Updated: May 17, 2020
1. Find the niche in which you can create sustainable value for your customers better than your competitors.
The list of companies that have dominated their markets by being “all things to all people” or a “one stop shop” is short. Fill in the blank in this sentence: “The thing our product/service does better than anyone else’s is _____________.” Then define the target market that needs the thing you just filled in the blank and focus, focus, focus, on creating ongoing value for those in that segment.
2. Become incredibly disciplined at turning down shiny opportunities that don’t fit squarely within your niche.
This might sound like a support sentence for number 1 that we added to the list so that we could round out our five tips, but its much more than that. Number 1 was the process of defining where you’ll operate. Number 2 is the art of filtering with discipline. As soon as business owners experience even a little bit of success all sorts of shiny opportunities start opening up to them. Many of these opportunities will seem irresistibly attractive but lead you down a path to a weaker company if they don’t build upon your core competencies. Don’t get tempted to do something outside of your core competencies.
3. Build a culture that seeks to make all who touch your organization better off because they have done so.
No matter what your industry, your people are your biggest asset. Invest in them and build them up with every chance you get. Those who exploit others for their own financial gain not only have a moral problem, but their success is almost always short-lived. Taking care of your people (employees, customers, vendors) leads to a much more fulfilling life. And companies that take care of their people are more profitable too. Want some proof? Check out the book Firms of Endearment.
4. Know Your Numbers
When your business is just you and a few employees you can probably keep your finger on the pulse of it without any accounting system at all. But as you grow things get complex - quickly. Business managers who understand their numbers make more informed decisions. Good accounting and organized data on their own are only useful in getting you through audits and tax returns. As a business manager you need to be able to use that data to make better decisions. This isn’t simply making your financial statements be everything your accountants want it to be. You should have the real-time financial and operating metrics and ratios at your fingertips in your dashboard and your pro forma to make informed decisions to effectively steer your business.
5. Use Business Processes to Create Value in Your Company Instead of In You
One of the largest omissions in business valuation reports is an accurate assessment of the maturity of a company’s internal processes. In the finance profession this is a large input into what is called Company Specific Risk, and it’s often so large that it trumps all other valuation considerations. A company can often double its value by creating easy-to-follow processes for every functional area of its business. This increase in value can happen even if the cash flows of the business stay exactly the same. Why? Buyers of businesses make assessments of value based on both 1) the cash flows of the business and 2) the riskiness of those cash flows. And one of the biggest causes of risky cash flows in lower middle market businesses are owners that are so involved with every aspect of the business that it can’t run without them. However, businesses that run like a well-oiled machine because of a talented rank of senior managers who follow documented processes are worth more – even with the same amount of cash flow. Even if buyers don’t speak in terms of company specific risk, they’ll still internalize this factor and make pricing decisions based on it. So, process mapping and delegation of authority are musts for any business owner seeking to enhance their value.
(Want to see some amazingly choreographed processes in action from a pit crew? Check this out:
Your business may not operate as rapidly as theirs, but you will still benefit from orchestrating the way your products and services are delivered with the same precision they use.)