Are you on the best side of the Valuation Teeter-Totter?

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In my 30+ years in business, this concept has escaped most business owners who want to transition ownership/sell – the relationship of cash flow and business value, known as the Valuation Teeter Totter.  We call it that because it reflects the relationship between cash, or the company's ability to generate cash, and the value of the business.
 
If you recall as a kid sitting on a teeter-totter, the heavier side goes down and the lighter side goes up. It’s the same relationship between cash flow and business value.
 
When a buyer buys a business, they really write two checks. The first check is obvious, it’s the check to you. But the second check is what most owners don't think about. That’s the check for working capital because a business is going to require cash right away to pay bills, payroll, accounts payable, rent, etc.  The problem is, both of those checks need to come from the SAME checkbook. So the larger the check needs to be for working capital, the smaller the check is to YOU. Ouch.
 
How do you improve the business’ ability to generate more cash so a buyer doesn't need a big check for working capital; and can instead shift more of that money to YOU when you are ready to transition? There are three areas you need to look at:
 
• Mistakes in the daily operation of the business
 
• Mistakes in your sales cycle
 
• Mistakes in your business model
 
Let’s talk about each.
 
First, mistakes are all over your business – sales communication, factory floor errors, order entry, shipping and receiving…the list is endless. Find those leaky holes in your bucket and plug them! They are loaded with cash opportunities.
 
The second area is the sales cycle time. Can you improve how fast it takes to get a customer by improving your sales process? Can you send out invoices faster? Can you get paid quicker? All of these methods are ways to get cash back into the business quicker.
 
And the third area to look at is your business model. Check out the companion video to this blog where I outline the X different business models. Which one are you now?  Do you need to make a change?
 
Costco is a great example of this. When they went head to head with Sam's Club, they made a strategic decision to do the membership model. That membership fee accounts for almost 75% of their net profit, and the resulting cash funds the growth of the business.
 
When buyers (internal or external) buy a business, they want to buy a company that doesn’t require them to keep funding growth with their own cash. They want businesses that can self-generate cash.
 
I find that most business owners do not want to discuss exit planning, but they are keenly interested in driving value in the business. Value Acceleration is not about the end game.  It is about driving value in the business daily - that focus will, in turn, increase your income today AND open up more transition options for you in the future. 
 
So if you want to increase the value of your business, improve its cash flow and place yourself on the best side of that teeter-totter equation.