Business Value Beyond the Financials

Whether your business is currently on the market or you are evaluating your exit strategy for five or ten years down the line, being educated about the steps needed to enhance your company’s overall value is key to maximizing your proceeds at the closing table.

Though these facts may seem obvious to many, the truth is that most business owners lose perspective when looking at their own company.  Time to take stock and discover additional ways to enchance value.

  • Fact No. 1  Many owners (and their brokers or advisors) take steps necessary to get their financial documentation in order.
  • Fact No. 2  Most owners (and their brokers or advisors) ignore all the other really important stuff that buyers consider when determining interest in and offering price for a business.

The truth is that most business owners lose perspective when looking at their own company.

Some thoughts to consider when evaluating your business

Are your profit margins over-inflated because you work too much?

Some owners think value is solely down to profit margins, but we have to analyze the hours an owner works to reach those figures.

Buyers do not like to spend their life savings on a business that requires them to reduce their quality of life (working ridiculous hours).

Example: An owner may have a hard time selling if the company’s success is dependant on him or her working 80+ hours a week.  He or she may make $180K net a year, but they have absolutely no life outside of the business.

A key to preparing for sale may be bringing on new assistant management or part-time personnel to reduce the owner’s workload.  The owner will be reducing his current annual net, but this move could equal tens of thousands of Dollars, if not more at the closing table.

Summary: A buyer will be much happier working 40 hours a week and netting only $100K annually.

Adding Value by Strengthening Your Transition Plan

Buyers want to know what will happen after close.  Are your employees going to leave, what about customer lists and contracts?  What do you have to offer a buyer that competing businesses for sale don’t?

Examples to consider:  Key members of staff.  A key employee can agree to stay on for at least the first year of new management.

Flexibility.  A buyer will be more encouraged to purchase a business if the owner offers some flexibility after the initial training period – agreeing to stay longer or act as a consultant at little or no cost for a predetermined amount of time may show an investor that the seller is confident in the business’s long-term success.

Operations Revisited

Before considering going to market, it’s time for a seller to have a good look at his business plan.  Don’t have one, or haven’t looked back since drafting it 20 years ago?  Time to dig in and have a look at your business.  The plan helps bring to light strengths and weaknesses that need to be addressed prior to going to market.

“I think it´s a shame that people associate business plans with starting a business, more than with running a business. Every business needs planning, ongoing and existing businesses as much as start-up businesses” – Tim Berry for Dun & Bradstreet

A seller may also create added value by spending some time and money creating a complete operations manual (or revamping the one from 15 years ago). This can be of great importance for a buyer with executive experience who may be transitioning from a different industry.

Occupancy Costs – An obvious point in this market that has surprisingly been ignored by many

Customarily, most owners do not inform their landlords about their intent to sell until a buyer’s in place.

However, considering the current economy, business owners should be reviewing their current lease to see what new terms they can possibly negotiate with their landlord to reduce occupancy costs – prior to going to market.

An owner who has not tried to reduce this expense in this market can unknowingly kill a potential deal if a competing business for sale has better terms already in place.  Buyers know this is a tenant’s market and often will completely pass up a good business opportunity if they feel that there will be drama with a landlord after due diligence and prior to close.

Spring Cleaning – From Retail to Office to Home-based Businesses

Sometimes it doesn’t matter if business has strong repeat clientele and cashflow is high – buyers will pass up a dump and WILL find a cleaner facility in this market that has comparable income to owner.  Same goes for how owners organize and file their financials.  Do you know how to use Quickbooks? Is it time for a bookkeeper? And is your accountant accurately itemizing your expenses?  If you have to scramble to get information, it’s time for help.

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