Business owners work hard over the years to build a company and it is important to understand the drivers that are involved in maximizing this value when a business sale is being contemplated. Detailed below are 10 of the more common elements that are can increase the worth of a business.
Clean Financial Statements
Increasing the level of detail and accuracy of a company’s income statement and balance sheet not only helps an owner to better manage opportunities for improvement but also enhances the confidence of both buyers and lenders, helping to maximize the worth of a business. Eliminating any non-reported cash from the business is critical as any off-the-books “cash” is unable to be utilized when deriving the value of the company.
Stability of Earnings
Most small businesses are valued on a multiple of “adjusted” earnings. This is not to be confused with income reported for tax purposes. Therefore, showing a stable and consistent stream of adjusted earnings over a three-year period will be one of the more fundamental mechanisms involved in increasing the value of a business. Not only will buyers be willing to pay more for a company with stable and growing earnings but lenders will be more likely to finance the business sale transaction.
Recurring & Growing Revenue
While the last few years have been challenging for many companies, demonstrating that there is recurring revenue from existing customers and showing a consistent and growing top line will be instrumental in maximizing the value of the company.
Concentration a Customers
When a large portion of revenue resides with a handful of customers a higher element of risk is created for the acquirer. Therefore, ensuring that a company’s client base is diverse without a disproportionate amount of business with one or two customers will assist in increasing the enterprise’s worth.
Management Team
For smaller businesses without a structured and deep management team, it is important that key employees are properly trained to manage major components of the enterprise. Too often, the success of the business is reliant on the expertise, knowledge, and capabilities of the seller. Ensuring that a trained and capable team is in place when the business is sold, will help to increase the company’s value as this critical knowledge is not leaving with the owner. Additionally, it will also mitigate the requirement for a long and protracted transition period encumbering the seller.
Customer/Vendor Contracts
A business that has contracts in place with customers and supply agreements established with vendors enhances the enterprise’s value. Long-term customer contracts provide the acquirer with confidence that this business will be secure when the company is acquired. Additionally, having exclusivity with a manufacturer or vendor for a specific product or a specific territory will also be an effective tool to build company value.
Diverse Product/Service Offering
Company’s that have established multiple revenue streams from a variety of products or services help to mitigate the income risk in a transaction. While there are exceptions to this, as some companies can be extremely valuable as the dominant service provider, it is always beneficial to not have all of the eggs in one basket.
Business Plan
There are a number of factors, both strategic and tactical, that are involved in building a successful business, and many of these will revolve around methodical planning and the establishment of realistic expectations. A business plan should be viewed as a written roadmap, typically over a moving 3 year period, that will assist the owner in planning the budgetary, marketing, and management tasks required to achieve forecasted sales and earnings. A strategic business plan should be viewed as a ‘living document’. It is established and lays the foundation when a business is started or acquired and is updated on a periodic basis as circumstances and goals change. A business plan is a standard requirement by nearly every lending and financial institution when capital is required for either an acquisition or company expansion. Therefore having such a document in place will be extremely valuable to the buyer when it comes time to sell the company.
Operations Manual/Job Descriptions
Establishing an operations and procedures manual and having detailed written job descriptions for all employees will add value to the transaction. Similar to the business plan, having step-by-step instructions on the company’s processes will provide confidence to the buyer that they have a complete understanding of how the company functions in addition to the required tools necessary to successfully operate the business.
Sector Growth
Being in an industry or sector that has a promising growth forecast is extremely important to both generate interest from buyers as well as create additional value when the company is sold. Understanding what the growth drivers and forecasts for the industry and/or sector are will be essential to properly promote the future value that this growth will bring. It is important to realize that while future growth is very important, the majority of business valuations are completed based upon the trailing 3 year period.
At some point time in time, every business owner will “exit” their business. In most cases, a small business represents a significant component of family wealth and the owner will be keenly interested in maximizing this value when the business is either sold to an outside 3rd party or key employee or transferred through an orderly succession to a family member. Unfortunately, most entrepreneurs are so immersed in the daily demands imposed in operating their company that they have neglected to properly plan for the inevitable transition of their business. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognizes that succession planning is the single most important way to take control of the terms and conditions of exiting their business.
The longer that a business owner has to implement the Exit Plan, the greater the opportunities will be to maximize the business value, minimize tax liabilities, avoid key employee turnover, and eliminate emotionally charged family issues.
Prior to assembling an exit strategy, it is important for the owner to understand what their business is worth in today’s dollars and the individual drivers used to determine that value. With this information in hand, it ensures that the proper elements are addressed so that when the company is finally sold, the transaction price is maximized.
