Selling a Business: Top Operational Factors to Build Value and Business Worth

If a hidden camera recorded the comments of prospective buyers touring your business behind closed doors what would it reveal?

Just like home buyers, prospective business buyers spot what’s worn, cluttered and dated. Like moths to a flame, they’re drawn to the defects, adding up renewal and revitalizing costs.

Some may see the business as an opportunity; all will see it as worth less money.

Like financial factors and organizational factors, operational factors can add or take away value. We’ll start with the most conspicuous.

Clean up the shop, warehouse, office, store

  • Dirt and dust say you don’t care. Show your customers and staff that you do. Clean and freshen up all store, work and rest areas.
  • Do your assets need repair or replacement? Deal with it.
  • What about your inventory. Do you have more than you need to sustain average levels of sales? Sell off the excess. Take the same approach to eliminate unneeded files, procedures, equipment and programs.

Tighten up operations: non-performing or unsatisfactory employees, non-performing or unsatisfactory suppliers, slow or non-moving products or services

  • If an employee isn’t working out, let them know. Give them a chance to improve. Provide coaching, an improvement plan and feedback. If they’re unwilling or unable to improve, start progressive disciplinary action. The steps that you take when you prepare to fire an employee matter; you do not want to end up paying out thousands for unlawful dismissal. It’s best to talk to a lawyer to understand your options, says Jay Humphrey of Jay C. Humphrey Professional Corporation. Jay was one of several professionals who sat down with me last fall to discuss ways owners could add value to a business.
  • Are family members who work in the business competent in their assignments? Are they held to the same performance standards? They should be
  • Are your suppliers punctual; do the supplies arrive in good condition? If not, take it up with them. If they’re at fault, review the penalties. Can you just “walk away” and go elsewhere? If the contract isn’t exclusive you may be able to dual-source. If you terminate early, there may be penalties. Again, legal advice may be in order.
  • Do you set and monitor profit margins for each product? You may need to keep some slow-moving items in your inventory if they’re high profit or critical to operation. Consider discounting and selling the balance.

Our next set of operational factors relates to systems used to run the business—the collection of processes or rules that govern our attitudes and actions in support of customers and staff.

Document, communicate and apply your Vision, Mission, Goals, Values and Principles

  • A Vision Statement defines what the business will be like in five years; a Mission Statement defines the benefits customers can expect from the business. Goal setting involves establishing specific, measurable and time-targeted objectives. A business plan sets out how you will achieve these goals. These documents aren’t just for large organizations; by being closer to where the rubber hits the road, smaller businesses can often respond faster and better to needs.
  • While these documents provide common purpose and direction– who you are, why you’re in business, what you do or sell, what you want to achieve– the values and principles define how you do business.
  • Have you an identity or brand? Is it reflected by your employees? Is it recognized by your target customers? Remember to carry it through every point of contact.
  • Practice your elevator pitch. Can you explain your business in 30 seconds? Try using three points –the name of the business, what it does, what defines it in the marketplace/why it’s successful.

Keep your Operations manual current and complete

  • An Operations manual or guide pulls together the processes and procedures needed to run the business. One that’s current and accurate will be worth its weight in gold to a new owner.
  • Standardizing activities across your business also makes your operation more efficient and effective, provided employees follow the “rules”.
  • A typical Operations manual has company-general information as well as position-specific information (job description, duties, results expected etc.). It should also reference any legislated requirements.

Maintain clean documentation, records, minutes and financials

  • Always know where you stand as a business. Are all contracts and licenses documented, current, and readily available? Minute book up to date? All required filings done? Jay Humphrey recommends you meet with your lawyer at least once per year to review your corporate records as buyers lose confidence in a business when the legal due diligence turns up a long list of outstanding issues.
  • Does your reported revenue adequately represent what your business is doing? Is your accounting supervised by appropriately trained, experienced professionals and performed by competent bookkeepers?
  • Keep in mind that buyers need three to five years of financial statements. An accountant’s Notice to Reader Statement is the quickest and cheapest type of financial review; a Review Engagement Report is more thorough and reliable. An Audit is the most comprehensive, but costs more than most small businesses can afford.
  • Look beyond financials: ensure Health and Safety records, licenses and/or permits are up to date; hold regular staff/management meetings and document their minutes.

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Gregory Kells
Articles: 89