10 Ways to maximize the value of your business
Looking at your business from a buyers view
Here's a list of key value drivers a buyer uses in evaluating a business:
1. Cash Flow
Cash flow is the single largest value driver for most businesses. Think of ways to improve your income on a sustainable basis. Buyers are suspicious of short term jumps in cash flow. Try to make the cash flow as consistent and predictable as possible.
2. Management Depth
Keep in mind that buyers buy a business that they hope will be functional and growing after the sale. It is tough for the buyer to place a high value on your business if you are the sole decision maker in the company and the business depends largely on your skill set. Developing your staff so that they can run the business when you are gone can pay big dividends when it is time to sell. If you are concerned about your employees leaving once you are gone, it may be good idea to consider employment contracts, stock grants and other incentives that give them a reason to stay long term. If possible, start work on staff related issues at least a year before you plan on starting the sales process.
3. Customer Diversity
Buyers are nervous about businesses where a high percentage of business comes from a handful of customers. Ideally, no single customer should contribute to more than 10% of your revenues or profits. The best solution for this problem is to diversify the customer base. If that is not feasible, be prepared to accept part of the transaction price paid as earn-outs or plan on supporting the buyer in an advisory role to ensure customer continuity.
4. Recurring Revenue Stream
Buyers love predictable and low risk revenue streams. Any long term contracts, regular service/licensing fees, and other recurring revenue streams make business more desirable and fetch a higher price in the marketplace. In service oriented business, converting predictable customer support calls into recurring revenue stream can turn a business liability into an asset.
5. Desirable Products & Services that are difficult to copy
Buyers place higher value on a business with unique products, services, or distribution systems than a business whose offerings are considered generic. What is unique about your business? Think of ways in which your product/service is unique and why it should be valuable to an buyer. Having an edge and having the ability to communicate the edge can do wonders to your business’s valuation.
6. Barriers to entry
With so much competition all around you, why is your business difficult to copy? Why will the buyer have as much success with the business as you have had? Is it because of intellectual property (patents, copyrights), regulation (permits, zoning), difficult to get contracts (you are one of the two or three qualified vendors at each of your major accounts), or something else? Having good answers to these questions indicates that there are barriers to entering your business. These barriers make your businesses more valuable than your competitor’s with similar cash flow.
7. Pending Upsides
You believe you are about to come up with a compelling new product or make major inroads into a premier customer. You expect these developments will double your business next year and do not want your company to be undervalued based on current financials. Delaying the sale has other consequences that make it unattractive for you to wait. So, what do you do? A good forecast backed up by management presentations with examples on why the company would achieve the forecasts is extremely powerful. Having a good understanding of your product/sales pipeline and having the ability to communicate it with your Business Broker can help structure a deal where part of the sales price can be paid in earn-out to capture some of the upside.
This value driver involves stability and consistency. Name recognition, customer awareness, history, ongoing operations, and reputation are all part of business goodwill and influence value. Even if the company does not have many hard assets, relationships are key. The fact that customers have been with the company for a period of time does matter. Brand recognition, service or product reliability, and high customer satisfaction are distinguishing factors that add value. This driver of goodwill should not be overlooked in a valuation because it is helps mitigate perceived risk.
9. Strategic Plan
A written strategic growth plan that clearly documents the areas the company can grow can be an asset to buyer. Length of the document is not as important as the content. A well written 2 or 3 page growth plan is sufficient.
10. Record keeping
To many buyers, high quality book keeping reduces risk and also says a lot about how the business was run. Having a set of clean, easily auditable books inspires confidence and helps during the due diligence and negotiation process.