Today’s Marketing Decisions Impact Tomorrow’s Sale Value
“How much is my business worth?” It’s a question that we, as an advertising agency, are seldom asked. But it is a discussion we raise in conversations with our small business client-owners. Remember, the definition of a small business is pretty broad. EAG Advertising & Marketing serves some small businesses with over 100 employees and more than $50 million in sales. So value is always a relevant topic.
There are two important points we want to make in this article that correlate business valuation and marketing. First, exit strategy and brand positioning are equally important to consider for any small business. Second, your business’s value at the time of future sale can be greatly impacted by marketing decisions you make today.
A business is worth as much as an owner can get for it. At the same time, a potential buyer will be looking for ways to lower the sale price by lowering the sales multiplier or discounting assets. That discounting of value is our link to the marketing discussion held years prior – when the seller first begins thinking about selling their business.
A brand positioned to generate long-term, recurring revenue will return a higher value at the time of sale. A business that pursues immediate sales with no long-term reselling process diminishes value. You may not plan to exit your business for 20 years or more, but marketing decisions you make today can help you determine how much your business is worth tomorrow.
How much is my business worth? Much less if you spend too much time in your business.
A business suffers at sale time when that business has become too dependent on the owner who will ultimately be turning the keys over to a buyer. And when the business owner has spent most of their time in marketing and sales, the gap in the value of the business grows even greater.
Nothing illustrates the point better than a real-life example:
There was a commercial refrigeration company that had been doing well for about 20 years. It was a second generation, family-held company of approximately 25 employees, mostly technicians and a few clerical employees. The owner closely held the process of marketing and selling to new customers. The sales cycle could be long since these were commercial refrigeration accounts so the business owner felt only he was capable of managing sales. Seldom did he trust employees enough to pursue new business outside of his involvement. The owner also really enjoyed the sales process. Perhaps too much. The new sales of refrigeration equipment dominated the business focus while refrigeration repair and service became secondary.
In evaluating the financials, anyone could see that repair and service accounted for nearly 60% of revenues. But this was “accidental” revenue in the sense that there was no initiative or marketing efforts that lead to or managed the flow of repair revenue. The business owner watched his net income closely, understanding that his net income multiplier would be his path to retirement. While he expected some adjustments at the time of sale, he didn’t expect some of the more significant discounts to the value of his business that were requested.
As the sole sales relationship-builder, the owner had put his business in the worst possible position for a sale. Now, a new owner would have to perform the task or hire a sales professional with no existing relationships in the business. This could become a significant adjustment to the value of the business. The repair and service business, accounting for 60% of sales, had no recurring revenue model (service contracts) and no regular marketing process to drive repeat business or customer loyalty. If the phone rang, money was made. But nothing was being done to make the phone ring.
As part of a brand positioning evaluation, we confronted the owner with these two gaps in his exit plan. Both were met with vehement rebuttal. His defense ultimately was that his customers all have great relationships with his technicians. That drives value. True, but what if his technicians leave or a new owner doesn’t like the existing technicians? The value of the business had been lessened by marketing decisions made by the owner years earlier. When the time comes to sell the business there will be no time left to change the course of action.
How much is my business worth? Much more if you prepare yourself and your business over time.
Follow these simple rules for ensuring that your marketing and advertising decisions today don’t negatively impact your business value tomorrow.
1) Think about your exit strategy and the value of your business from the very moment you launch your business. Don’t name your business after yourself if you plan to sell in only a few years of business. Tom Brown Plumbing is less appealing to Mike Smith because he immediately has to deal with an expensive name change.
2) Your database of customers and prospects is a goldmine of information. Without a well-maintained, accurate, easily accessible database, your business value will drop. Any buyer with a minimum of marketing savvy knows how important a database is when determining the value of a small business.
3) Do you own your logo? You’ve been in business 35 years, of course you do – right? Not necessarily. If you have not taken the steps to own and protect the intellectual property of your marketing materials, you may have less to sell to a prospective owner. Remember the trademark protection you didn’t want to pay for when you started your business? Now that decision will haunt you.
Small business marketing isn’t just about finding new customers; it’s about adding value to your business in advance of a sale. Great marketing not only influences buyers of your product or service, it can influence the buyer of your business. Keeping your exit strategy in mind when you are working on marketing initiatives for your small business will reap rewards at the time of sale.