Last post I wrote about the first of the three situations in which businesses can find themselves:
- Losing money.
- Recent upward trend or reduction of expenses. Is it a spike or a trend?
- Long-term consistent growth with steady profits.
Today we’ll look at number two. Realize that business owners are a wide and varied group. Some seek rocket ship growth, others like slow and steady and many reach a point in life where lifestyle becomes increasingly important and they “coast.” They do what it takes to maintain their income but aren’t taken to initiating new strategies or additional investment.
Then it becomes time to sell the business and they read and hear that growing companies are more attractive to buyers and generate a higher price so they take action. Here are three situations I’ve recently seen in regards to situation two and the buyer’s (typical) first questions.
- Revenues are up but profits are down. Buyer: Are they creating a cost structure that will be tough to change? Is it more expensive to grow than they thought (and led me to believe)?
- Revenues are up a little and the cost of goods sold is up a lot. Buyer: What the heck is happening, they’ve never had margins like this before? Can I sustain this? Is there any reason I should value the business based on what may be a short-term spike?
- Overhead costs have declined including wages, equipment, and repairs and maintenance. Buyer: Are employees being worked too hard and I’ll need to hire more people? Why did they suddenly get to the point where capital expenditures are no longer necessary? Are things ready to breakdown (this is especially true of computers and software as almost all sellers stop upgrading when they decide to sell)?
Short term, band-aid type fixes don’t work. To truly raise the value of the company an owner needs to initiate long-term strategies, monitor them and record results (to prove what they did works).
“What counts that we are not counting?” Chip Conley, (quoted in Inc. Magazine’s article titled, “35 Great Questions)