Is your business ready to sell now? Whether you plan it or not, at some point in time, your business will transition in some way to someone else. Often, the perfect buyer comes along when the business owner least expects it, and is willing to pay top dollar based on the existing condition of the business. If you are not always prepared, you will have left money on the table. Ideally, you should always be enhancing your business.
We have identified below some steps to enhance your business. Some require a change in how you run your business, but the end result will greatly improve the value of your company:
A company’s earnings or cash flow are the driving force in most valuations. To show consistent cash flow, you may need to run your business differently for several months to a few years. For example, if you are currently managing the business to minimize your taxes, you could be expensing items that lower earnings. Reducing your earnings by $1 will generally save about $.41 in state and federal income taxes, but the same reduction in earnings could cost $4 to $6 in selling price. Perhaps you are leasing equipment that is reflected as an expense. It might make sense to purchase the equipment, so it is reflected as an asset, which builds the balance sheet and improves earnings. Your M&A advisor can help you identify these opportunities to enhance the value of your business.
- Remove certain assets from your balance sheet
Many assets on a company’s balance sheet do not add significant value to a buyer’s calculation of price, since the driving force of a valuation is the earnings of the company. Often you can convert the assets to cash or remove them while your business continues to operate in the same manner. We see business owners realize hundreds of thousands of dollars in savings.
Meticulous documentation shows a buyer that everything is in order, and can comfort a buyer if they have concerns that key employees might leave after a sale. Have an outside firm perform a review or audit of your company, or at the very least have accurate financials according to generally-accepted accounting principles (GAAP). All important paperwork should be well-organized.
- Make sure business isn’t dependent on you
Many times, the first questions we receive from potential buyers relate to this topic. What is the management team structure? How long have key people been with the company? Can the management team run the company without the owner’s involvement? A business that relies heavily on the owner commands a lower selling price or more seller financing than one that can be run by experienced management. If a strong team is not in place, now is the time to build one. If you believe you have the right team in place, back away from the business for 30-60 days to test your team, and make adjustments if necessary. Additionally, you should have on file signed non-compete agreements, non-solicitation agreements and confidentiality agreements from key employees, as this will ease the mind of a buyer.
- Protect intellectual property
This is an important area that can add significant value to your business. Intellectual property puts you at a distinct advantage over your competitors, and buyers will want to know that you have protected it. Make sure you have trademarked your company name, have patents on file and have copyright protection on appropriate materials. Also have employees sign work made-for-hire or assignment agreements.
- Clean up your skeletons
This is usually unsettling for sellers, but it’s important to come clean at the outset if you are involved in any litigation, have employee dissent, or other unpleasantries. Resolve these issues and other skeletons before going to market. Buyers don’t like surprises.
Buyers are interested in companies with broad markets, so identifying developing new customer groups or sources of revenue will make your company much more attractive than if most of your income comes from a few customers.
Investments in new technology or upgrading current systems will positively affect your sale, especially if you can document how the modernization will reduce expenses. However, do this early on as investments in capital expenditures may not pay for themselves for several years, and a purchaser will not reimburse you for those expenditures except through an increase in earnings.
- Position yourself as industry leader
Don’t stop marketing your business when you decide to sell. A sound marketing plan with ROI results will go a long way with buyers. Keep investing in your marketing, whether it is designed to gain new customers, keep existing ones, or simply create awareness about your company.
- Show solid performance history
In an ideal situation, you should have a trailing 12 months of increasing sales and EBITDA. While selling declining or flat businesses is common, you will fare so much better from your sale if you can demonstrate that sales have been increasing, and that you have a growth plan for the future.
- Show growth plans
As stated above, a growth plan for the future is a key part of selling your business. Have a well-thought-out plan with growth strategies that could include new products, new target demographics, new target geography, etc.
- Establish a recurring revenue stream
If you don’t already have a portion of your business that can be relied upon every month, try to develop that steady stream. It will serve as good cash flow, and will limit perceived risk to the buyer.
These are just some of the ways to enhance the value of a business. Each situation is unique, and you and your advisor are the ones who can best determine what will make your business more attractive to buyers. Taking every opportunity to enhance the value to your business now will certainly provide a more favorable outcome for you at the end of the transaction.
For advice customized to your company's unique situation, contact Mike O’Malley at 913-648-0185.