The Key To Enhancing Business Exit Value
When considering enhancing business exit value, we start at the beginning. In business, the journey begins with the 'discovery' phase, where new owners and entrepreneurs, immerse themselves in a world of learning and eagerly apply their newfound knowledge. This phase is crucial, as it lays the foundation for the business and instils a culture of adaptability and growth.
As the business matures, it transitions into the 'delivery' phase, where the focus shifts to executing strategies and optimizing processes. This phase is marked by a more analytical approach, with key performance indicators (KPIs) guiding decision-making. However, an overemphasis on delivery can lead to rigidity and a disconnect from market changes.
The key to sustained success in business is maintaining a balance between these two modes of operating.
Especially during a time when you are contemplating your business exit, it is especially important to keep the spirit of discovery alive, while also in delivery mode.
This ensures the business remains innovative, adaptable, and responsive to the changing market, enhancing the potential for a higher valuation multiple for your exit.
At Business Exit Partners, we understand the nuances of this journey, especially when it comes to planning your exit so that you can maximise your returns by balancing your need for ‘discovery’ and ‘delivery’. Read on for more insights.
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Beginning the Entrepreneurial Venture: The Discovery Phase
Even though as a business owner or entrepreneur, you bring certain knowledge and experience with you to the table, it’s also a phase of learning and growing.
This learning may take the form of reading books and consuming courses, while taking copious notes and then enthusiastically implementing what you have learnt. Inevitable lessons along the way force you to review your decision making and re-evaluate, always looking for ways to improve.
This phase in the business journey is the ‘discovery’ phase.
Transitioning to Growth: The Delivery Phase
After a few years - typically once growth kicks in, a new phase of the business journey commences – the ‘delivery’ phase.
This is when owners and staff focus on processes and eventually become set in their ways. They get busy delivering on what customers told them they value. The business delivers as much as it can and as quickly as it can, to secure its market and future.
Measurement and Management: The Delivery Phase Evolved
From Cash Flow to Profit - The Business Maturation Process
Delivering efficiently invites higher levels of measurement and management. Several things begin to shift.
‘Cashflow’ thinking turns to ‘profit and loss’ thinking and a desire to plan (or thinking ahead) takes hold - in forms like budgets and forecasts.
Also, key performance indicators (KPI’s) are often implemented at this time.
Being in ‘delivery’ mode, it is understandable that the focus is on outcomes or output based KPI’s – otherwise known as lag indicators.
This is how an organisation knows whether it is meeting its objectives – being successful or not.
The profit and loss statement is a classic example of a lag indicator in business, in the same way that CPI or GDP growth is for the economy.
Recognising Signs of Decline: The Impact on Business Exit Value
Identifying and Addressing Business Complacency
While everyone is busy, the world keeps changing, which shouldn’t surprise us, but it frequently catches many businesses asleep at the wheel.
The business has become fixated on delivering and habits and patterns have formed. Invariably, what customers value has also changed.
If you were buying a business now, would you want to pay top dollar for a business that is in decline because of complacency and lack of innovation? And neither will your purchaser.
Waking up to this situation can be a painful process for all involved, and sadly for some it may be terminal. Classic pain points can include:
- doubling down on outcomes
- change in behaviours such as micro-management
- stiffening up on rules
- pushy sales demeanour
- creation of ‘us’ versus ‘them’ divisions inside and outside of the business
Challenging Business Beliefs: Paving the Way for Enhanced Business Exit Value
Innovation as a Key to Exit Success
Another element of being creatures of habit is the lost opportunities for learning and growth, both personally and financially.
The longer you hold beliefs about your business and don’t question them the harder the lesson is when it comes.
The lesson may come late in the business journey such as when you are thinking of selling and realise the valuation of the business is too low for you to retire.
Innovate in all areas of your business and your life to gain the maximum value.
Embracing Change: Dynamic Teams and Team Dynamics
Fostering a Balance of Discovery and Delivery for Exit Strategy
This is why innovation or reinvention is a necessary constant in business. Owners who realise they need to reintroduce or re-emphasise ‘discovery’ in the business, are winners in the overall outcome.
There is a different language and mindset in ‘discovery’ and ‘delivery’.
Balancing the two mindsets and languages requires a full understanding of the differences between the two and communicating this to your leadership team and employees so that confusion and conflict don’t occur.
With ‘delivery’ capability as the driver for hiring in mature businesses, it is also likely people with ‘discovery’ skills and experience within the business dwindle in numbers because they leave or are integrated into delivery roles. Reconfiguring or reinvigorating the team brings another dimension of change.
Forward-Looking Strategy: Lead Indicators For Exit Success
Predictive Metrics for Enhancing Business Exit Potential
Eventually the changes inspire a greater strategic and forward-looking outlook and a need to assess momentum or trends for future performance – in other words, establishing a set of lead indicators.
Understanding Lag and Lead Indicators: Tools For Business Growth
Quantitative and Qualitative Measures for Exit Readiness
Lead indicators are predictive and mostly based on inputs, such as activities or behaviours.
Being predictive means they are not as accurate when compared to lag indicators which provide a retrospective view which assesses the effectiveness of past strategies and actions.
Both are equally as important, to assess progress towards organisational goals – allowing proactive adjustments to be made to improve outcomes in a changing environment.
Listed below are 10 commonly used lag and lead indicators. Although it is not immediately obvious, it important to appreciate the distinction between quantity versus quality focused indicators.
Lag Indicators
Quantity
- Revenue and sales growth
- Market share
- Customer acquisition cost
- Production / product output
- Staff utilisation rate
Quality
- Customer retention rate
- Customer lifetime value
- Return on investment
- Employee turnover rate
- Product defect or claim rate
Lead Indicators
Quantity
- Sales pipeline metrics
- Growth in new markets & strategic partnerships
- Innovation metrics – ideas, suggestions, and implementations
- Staff training and development participation rates
- Social media engagement
Quality
- Referral score or rate
- Employment satisfaction / engagement
- Leadership development / score
- Customer satisfaction index
- Quality of sales leads
Quality vs Quantity: Maximising Business Exit Value
The Role of Quality Lead Indicators in Business Valuation
Quantity focused indicators are generally well supported by measurement systems and tools.
On the other hand, quality focused indicators are harder to measure and assess, especially for lead indicators.
Because quality lead indicators are harder to measure, they are often avoided. The question is, are they too valuable to ignore? I believe the answer is a resounding yes.
Let’s take a closer look at the list of quality lead indicators.
The best form of new business is referral business. When an existing customer or client refers a friend or colleague to you, they come as a warm lead, saving on marketing cost and effort to attract and engage with them. Price or costs have probably been discussed with the referrer so you can get down to discussing results and solutions far more quickly.
- What proportion of new customers do you want from referrers?
- How do you turn your existing customers into raving fans who refer people regularly?
Who comes first – the customer or the team?
Without a great team you won’t serve your customers as you’d like, and how they would like to be served. Besides staff surveys to collect and gauge satisfaction or sentiment the quality of relationships and conversations is more important.
- What behaviours and elements in your culture demonstrate how you care for your team and that you are tracking it regularly?
Leadership is a hot topic with many branches to the discussion. To simplify it, leadership is an action or behaviour (not a position and quite separate to management) and the person who undertakes those actions, is behaving as a leader is expected to.
This can only exist when other people are involved – when they get together to achieve something and have a shared purpose. Therefore, relationships are fundamental to achieving.
How do you assess the quality of your relationships and what is expected of leaders?
One of the critical elements of leadership is trust. If trust can be improved how will that lead to better results?
Unless you build that focus (and others) into the development and feedback process in the business you will be avoiding important value builders.
Customer satisfaction, just like employee satisfaction, is more than the surveys and social media posts and smiley emojis.
Instant and open feedback is a very useful tool and indicator of sentiment, especially when potential customers are considering your product or service and scanning feedback on social media.
Perhaps the most valuable part of customer feedback are the complaints or negative comments:
- What are they?
- How many are there and what is the trend?
These are gems that keep you focused on how your customer is feeling and what they are expecting. Remember they are changing with the environment.
The quality of your sales leads goes to the heart of the quality over quantity discussion. You want more of what matters and less of what doesn’t matter and that is certainly the case in sales leads.
The ‘right’ lead has a much higher probability of being converted into a sale than one that takes up time and money and misses the mark completely. Your future revenue results can easily be correlated to the number of leads and the quality of those leads.
As a business owner wanting to maximise your business returns either now or in preparation for a sale, these quality lead indicators are an often overlooked source of securing your business’s predictable and sustainable future earnings thus enhancing the chances of securing a greater multiple at exit.
Success is working out what matters in the future, developing a path to get there and then getting it done
Building Future Business Value for Successful Exit
Stepping back from the detail and the indicators used, the lesson for building value for your business is this: success is working out what matters in the future, developing a path to get there and then getting it done.
It is a continuous process that needs focus and monitoring.
At Business Exit Partners, we guide you through the journey, especially when it comes to planning your exit so that you can maximise your returns by balancing this new ‘discovery’ phase with solid ways to optimise delivery and create greater value in your business. Book your Business Exit Readiness Call Now.
