Someday you are going to transition ownership of your business to another owner either through a sale or a succession plan. If you hope to one day sell your business and reap the benefits there needs to be value. If you plan on succession, there will need to be present value the successor will want to receive.
Here are 8 ways to make your business more valuable:
1. Remove yourself from the business.
Investors do not want to buy a job. By the time you put your business on the market, you should be as hands-off as possible. This demonstrates that your top managers and employees can handle running—and continue growing—the business without you. Because eventually, they will have to.
Diversify your employee base as much as possible. Overreliance on a single individual whether it be the owner or a single key employee can be a red flag to potential to a buyer that the business model itself can’t stand on its own.
Thoroughly screen and hire qualified employees then make sure incentives are in place to retain them. Saving a few dollars today in employee overhead can end up costing your thousands of dollars down the road in errors, poor customer service and defalcations.
Finally, once you have your all-star team in place be sure to step back and delegate business operations to them. Your trust will be repaid in kind many times over.
2. Diversify your customer base.
Buyers dislike seeing a small number of key customers accounting for the bulk of sales. Work to diversify your customer base – by size, numbers, geographically and other factors. You should also know that if you have a highly concentrated customer list when your business sells, you may be asked to include a so-called “erosion clause” in the deal that lowers the price if a top customer leaves.
If you can add additional locations and maintain or increase existing key performance then do it! Remember that valuing your business includes considering multiples of earnings restated various ways. The more earnings and profit the more your business will be worth.
When it comes to adding more locations don’t forget your online presence. According to the U.S. Census Bureau’s Quarterly U.S. Retail Sales Report as of the 2017 year end e-commerce now accounts for 8.9% of all retail sales as compared to 3.6% ten years ago. If you sell retail goods directly to the public consider opening an online store in addition to your existing bricks and mortar. By all means invest the capital needed to make sure your website offers a pleasant user experience.
3. Maintain Fiscal Transparency.
It’s vital to have sound accounting systems and financial safeguards in place, and to keep accurate records and statements. Any buyers will want to examine these records as part of a due diligence process. Also try to avoid adjustments or add-backs, which don’t look good.
Avoid any “off the books” cash to the extent possible. When it comes to calculating value unreported cash will not be included in value and a bank will not make a loan based on it.
If possible plan for the sale of your business in advance. The more time to make sure your financial statements reflect the true strength of your business the better. Having to explain a sudden spike in performance is awkward and does not build as much trust with buyers as does consistent verifiable results proven over two or years.
4. House your business in physical facilities that make sense.
Home based business owners really need to pay attention here. If you are planning to sell relocating your business to a dedicated commercial facility may increase the value of your value and improve your home life. A legitimate business address also works wonders for SEO.
If you do lease negotiate the right kind of lease. A month-to-month lease may seem appealing because it offers flexibility. But buyers and banks think more about how expensive it is to move a business. In fact, for other than professional type businesses, banks are reluctant to lend for longer than the term of a lease, including options. No lease can mean no sale.
Owned premises can be a plus to many buyers. Since you will be selling the business and real estate for the current market value make sure the business can afford to pay the new mortgage amount. As an alternative, you may continue to own the real estate and lease the premises back to the buyer, possibly a good strategy to reduce your tax bill on the sale as well. If you do offer a leaseback option be sure the business can comfortably make the lease payment.
It is also important to keep the workplace premises clean and tidy. Just like first impressions are crucial in selling a home a buyer’s first impression of your business premises may make or break a deal right out of the shoot. Avoiding deferred maintenance issues to keep your facility always looking its best by handing repairs as things wear out. This will also help with positive employee morale and customer perceptions. Some considerations for an inexpensive and quick makeover could include a fresh coat of paint, new furniture, floor covering, signage and landscaping. Just make sure any renovations are all complete before the first buyer steps foot on your property.
5. Keep your technology up to date.
Consider updating any of your primary technology components that are more than five years old as they are likely out of date. The capabilities of technology are changing for the better at an alarming rate and staying up to date show increased efficiencies (and profits) and sell for a higher price. A business that maintains relevant technology as a best business practice will be in a position to capitalize on opportunities. Buyers will take notice of up to date systems which will result in a higher price for assets in place.
6. Diversify and scale your revenues for growth.
This one’s rather obvious, but true since values are determined in part as a multiple of revenue. The overall risk of a business also comes into play with the size of the business being a major component of the risk calculation. A minor setback to a larger operation can be catastrophic to a smaller one.
Make sure to establish recurring revenue sources with accompanying overhead that can quickly expand or contract with economic conditions. Source and capture opportunities that generate a perpetual ongoing revenue stream. This also means feeding and caring for vendors and customers that are core to your businesses success so buyers can rest assured they will have a firm foundation to build upon.
7. Keep business and personal matters separate.
One benefit of owning a small business is to legitimately fund expenses that benefit both the business and its owner. But be vigilant and guard your successful business from the temptation to finance an extravagant lifestyle. While your business may be able to handle such demands on working capital the related expense addbacks to justify a selling price will be suspect to buyers and held in contempt by the bank and the bottom line is that banks and buyers want to see profits. Plus plaintiffs’ attorneys always appreciate an easy way to pierce the corporate veil and access your personal assets.
Fiscal discipline will positively impact the culture of your business and will positively noticed by potential buyers. Show a lot of profit, pay some tax and it will come back to you in multiples when it comes time to sell.
8. Have and follow written policies and procedures.
Most experienced buyers will recognize your value to the company and will be concerned how well equipped they will be to run the business once they take ownership. The way to do mitigate this concern is by developing airtight processes and routines that enable the company to function effectively without your direct involvement. Make sure these processes are also documented so the new owner essentially has a guide to getting up to speed and running the business successfully.