There are many things that can impact a company’s value…positively or negatively. Many items are uncontrollable, such as tax rates, interest rates, the economy, and competition. In our 31 years of helping owners sell their business, we have seen dozens of controllable things that impact value. Some of the greatest value drivers are earnings, management, non-compete agreements, confidentiality agreements and owner dependency.
A company’s re-casted earnings or cash flow is the driving force in most valuations. Historical earnings trends tell the story of what has happened in the past. By looking at a 12-month trailing income statement, a buyer can see what trends might be in the near future.
What can an owner do to make their company’s earnings greater for the current trend and the future? Most business owners are so concerned with minimizing taxes that they don’t think about how much minimizing taxes significantly impacts value in a negative manner. Reducing a company’s earnings by $1 will generally save about 43 cents in state and federal income taxes, yet the same $1 reduction in earnings may cost one about $4 to $5 in selling price, or about 10 times the benefit. Compare gaining 41 cents in tax savings to losing $4 from your selling price, and it’s pretty easy to see that you should shift your focus to increase earnings, when you are considering selling.
Some of the first questions that a buyer will ask when looking at a business are related to the management of the company. What is the management structure like beyond the owner? How long have the key people been with the company? How many years of experience do they have in the industry? Can the management run the company without the owner? Does the company have a strong #2 person? If you can’t answer the above questions favorably for a buyer, your company’s value could be discounted. Plus, you will probably receive less cash, will have to finance more of the sales price, and you will most likely have to work longer for the buyer after a sale.
Similarly, owner dependency is also a key concern with buyers. Many small business owners wear multiple hats and often remain too involved as the business grows. To ease a buyer’s fears, you should build your business so it can function well without your involvement. A good test is seeing how your business operates when taking 30 - 60 days off.
Non-compete agreements and confidentiality agreements are important to preserving a company’s most valuable assets. Without these agreements there is little to keep key employees from taking the company’s knowledge out the front door. Although some non-competes may be unenforceable, having one in place is at least a deterrent. Often you can’t keep a person from earning a living wage in their industry, but you may prevent them from contacting your customers for a period of time. Getting employees to sign a non-compete agreement while already employed might be difficult without some form of additional consideration, but all future employees should be required to sign one as a condition of hiring. Confidentiality agreements are a necessity for just about any organization. Confidentiality agreements can help stop pilferage of company secrets, strategies, financial information, processes, compensation, etc. You should get all your employees to sign a confidentiality agreement now and make it a permanent part of any future hiring practices.
Your employees are certainly valuable resources to your company, but the intellectual property is your most precious asset and something that you can control.
These are just a few of the simple steps you can take to enhance the value of your business. For more detailed information please call us at 913.648.0185. We welcome your questions or comments.