Value Drivers to Enhance Your Business - There are many things that can impact a company’s value…positively or negatively. Some are uncontrollable, such as tax rates, interest rates, the economy, and competition. But controllable issues that impact value are not difficult to change. Some of the greatest value drivers involve earnings, management, and the growth of the company. Below are some specific items that every business owner should consider.
- Earnings. A company’s re-casted earnings are the driving force in most valuations. Historical earnings trends tell the story of what has happened in the past. Sellers should also provide a monthly 12-month trailing income statement, so a buyer can see what trends might occur in the near future.
- Expenses. These should be reduced wherever possible. Capitalizing equipment costs rather than expensing them will increase earnings. Keep personal expenses out of the company’s income statement. Every dollar you can generate in additional earnings should increase the businesses value by $3 to $6 or more.
- Predictable income. Recurring revenues are very desirable among buyers, and the higher percentage of recurring income the better. If you utilize contracts with customers and suppliers, convert them to automatic-renewal contracts and try to have the contracts assignable to successors and assignees without needing approval on ownership changes.
- Owner dependency. Many small business owners wear multiple hats and often remain very involved in all aspects of the business as the business grows. To ease a buyer’s fears, you should build your business with a strong management team so it can function well without your involvement. A good test is to evaluate how your business operates when taking 30 - 60 days off.
- Employees. Key employees are a threat to become competitors. Have current employees and all new hires sign non-compete, confidentiality and non-solicitation agreements before they find out the business is being sold to keep you in control and comfort a buyer’s anxiety. Make sure employees are cross-trained in multiple areas of the business, as this minimizes the negative effects of employee defections before and after a sale.
- Relationship dependency. Consider whether key customer and vendor relationships are dependent on the owner or certain employees. Buyers want to see transferable relationships that won’t be overly vulnerable to competitors once the owner or employee departs. Also diversify customers and suppliers so a large amount of the business isn’t dependent on them.
- Diversity. Market your products and services to multiple sectors. Diversified companies are better protected from downturns and also offer more opportunities for growth.
- Financial reports. Prepare accurate income statements and balance sheets every month, with clean month-end cutoffs. Be sure revenues match the appropriate costs. Don’t defer revenues at year-end to save a little on taxes.
- Working capital = current assets, less current liabilities. Lower your working capital (excluding cash and debt) where possible to retain more cash for the stockholders. This means collecting accounts receivable sooner, lowering inventory and prepaid expenses. See if you can extend accounts payable with your suppliers.
- Growth. Continue to grow the company even though you might be comfortable within the current status of the business. Some owners slow down in their final years, but a company growing at a 15% to 20% pace will bring a higher value than one that is flat or in single digit growth.
These are just some of the ways business owners can enhance the value of their company prior to a sale. For more information about preparing a business for sale, contact us at 913.648-0185.