In the past year, my clients and my partners at B2B CFO® have shared quite a few insights with me. It’s always interesting to distill the most important ideas down to an organizing principle. Some people refer to this process as homiletics. I’ll call it the “So What?” principle. If I share ideas with someone, they will ask why those ideas are important.
“That’s interesting, but why should I care? So what?”
In choosing which ideas and approaches are most important for the health of a company, I believe that sustainability is one of the most clear organizing principles in business. This is true whether we are trying to improve our business for many years to come, or sell it next year.
The Keys to Sustainability in Business
Since savvy business owners are well aware of the importance of sustainability, I will focus on specific attributes that differentiate the sustainable business.
- Repeat business is better than having to constantly find new buyers.
- Subscription revenue is better than having to compete for each new transaction.
- Established processes are better than having to do everything as a one-off.
- Long term high-knowledge employees are better at serving your customers and strengthening your team than high turnover employees, and in the long term are well worth the cost.
- A career path for employees, and a succession plan for executives, is critically important.
- Established relationships with vendors are better than constant shopping – provided that the vendors work with us.
- An established relationship with the right banker is golden.
I’m certain that you, our readers, could add to this list. We’d be interested in hearing from anyone who would care to share their ideas with us.
Sustainability as You Prepare to Sell Your Business
Now, what about the business owner who wants to sell, and get the highest price and best terms?
- Most buyers look at a multiple of adjusted earnings before interest, tax, depreciation and amortization (EBITDA) to determine the price range they are willing to pay. Yes, they look at other metrics, but this one is often dominant.
- The adjusted EBITDA number is very objective. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.
- The multiple is usually within a known range.
- Whether our business is at the high end or the low end of that range is a function of risk. The lower the risk, the higher the multiple.
- With that in mind, the inverse of risk is sustainability, and greater sustainability equates to a more valuable business.
Our business strategy, processes and procedures must go beyond achieving success, and actively promote sustainability. Otherwise, we are likely to find it harder to justify a high value for our business when negotiating with a buyer.
For more information about sustainability as it relates to the health of your business, I invite you to contact a B2B CFO® partner.