Neal started his company 22-years ago. After 17 years he sold it and stayed on with a five-year management contract. He was now leaving and wanted to buy three or four "small" businesses.
Why buy three or four businesses? Because three of the vice presidents at his old firm had approached him and asked if they could work for him when he found a new company. His plan was to make each of them a company president (they would make an investment in "their" company). He would be Chairman and run one business himself.
Interesting story, isn't it?
What if you wanted to buy Neal's old company and were comparing it to another company in a similar industry, with similar sales and similar profits? If you only looked at the financial statements you would conclude the two companies have a comparable value. But isn't it riskier to buy a company where three of five department heads are ready to leave? Isn't that company worth less?
This is only one reason why the non-financial factors are critical to the value (and future profitability) of a company. The non-financial factors most often considered are:
Business buyers are always concerned the key employees won't stay. A few years ago the employees were just as worried they would be let go. Not now. Now they know they can probably get another job, for higher pay, if they're willing to put a little effort into it. Your employees are a major asset and to receive maximum value for your firm they must be happy and willing to stay.
Customers are just as important. You must keep them happy. The cost of finding a new customer is estimated at six to eight times the cost of doing business with an existing customer. If any one customer accounts for over 10% of your business put an emphasis on adding new customers. Make your customers feel special and they will reward you with more orders!
The market conditions in your industry are key. In these days of consolidations, roll-ups, Internet businesses and specialization it is critical to keep on top of your market. Frank bought an old, established manufacturing business. The key to the deal was that the company did not sell their products outside of the U.S. The owner felt it was a "hassle" to do all the required paperwork. This added potential made a sweet deal even sweeter. In less than one year Frank started selling internationally and doubled the company's profits. What market potential does your company have that it is not reaching?
Do you know everything you should about your competitors? Do you regularly track their pricing? What about their service? Do you buy from them and test their service? It's not enough to know that your industry is competitive; you must know what issues are important. Small businesses usually try to compete on service and must do those little extras the large companies can't.
Very often the lease is simply an overlooked document in the file cabinet. Or, worse yet, the owner is proud to be month-to-month. If you want to sell your business, the lease is critical. A buyer should never make payments longer than the term of the lease. In fact, the SBA will not guarantee loans for longer than the lease. In retail, the three most important factors of success are location, location and location. What about manufacturing or distribution firms? It can be prohibitively expensive to move. A good lease at a fair rate is an asset to your company. Respect and treat it as such.
Bob's company has one dominant supplier that is buying its competitors. Prices have risen steadily over the last few years. The alternative is to buy direct from overseas distributors. The choice is pay a high price or tie up a lot of cash. Neither is very attractive. The ideal situation is to have suppliers fighting for your business. Pay attention to this and don't become reliant on one or two suppliers.
When doing strategic planning, analyzing a company for acquisition or preparing your business for sale or an investor pay close attention to the non-financial factors. We use a 32 point rating sheet. Please call if you would like a copy of it. The non-financial factors tell you where a company is going. If buying a firm, don't ignore them. If selling a firm, emphasize your strengths in these areas. If growing your business, these are the keys to long term success and stability.