Do you hope to increase business exit value for business succession purposes? While each business is unique, these approaches apply to every business.
In many cases, owners (you?) feel it is not worth making changes “after all, I’m just selling it.” But time and time again owners who do prepare sell their business faster and obtain a higher price.
A. Be highly profitable.
High profitability will increase your business value more than any other one thing you can do. Cash flow, largely a reflection of profitability, is half of any valuation equation. In addition, high profitability is viewed to reduce risk. So, high profitability improves both sides of the valuation equation. Here are some things you can do to increase profitability.
- Reduce expenses. Almost every business can cut expenses 10% by looking closely at expenses and weeding out the redundant or unnecessary costs such as software subscriptions that are no longer needed. This is also a time to critically review staffing and identify employees who consistently underperform or do not have a full workload.
- Sell more high margin products and services. Most businesses have a range of profitability across their products and services. Prepare a gross margin, or contribution analysis and to the extent possible and then focus on selling more of the high margin products.
- Grow, if profitability can be maintained. Growth can be expensive. Do not grow at the expense of profitability if you expect to take your business to market in the next three years.
- Do not over-invest in capital items like a new warehouse, large major machinery, etc. that will lower profits and take a long time to absorb if you are within five years of going to market. However, continue making normal periodic equipment investments like trucks.
- Refinance debt to lower rates if they can be obtained.
Keep your company lean. Remember, the last two or three years and the current period through your closing date are going to determine your value. During this period focus on profits.
B. Reduce risk
The other half of the valuation equation is the multiplier or discount rate which is an adjustment that factors in business risk. Reduce risk wherever possible. Examples are:
- Contracts: Obtain long term contracts instead of working with no contracts. Obtain service contracts when possible. Develop backlog and bid waterfalls to estimate (and later show) potential work.
- Liability Insurance: If you have a professional practice make sure you have professional liability insurance.
- Legal Resolutions: Resolve lawsuits that are not covered by insurance if possible before beginning the sales process.
- Safety Ratings: Maintain a good safety rating in dangerous industries.
- Balance Sheet: Build a strong balance sheet. Strong balance sheets demonstrate long term profitability and the ability to overcome short term difficulties.
- Joint Venture Options: If you have a preferred buyer, try to joint venture or otherwise work for them. Knowing you, assuming things go well, reduces risk at least to that buyer.
- Training: Develop other salespeople besides yourself. In fact, develop systems and train people to solve problems to reduce reliance on yourself.
C. Become Expendable
In most small businesses, the loss of the owner is the biggest risk because every major decision leads to the owner. Therefore, when you sell your business much of the decision making and intellectual property leaves with you. A prospective buyer will view this as a serious liability.
Start training your staff now to make decisions and share the day-to-day responsibilities. Granted, this process is challenging and in some cases may mean additional training for current employees and/or hiring a higher caliber staff. Work towards being able to take a two week vacation and not call in.
This effort will not only reduce risk but also create business value. Of course, if you don’t have to work so hard, you might now want to sell at all.
D. Lock in Key Players
As you develop systems, train key people, and start taking time off, the risk of losing of key people increases. Create a “golden handcuff” plan to keep your key people now and through a transition. If you have a high year end bonus culture you can pay bonuses, 1/3 this year, 1/3 next year, and 1/3 the year after. This approach always creates a higher barrier to leaving. Similar but different are stay agreements. A stay agreement will often promise approximately 50% of the annual salary as a bonus if the employee stays two years after any type of ownership transition (which would include a business sale, disability, or death). Finally, get non-solicits of both other employees and customers from all key employees to reduce the temptation for them to start a competing operation.
E. Hire a Broker / Banker
Unless you are selling to insiders or family members, a business broker or investment banker will make a market for your business. Experienced brokers use proven processes to attract multiple bidders. This bidding process and the resulting fear of loss on the part of the prospective buyers gives the seller negotiating leverage.
In addition brokers are experienced negotiators that know how to listen and then create win-win solutions. A quality broker will help you put together a deal team (a tax professional, transactional attorney, financial planner and other participants as necessary) if you don’t have one.
Yes, business brokers cost money but they bring peace of mind and higher prices in market business sales.
If you are considering an exit plan, you need to make sure you get it right. The area is complex and many things from tax laws to negotiating strategies are not always intuitive. Don’t learn on yourself.
The book, “The Art of Business Valuation, Accurately Valuing a Small Business” has over 75 of its 400 pages covering many aspects of small business market sales including working with business brokers, increasing sales value, descriptions of a well-run sales process, due diligence including a checklist and guidance on SBA loans. If you are selling a business with revenues under $10 million, you need this book on your desk. The book published by Wiley is available through your favorite bookseller. More information can be found at www.theartofbusinessvaluation.com
Finally the author, Greg Caruso, JD, CPA, CVA, is always available to assist with exit planning, brokerage, and to prepare or review business valuations with an emphasis on increasing value and likely transaction values and terms. firstname.lastname@example.org