The Adventures of Lee The SME Owner - 30.
Chapter Thirty - Setting The Focus For The Next Years
With the results of the Fair Market Valuation (FMV) in hand, Lee had a clearer picture of where his business stood at this stage of the exit process. While many of the initiatives he and John had implemented were starting to bear fruit, the valuation highlighted areas that still needed work if Lee was to maximise the sale value of the business in the coming years.
The FMV gave a detailed analysis, and now Lee and John had to use those insights to map out the next phase of work. Some changes were already underway—like leadership transitions, product mix adjustments, and branding—but other key areas required more focus.
Here’s what the FMV revealed and the next priorities Lee needed to tackle.
1. Strengthen Management Independence
While the transition with Sam as General Manager was progressing well, the FMV flagged the business’s reliance on Lee as a potential risk factor. Although Sam was stepping into his role, the business still felt connected to Lee’s presence. To maximise value, potential buyers needed to see a company that could operate entirely independently of its founder.
Action Steps:
Complete the Leadership Transition: Continue mentoring Sam but progressively reduce Lee’s direct involvement in daily operations. Lee should work toward making himself invisible to customers and suppliers over the next 12-18 months, solidifying the business’s independence.
Empower the Management Team: Beyond Sam, Lee needed to ensure the rest of the management team was confident and capable of running the business without him. Further training, mentoring, and leadership development for key managers like Bill, Susan, and Tracey would be essential. This would reduce buyer concerns about a leadership vacuum when Lee steps back.
Create Standardised Processes: Documenting operational processes, decision-making protocols, and key business functions would ensure the business could operate smoothly, regardless of leadership changes. Standardising processes also reassures buyers that the company is scalable and less reliant on any single individual.
2. Increase Profit Margins by Optimising the Product Mix
The FMV confirmed what Lee had already suspected: while two of the product categories were highly profitable, the others were either underperforming or breaking even. Adjustments to the product mix were already in motion, but there was still work to be done to refine the focus on higher-margin products.
Action Steps:
Retire Underperforming Products: Lee needed to move more decisively on phasing out the unprofitable or marginally profitable products. While this might lower top-line revenue, it would improve profitability, which is the real driver of value for buyers.
Maximise Profitable Lines: With the underperforming products gone, the next step was to increase focus on the two high-margin product lines. Lee should work with Sam and Tracey to explore new markets, customers, or sales channels for these products, ensuring they grow their share of the company’s revenue.
Introduce Complementary Products: As discussed earlier, introducing new, complementary products that align with the company’s existing offerings could attract more customers and expand market share. This was a calculated risk, but one that could yield significant rewards if executed well.
3. Boost Customer Loyalty and Reduce Concentration Risk
One area highlighted in the FMV was customer concentration. If a significant portion of revenue was tied to a few large clients, that posed a risk for potential buyers. Lee needed to diversify his customer base to ensure no single client represented too much of the business’s income.
Action Steps:
Diversify the Customer Base: Tracey and the sales team should work to broaden the company’s customer base. This could include targeting new markets or industries that hadn’t been explored yet. Reducing reliance on a few key customers would make the business more stable and attractive to buyers.
Enhance Customer Retention Programs: It’s easier to retain existing customers than to find new ones. Lee should strengthen customer loyalty programs, ensuring that customers are consistently satisfied and engaged. This could include expanding after-sales services, offering loyalty rewards, or implementing a customer feedback loop to address any potential issues quickly.
4. Develop Recurring Revenue Streams
One thing that consistently adds value to a business is recurring revenue. Buyers place a premium on companies with predictable, ongoing revenue because it reduces risk and ensures stability. The FMV noted that Lee’s business had some recurring revenue streams, but there was room for growth in this area.
Action Steps:
Create Maintenance or Service Contracts: If applicable, Lee could introduce maintenance or service contracts for his products. Offering customers ongoing support, regular maintenance, or subscription-based services would help create a steady revenue stream.
Subscription-Based Sales Models: For products that lend themselves to regular replacements or updates, Lee could introduce subscription-based models. This would provide consistent, predictable income that would appeal to potential buyers.
5. Leverage Branding for Long-Term Value
The branding exercise with Courtney had already made significant strides, but the FMV showed that more work could be done to strengthen the company’s brand in the eyes of both customers and the market at large. A strong brand would make the business more resilient and add intangible value to the sale price.
Action Steps:
Continue Strengthening the Brand: Lee and Tracey should work closely with Courtney to further develop the brand story and messaging. Ensuring that the brand reflects the company’s values, reliability, and unique selling points would differentiate it from competitors.
Increase Brand Visibility: The company’s digital presence, content marketing, and customer engagement efforts should be amplified. This would not only drive more sales but also solidify the brand’s presence in the market, making it more attractive to buyers.
6. Improve Operational Efficiency
While the FMV confirmed that Lee’s operations were running well, there were opportunities to increase efficiency. Buyers are always drawn to businesses that can do more with less, so improving efficiency across the board would directly impact the company’s value.
Action Steps:
Invest in Technology and Systems: Continue upgrading systems like the MRP software to improve operational efficiency. Automating repetitive tasks and streamlining workflows would reduce overheads and boost profit margins.
Supply Chain Optimisation: Lee should review the supply chain again to ensure he’s getting the best deals from suppliers. Any savings here could directly improve the bottom line without sacrificing quality.
7. Document Everything
A buyer will always look for a well-documented business—one that can be handed over seamlessly. This means having clear, thorough records of all operations, financials, and customer relationships.
Action Steps:
Create a Business Manual: Lee and his management team should work together to create a comprehensive business manual. This document should cover everything from key processes and systems to customer relationships and supplier contracts. A well-documented business is easier to sell and commands a higher price.
Organise Financial and Legal Documents: Ensuring that all financial records, contracts, and legal agreements are easily accessible and up to date will streamline the due diligence process when it’s time to sell.
8. Employee Retention and Succession Planning
The FMV pointed out that while the management transition was underway, the business still relied on key personnel. Buyers will always assess how stable the team is and whether there’s a risk of talent leaving after a sale.
Action Steps:
Create a Retention Strategy: Lee should put in place retention incentives, such as bonuses or shares, to ensure that key employees stay on board during and after the sale. Offering management stability will provide potential buyers with confidence that the business won’t lose critical talent.
Develop an Employee Succession Plan: Beyond Sam, Lee should ensure that other critical roles within the business have clear succession plans. This adds another layer of security and continuity for buyers, knowing that leadership and talent development are well-established.
Conclusion: Building for the Future
With the FMV as a baseline, Lee now had a clear roadmap for the next few years. The journey wasn’t just about increasing revenue—it was about creating a business that was efficient, well-managed, scalable, and independent of its founder. By focusing on these critical areas, Lee would not only maximise the value of his company but also ensure that when the time came to sell, it would be in the best possible shape to attract serious buyers.
And, with John guiding him through each step, Lee felt more confident than ever that he could successfully navigate the path to his ultimate goal: a well-deserved exit, knowing his business was left in capable hands.