When business owners are in the midst of building their own company, the end of the adventure may not be the first thing that they plan. Unfortunately, many business owners are caught without an exit strategy when the time comes to sell their business. It is important to prepare your business for a sale long before you even begin to consider leaving the company. This will also aid you in receiving the full value of your business when the time is right.
The following tips will help any business owner—new or experienced—utilize strategies for building business value throughout the years of management.
1. Ensure that the business can run smoothly without its owner. This may sound counterproductive, but building a business that can run independently without its owner will prove most valuable. When a buyer looks at a company, they need to be assured that it can be run without the seller; otherwise the element of personal goodwill may diminish your company’s value. Setting up a strong managerial staff is one way to establish a well-run business independent of its owner. Even if you would like to stay with the business post-closing, it is still important to get the company to run on its own as much as possible.
2. Constantly analyze the strengths and weaknesses of the business. Examine your business from an outside point of view. What makes it attractive to potential buyers, and how can you further improve those assets? What are the weaknesses of the company, and what can you do to eradicate these problems? How well does your company follow industry trends? Take inventory of these elements on a regular basis; do not stick to what has always worked in the past. Always make room for growth.
3. What is your financial position like? Obviously a company that generates more revenue to the bottom line will sell for a higher price tag, but many other factors are involved in the valuation of a business as well. It isn’t always a good idea to minimize your taxes in exchange for a smaller profit. Analyze your debt-to-equity ratio and compare it with other businesses in the field. Also remember to be aware of the value of other assets such as intangible assets that are not measured in monetary values.
4. A constantly growing cash flow. Many business valuations are done based on a multiple of EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA really just means free cash flow after an adjustment for a manager’s compensation package. This is one element that a buyer will approach first when considering a purchase, so a track record of growth will make the company more attractive.
5. Create a reputable brand. Despite your assets and cash flow, buyers often shell out the big bucks for a reputable brand name. If your brand is well-known and associated with expertise in the field, it will heighten the value of the company. Branding also creates a barrier to entry that can enhance your value. Extra efforts directed towards a positive brand reputation will pay off in the future.
6. Care for your assets. This includes both physical and intangible assets, such as equipment and customer lists. All physical assets should be maintained for long-term use. Insurance can be a good way to protect your physical assets. Safeguarding intangible assets through password protected programs is another way to secure what is yours. Buyers do not want to acquire a company with risks. The higher the risk, the lower the value.
7. Strive for at least one aspect that sets the company apart from others in its industry. You don’t merely want your company to be good at something—it must be great in order to be successful. Create a reason for people to choose your business over others in the field. Latch on to that and become the best; whether it is the best customer service, the best price, or the best secret cookie recipe. Give consumers a reason to choose your company. The principles of alternatives and replacements are always at play.
8. A broad customer base will make your business more valuable. Depending on a small sector of clients does not always allow room for growth and can stunt your business. Constantly consider ways to broaden your reach. That being said, do not depend on any other one single supplier or employee either. A buyer will immediately use client concentration to lower your company’s value and could lead to an earn out of payments tied to the clients’ retention.
9. Keep all documents in order. An organized and accurate accounting system will speed up the due diligence process when it finally comes time to sell your company. Buyers value a well-organized information system.
10. Envision the future. Having a future plan and goals for your business will help it reach full potential. Setting up smaller goals along the way will make it easier to complete more long-term objectives. Become an inspiring leader with your ideas for the future. Even if the business will not always be in your hands, planning its growth will make it more appealing to potential buyers, because they will have less work in the long run.
The most important takeaway is to remember to always be prepared. Whether or not selling the business is anywhere in the forefront of your mind, keeping up with these good habits will add to the value when the time does come (even if the business is not sold during your generation).
We hope this list has been helpful in guiding you towards bringing your business up to its optimum potential. If you have any more questions about business valuation or the sale of your company, feel free to contact George & Company.