8 Steps to Increase Your Store's Value
Music retailers often spend time analyzing their retirement accounts but forget about the value of their own businesses. In many instances, this may be your largest retirement asset. And unfortunately, many retailers who have thought about the value of their businesses have an inflated sense of what they're worth.
Who can blame you? You've put your life into your store. But time, effort and capital infusions mean nothing unless they convert to bottom-line profits. The more bottom line profits (free cash flow) a business generates, the more attractive the business will be to potential buyers and the more the business will be worth. Bottom line: If you want to increase the value of your business, increase your cash flow.
I know this is easier said than done—increasing a business' cash flow is a challenging, lifelong pursuit. That said, identifying and exploiting your company's value drivers will result in improved operations and greater profitability. Given that, I recommend the following. (Note: This is not legal advice. For more information, consult a financial and legal professional.)
1. Retain key people. I once valued a combo shop for a possible acquisition and discovered that the business had recently lost a key salesperson. Apparently, the owner had no idea how important the salesperson was to the business and let the person slip away. The business owner was under the false impression that his product line was the true salesperson. He discovered, too late, that it wasn’t. Had the owner recognized the true value driver of his store, he could've attempted to retain this individual and may have realized a greater value upon the business’ sale.
2. Increase inventory turns. Often, business owners become so concerned about gross profit margins that they hold on to inventory for far too long. I've seen many retailers realize higher profits by lowering their margins and increasing their turns.
3. Manage operating expenses. A sure way to increase cash flow is to reduce expenses. While this can be tougher than it sounds, incorporating the use of an annual budget will help monitor and control spending. If you're not using annual budgets, you are missing out on a valuable financial tool.
4. Implement a growth strategy. The most effective way to increase cash flow is to have an actual plan. Develop a step-by-step business plan to get from where you are to where you want to be.
5. Decrease risk. Cash flow is adversely affected by the inherent risks put upon your company’s operations. Risk comes from either internal or external sources. Internal risks include poor management, high employee turnover and poor internal controls. These risks need to be identified and addressed. External risks include the economy and the industry. You can’t control external risks, but you must be aware of them so that you can respond.
6. Develop an exit strategy. You will leave your business one day, so you must determine your departure objectives and lifestyle needs. Planning your exit now will give you time to maximize your company’s value. Selling without planning almost always leads to a deflated value.
7. Document earnings. Business owners, in their pursuit to minimize taxes, will strategically show little or no annual profits. Unfortunately, banks and buyers may overlook your business because they want proof of consistent earnings before they'll be willing to invest.
8. Properly manage your debt. Debt is a necessary evil in all small businesses. Used wisely, it will help you grow and reach your goals. However, interest costs can strip your company of profit and cash flow. Use trade debt and floor planning wisely, and be certain that long-term assets are financed with long-term debt.
These are just a few practical tips to help improve and maintain your company's cash flow. However, all business owners need a qualified, competent team of advisors to help them meet their business and individual financial goals.
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