Well before you start the process of selling your business and as you are contemplating exiting your business, consider these tips to boost its value…
When it comes time to sell a business, most owners know they must receive a certain price in order to achieve their exit goals and fund the next stage of their life or career. But when it’s time to finally list their companies, many owners often discover that their businesses are worth less than they had hoped. If you’re like most sellers, you need to work on increasing the value of your business—well before you plan on listing your company for sale.
How to Improve Business Value and Sale Price
The rule of thumb is that the longer you have to prepare, the more control you have over the value of your company. With that in mind, here are several ways to make your business more appealing–and more valuable–to today’s small business buyers.
- Increase profitability. It’s common sense that buyers are willing to pay more for companies that can quickly and consistently generate a profit. Showing buyers that you are profitable is certainly a good first step but if you can show them that your profits are still increasing, that will certainly drive up the price they are willing to pay. Look for new ways to cut costs or create efficiencies that will give your business that extra profit boost leading up to a sale. And beyond profitability look at cash generation, as the financial models used to value a business are often tied to the ability to generate cash over a relatively short cash cycle.
- Establish recurring revenue streams. Sales are the engine that drives successful small businesses. In the years leading up to your exit, consider ways to consistently increase sales and revenue, with special attention on recurring revenue sources that generate gross income for a new owner right out of the gate. Building recurring revenue streams and shoring up any pending customer or vendor contracts will give buyers comfort that they will have a consistent revenue flow while they get their new business transitioned and gaining momentum.
- Create seamless processes and routines. Savvy buyers understand that, unfortunately, in some businesses, the most valuable asset is the seller. As the seller, your job is to convince buyers that they can continue to successfully operate the business after you leave the scene. The way to do that is by developing airtight processes and routines that enable the company to function effectively without your direct involvement. Make sure these processes are also documented so the new owner essentially has a guide to running the business successfully. The definition that ActionCOACH uses for a successful business highlights the critical need for robust systems…. A successful business is a “commercial, profitable enterprise that Works, WITHOUT you.”
- Keep key employees on board. The last thing a new owner wants is employee turnover. Skilled employees bring stability to the business and generate real dollars for the company. By actively cultivating a high quality workforce, you can increase your company’s worth, especially if employees are committed to remaining with the company after you exit. Build long term incentives for key employees, such as equity ownership that vests over time or bonus plans tied to profits that motivate key employees to stay on after a business sale.
- Differentiate your product or services. Differentiation is an important priority for any small business. But in the business-for-sale marketplace, companies with differentiated products or services can command a premium, but you’ll need to demonstrate that your company is uniquely positioned to dominate a market niche. To do this, develop and promote any patents, intellectual property or other unique features of your products or services that give you an advantage over your competitors.