Building Company Value – Documented Operating Systems
True transferable value in a business is determined not by how well you run the business, but by how well your business runs without you. Whether or not you intend to sell your business, effective value drivers increase company value if they contribute to cash flow both during and after an original owner’s departure.
For every business owner, determining how to increase transferable value is the business owner’s job. However, once owners and their advisors determine which of the appropriate value drivers must be strengthened, everyone in the company should be involved. By definition, business owners cannot do it alone. If they could, they would not be creating transferable value, because once they departed, the value drivers would disappear.
If you wonder whether installing systems in these (and all) areas of your company is worth your time or effort, let us look at systems from the perspective of a potential buyer. If a buyer compares your company to another, which company will he or she pay more for?
Your Company which is run by an owner who:
• Has creatively and effectively built the business with intuition and intelligence; and
• Will be gone once the buyer takes the reins.
Another company which relies on systems that:
• Are written and communicated clearly
• Are adhered to by all employees
• Produce consistent results
• Will be in place long after the owner leaves
As you can see, systemizing internal operations are a critical Value Driver. In the context of transferable value, operating systems are the established and documented standard business procedures that demonstrate to potential buyers that a business can maintain its profitability after an owner leaves it in the buyer’s hands.
The Value of Documented Operating Systems
The theme of Michael Gerber’s best-selling business book for entrepreneurs, The E-Myth Revisited, is, “Let systems run the business and people run the systems. People come and go but the systems remain constant.” This advice is as true for smaller businesses as it is for larger enterprises.
Having great processes means customers, vendors, and employees enjoy the same experience each time they interact with a company. It also means that the data surrounding each interaction can be measured, interpreted, and mined. Using that information, next-level management teams continually modify and improve those experiences.
If your objective is to sell your company at some point, you would be well-served by building reliable systems that can sustain the growth of your business. Before we get started on discussing this important value driver, here are a few quick definitions:
• Systems refer to a group of related processes
• Processes have purposes and functions of their own and are components of a system. Taken independently, a process alone cannot do the work of a system
• Procedures are the approved way we do things and often include a sequence of steps
• Steps are the actions we take to get something done
That was a mouthful! A solid management team is one of the first important value drivers to focus on when you are preparing for a potential business exit. In addition to building a strong management team, it is important to build reliable operating systems that can sustain the growth of the business. The second value driver then is the development and documentation of business systems that either generate recurring revenue from an established and growing customer base or create financial efficiencies.
Look at your business from a buyer’s perspective. Would you buy your business? If you leave shortly after a sale, what remains? If the answer is top management and highly efficient business systems, you can be more confident that you will have a strong legacy and be able to get full value for your business.
The documentation of company systems and their related processes and procedures is important to ensuring that quality and consistency can be maintained after the sale. They also signal to a potential buyer that elements critical to the successful transition of a business are in place. Some examples of items worthy of documentation are:
• Financial control systems and accounting policies.
• Policies to ensure compliance with legal and regulatory matters, especially those related to employer/employee relationships and safety.
• Data management and information systems that tie the company together.
Again, put yourself in the shoes of a would-be buyer. Buyers want assurance that the business can continue to move forward under new ownership and that operations will not break down when the former management leaves. This assurance can be obtained when there are documented systems in place that enable the potential buyer to repeat the actions of the former owner to generate income and grow the business.
There are several business systems, which, once in place, enhance business value whether you plan to sell your business now or decide to keep it. These systems include:
• Effective marketing practices with metrics that can be measured
• Effective customer qualifying processes – only working with qualified clients
• A documented sales process that guides potential clients through their sales experience
• A documented sale to production handoff
• Daily production management systems so that clients enjoy the same experience every time
• A documented close-out and warranty process
• Processes on converting every past client into a client for life
There is a lot of content here. If you would like assistance with generating documented company operating systems, please contact me. I have a business manual with 21 construction-specific job descriptions that will facilitate this process for you: David@RemodelForce.com.