numbers of business work. Then, I was given a lead on a book called ‘The great game of business’. That book tied together all the ideas that I was having about being transparent and laid the groundwork for how we share numbers today.
Tips for Transparency :
Start small. This is how we did it.
We started by doing a profit and loss game with a super simplified profit and loss statement. The line items were as follows:
Cost of Goods Sold (COGS)
Then, I got on amazon and bought fake $500 dollar bills and made $50,000 bundles with them. This may sound silly but seeing the piles of money on each part of the statement really drove the point home.
If you don’t tell the employees the numbers they will make up their own and I trust you they will be way off the mark. To prove my point, before you play the game for the first time ask at random all your employees to write down how much Sales the company has had to date that year.
I assure you the answers will be all over the board and more than likely very low. After successfully completing the game, add 10% to sales but reduce expenses and COGS by 5% and see the effects on the Net Profit.
That exercise was the basis for our bonus program. Basically, we said if we can hit those improved numbers, then there will be a bonus pool available for the employees to share in.
Reinvest and Stay current
Reinvesting profits will amplify your efforts at an exponential rate. If you keep reinvesting your profits in the business, then the value of your business will also grow at an exponential rate.
One of the most important investments I have made in recent years is in myself. I started small by just listening to audiobooks about business and manufacturing. I figured if I could learn about how successful people made it then I could replicate their efforts.
I also hired a business coach that is from the manufacturing sector and brings a unique mix of accountability and outside the box thinking that makes me a better owner.
Recently, I added a marketing consultant to help me get the message out in a way that is going to create partnerships, not just another project.
So, taking it all the way back to step one, I fired myself and put my business on a path where I can reinvest in, not only the business, but in myself as an owner. I am now in a position that I can provide so much more value to my component business than I could from the shop floor.
You can start today
You can start today and every day by firing yourself from something that is holding your business back. Then sit back and see what doors open that you never thought about before.
Most importantly, if you are concerned about the value of your business, then focus on what the business does without you. Then when the day comes to sell or transfer the business, you as an owner will have no problem justifying that your business has value beyond just the assets.
are you up for the challenge?
How much do you think your business is worth without you in it?
What is the ONE thing could you do today to improve the value of your business?
Could you commit 30 days to improving the value of your business?
Start by making a list of all the items that would add the most value to your business without you. Pick ONE thing from that list, do it, then Push Thru to the next item.
In 30 days you could add tremendous value to your business by making it run better without you.
Let me know what your ONE thing was by filling out the form below. I will check up on your progress in 30 days and hold your feet to the fire! Are you up for the challenge?