Margin Advantage Could Be the One Reason Your Business Sells for More
Because the true value of your business will be determined by the final amount you get when you sell it, doesn’t it make sense to focus on those factors that create and drive that value up? Too many business owners focus instead on day-to-day income generation or spend all their time working in their business rather than on their business, to their detriment in the end.
70% to 80% of businesses don’t sell simply because owners neglect to concentrate on building the value of their business. To realize the greatest value possible and walk away with a prime payout, it’s in your best interest as a business owner to pay attention to and refine your business value drivers, in particular, your company’s margin advantage.
Possessing a Margin Advantage Makes Your Company More Attractive than Others
To have a margin advantage doesn’t mean you consistently have a healthy profit margin. You only have a margin advantage if your company enjoys gross and net margins greater than the industry average. To put it simply, your advantage lies in the reasons why your customers buy from you, not from your competitors.
“…having a strong competitive advantage can differentiate you from the rest of the pack, and if that differentiation is positive, buyers will be more likely to pay top dollar for it.”
Take this case study as an example of a margin advantage. A business owner decides it’s time to re-examine his business to increase its value rather than its profitability. They determine the business is offering multiple services that are too much work for too little revenue. So, they make the call to stop offering those services and instead concentrate on delivering the remaining services faster than their competitors. At the same time, they raise the prices of those same services to just less than that of their competitors. Now they’re offering the same services faster and cheaper than their competitors. This doubles their margins, making the business incredibly attractive to potential buyers.
Examine and Revamp to Create a Margin Advantage to Realize Top Dollar for Your Business
It’s all well and good to know you need to create a margin advantage for your business, but how do you go about doing that? Because having a margin advantage requires your company to have greater gross and net margins than your competitors, the answer is as obvious as it seems: increase sales, reduce expenses or both.
While just increasing your prices may seem the easy answer, it could come at the cost of alienating your customers, so balance that out by examining how you can add value for your customer. Keep in mind the example business owner who cut out some services to concentrate on offering others faster and cheaper than the competition while still asking a higher price than previously. Of course, an additional option is also to sell more than you were. Can you target a new market? Can you increase production?
“The best strategy is to focus on increasing sales and decreasing expenses simultaneously.”
As such, while you work to increase your sales, examine the costs of your day-to-day operations and production. Hiding in that forest are many ways you could reduce expenses as a business owner that you may not have considered before, such as relocating your headquarters to a cheaper part of town, leasing smaller factory space, or reducing your workforce.
Other options could include finding find cheaper sources for the raw materials you need or expanding. Make sure you can use those less expensive sources you found without sacrificing quality though, or you risk losing the goodwill of your customers. Expansion can quite often be the preferred option since with increasing production comes additional benefits such as wholesaler discounts; less depreciation; and lower advertising, administration, research and development, and production costs. This is a long-term strategy, however, so plan ahead to achieve the desired effects.
Finally, take a look at places you could refine your expenditures. There are corners in every company that hides expenses in plain sight. You don’t see them because they’ve always been there. Is there anywhere you could eliminate redundancies, install automation, or outsource for example?
Profit or income alone doesn’t translate directly to business value; therefore, to realize the top dollar from the sale of your business, hone in closer on margin advantage. Just because you’ve consistently made a tidy profit doesn’t mean your competitors aren’t doing the same thing, only better. Examine your gross and net margins to determine if your margin is greater than the average in your industry instead.
If they aren’t, look to increase sales and reduce your expenses. Try targeting a new market, cutting some services or products not worth your time to focus on those that are and raising your prices accordingly, or finding something new you can produce, sell, or offer based on your current product.
Do some research to see if you can’t source less expensive materials or relocate your headquarters or facilities to reduce overhead. If you’re planning to sell in the future and you have time, consider expanding to take advantage of the benefits of a larger production. Or see if there’s anywhere you change the way you’ve always done things, perhaps automate a system or outsource a step.
Taking both steps simultaneously will always result in the greatest outcome, so when selling, plan to both grow sales and shrink costs. When doing so, however, keep your customers top of mind. You’ll only lose sales and goodwill if you fail to do both thoughtfully.
Value drivers such as margin advantage establish the highest standard for building operational excellence in middle-market businesses, so if possible, focus on them from the day you launch. Otherwise, work on improving them at least 3 to 5 years before you go to sell, or as soon as possible.
Then when you’re ready to sell, follow the knowledgeable advice of Business Development Canada and hire a professional broker who specializes in mergers and acquisitions. An expert will take care of all the intricacies of selling, leaving you free to focus on your business, your team, and those value drivers. A broker will get a far better price for your business than you could alone, much the way a lawyer is far more effective than you in a courtroom.
Start with Muise Mergers & Acquisitions Inc. Their decades of experience will take the weight of selling off your shoulders and transform it into a successful deal. Call them now at (902) 456.6473 or send them an email and get a premium price for your business with little hassle.