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Picture this: you run a successful small business. You have loyal customers, steady cash flow, and a great management team. Day to day operations run smoothly even if you’re not in the office. In fact, you’re starting to think it’s time for the business to run without you entirely. Maybe it’s time to sell.
There are 29.5 million businesses in the United States, but more than 80% are considered non-employers[i] and most will never hire an employee. They’re owned and operated by a single person who will always be an army of one either because of their personal preferences or the type of business they run.
If you’ve ever taken a business class or pitched a business idea, you’ve probably had to talk about business plans. Projections, customer profiles, key performance indicators, you’ve heard the jargon and struggled your way through envisioning what your business—or maybe just your business idea—will look like in one, two, five years, or even beyond.
One of the biggest factors in determining the value of your company is the extent to which an acquirer can see where your sales will come from in the future. If you’re in a business that must start from scratch each month, the value of your company will be lower than if you can pinpoint the source of your future revenue.
Hub & Spoke measures the extent to which your business can thrive without you. To be valuable to an acquirer, your business must be able to succeed and grow without you at the hub of all activities, as your employees are mere spokes that cannot operate independently of you.
The Swiss are obsessed with independence, and when it comes to running your company, you should be too. When your company becomes too reliant on something or someone you don’t control, acquirers will consider that to be a risk factor, and discount the value of your business.
How big your company could become tomorrow has a lot to do with what someone will pay for it today. Your current growth rate is important and an acquirer also needs to know that your growth rate is sustainable over the long run. One of the best ways you can make that case is to describe all of the potential ways that you can grow your business.
Most business owners know intuitively how satisfied their customers are, but as their company grows, some owners lose touch with their customers. Being able to objectively measure the satisfaction level of your customers is essential to maintaining their loyalty.
Warren Buffett is famous for investing in companies with a protective “moat” around them. The deeper and wider the moat, the harder it is for competitors to compete. In addition, an enduring competitive advantage also gives an owner more control over pricing, which increases both profitability and cash flow.
Imagine a playground teeter-totter that can move in only two directions – when one end goes down, the other must go up. The same is true of the value of your company as it relates to your cash flow