Wednesday, April 4, 2007/
Not every business has unique valuation drivers. You’d be surprised what can be achieved with the right approach.
How can I increase my profits when selling a business?
If you are selling a conventional business then you will almost certainly be selling to a buyer who will value it based on some multiple of earnings, usually EBIT (earnings before interest and tax).
Part of the process of increasing the valuation is to generate higher sustainable profits. Easily said, but how can this be achieved in a systematic manner?
You could spend your life reading all the business books looking for every process and every fix, but then you would not have any time to actually run your business. So are there some generic processes that you could use to improve profits over time?
The difficulty here is to find approaches that can be used across a wide variety of businesses. Try these:
First, simply focus on getting rid of gross wastage. I don’t mean to imply that your business might be frivolous when it comes to expense control, but you would be amazed how much can be saved with a different perspective.
So get rid of obsolete inventory and equipment and review how you use warehouse and office space. Ask the hard questions about your use of travel, marketing and entertaining expenses. Simply adjust your lenses to saving money; you will be surprised what can be achieved.
Now list all your expenses, largest first down to the smallest. Start with the largest. What can be achieved over a 12–18 month period if you concentrate some effort on negotiating new agreements, improving productivity or paying more attention? Small reductions in large expenses add up to some sizeable cost reductions over time.
Now find out what you do well and what can be improved. Join a benchmarking program for your industry or subscribe to some benchmarking results. What are you doing that is better than the industry average? What are you doing that is clearly below par?
Now look at the industry best practice. Find out how that can be achieved. Once you can isolate practices that can be improved, you might spend some time reading, getting educated, talking to peers or hiring a consultant who can help you with improving aspects of your business that increase revenue or expense productivity.
For those parts of your business that are unique, consider introducing a continuous improvement process. The convention here is: if you don’t measure it, you can’t improve it.
The methodology behind this technique is to put in performance measurements so you can see what happens period on period. You can expect variation in performance and your task is to discover what creates improved performance. You may need help with implementation, but at least you know where the problems are.
Improving profits over time so that you can benefit from a higher valuation is not that difficult, but to be sustainable those changes need to be done in a systematic manner that can be demonstrated to produce reliable long term improvements.
Professor Tom McKaskill is a global authority on exit strategies and the Richard Pratt Professor of Entrepreneurship and Academic Director of the Master of Entrepreneurship and Innovation, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne.