How to Manage your Business Goodwill

We have seen in a previous article that the type of business having the least chance of succession related failure, and therefore considered the most valuable to a prospective buyer are culture driven businesses. In this environment, the culture (driven by both people and systems) make the business happen. It is considered as close to a pure “investment” as a business can come. Its culture indoctrinates new hires into an environment of continuous improvement, based on systems completely independent from their owners. The result is what we call, a “Culture of Excellence”.

Find out in the simple test below if your business is ready for your departure. Rate each question from 1 to 10, 1 being the lowest mark:

  1. Does your company have a 3-5 year strategic objective, outlining your overall goals?  If so, how effective is it?
  2. How effectively does your company utilize key performance indicators to track its ongoing success?
  3. How complete are your company’s systems for recruiting, retaining, developing and managing your employees?
  4. How defined is your company’s unique market position (why your business is unique) in the eyes of your customers?
  5. How dedicated are your employees to doing the best job possible, even when you are not present?
  6. How effectively does your company utilize an annual calendar to manage its business cycle (i.e. employee reviews, budget reviews, special events, etc)?
  7. How effectively does your company deliver on its production or service demands?
  8. How well do your employees work together as a team for the betterment of the company?
  9. How effective are your lead generation and sales systems when you are not around?
  10. How well would your company survive if you took a six-month vacation?

A score below 50 means that if you leave the business now there is a great chance that it will collapse. 51 to 80 you have room for improvement. Above 80 your business will survive your departure.

Measuring goodwill can be subjective but to be as impartial as possible you should analyse all aspects of your business value

Goodwill value

The goal of this exercise is to work toward higher goodwill value to do so you should understand for each driver how much they are dependent on you, your staff or systems

Drivers by category

 

You should then dig down further understanding the general value indicators and how well you perform in each of them

Genral value indicators

Each business driver should be divided in sub categories

Operations Goodwill Breakdown

You can now begin to build the goodwill value of your business in a systematic method using some specific tools.

The main tools are:

1)      Business Manual: Organizes every aspect of your business including, Operating Manual, Strategies, Organizational structure, Systems, Training programs, Find your lease. If you rent space, you may be required to notify your landlord if you intend to sell your company. Read through the fine print and ensure you’re not scrambling at the last minute to seek permission from your landlord to sell.

2)      Employee Manuals: Organizes all of the information necessary for managing, training, and empowering your employees. Employee handbook, Office policies, Job descriptions and so forth… 

3)      Analysis Manual: Tracks your progress towards your business objectives. KPIs etc. That which is inspected is respected – measure what you want to improve.

  • Professionalize your books. Consider having audited financial statements prepared to give a potential buyer confidence in your bookkeeping.
  • Stop using your company as a cash machine. Many business owners run trips and other perks through their business, but if you’re planning to sell, these treats will artificially depress your earnings, which will reduce the value of your company in the eyes of a buyer by much more than the value of the perks.
  • Protect your gross margin. Oftentimes, when leading up to being listed for sale, companies grow by chasing low-margin business. You tell yourself you need top-line growth, but when an acquirer sees your growth has come at the expense of your gross margin, she will question your pricing authority and assume your journey to the bottom of the commoditization heap has begun.
  • If you’re lucky enough to have formal contracts with your customers, make sure your customer contracts include a “survivor clause” stipulating that the obligations of the contract “survive” the change of ownership of your company. That way, your customers can’t use the sale of your company to wiggle out of their commitments to your business. Have a lawyer paper the language to ensure it has teeth in your jurisdiction. 

4)      Business Calendar: Organizes and manages your business development activities according to a schedule eg. Weekly sales forecast, monthly operation reviews, quarterly board meetings…

5)      Get your Sellability ScoreTake 13 minutes to answer the Sellability questionnaire now. You’ll see how you performed on the eight key drivers of Sellability and you can identify any gaps you need to fill before taking your business to market.

Increasing value should be the business owner’s number one goal. By focusing on value, you get:

  • A business that can be sold more easily
  • A business that can survive a management buyout
  • A business that can survive a family succession
  • A business with greater growth potential
  • A business that can capitalize on a recession
  • A business that is not operationally dependent on its owner

If you have a question or disagree with me please leave a comment on this blog.  I will respond promptly so we can have a fruitful discussion

If you like this article please share this link with your friends on social media, your Blog or by e-mail

If you envisage to transition out of your business in the near future and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk

 

 

 

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