Would you like to know how to increase the value of your business prior to selling?
Asking this question too late in the sales cycle can often cost a business £millions.
Of course, there are numerous aspects that make your business more or less attractive to a buyer.
• Your business may fit in with their needs for expansion, or
• There could be potential for growth for their business or
• The chance to combine two different businesses for strategic reasons.
Whatever the reason for buying, here is a quick look at the main aspects that are likely to impact the value of your business or on the other hand, decrease the value if you get it wrong.
To maximise your value you need to ensure that your companies’ processes are all systemised to the point where the founder or founders are no longer needed within the business.
This means that your buyer does not need to create all the systems to run the business.
This can often double the price you can achieve. If you have started to systemise your business you would have noticed that your life would be becoming increasingly easier anyway!
2. Consistent Performance
A potential buyer will want to know that your business has performed consistently well over the last several years. They will want to take a look at the balance sheets and see a demonstration that profits are on the rise rather than starting to fall. Strong performance is key if you are going to attract the right kinds of buyers and receive a great sale price.
If you are selling because you are declining, bring in a really great coach to help you turn the business around. As the business performance starts to move in the right direction, a couple of things are likely to happen. Firstly, you will be offered more for your business and secondly you may fall back in love with your business and no longer wish to sell. Bummer.
2. Potential for Growth
No one wants to buy a business that is going to remain static, nor in fact do you really want to own one that does… While you may not have grown your company as much as you wished, the higher the potential for growth the more attractive you are to buyers and the higher the price you can command.
3. Your Client Base
How many loyal customers you have and the likelihood that they are likely to stay when the company is sold is another issue that may affect the price. A healthy, evenly spread customer base that brings in a steady revenue is a great place to start and combined with the potential for good growth can give buyers a strong platform on which to develop the business.
One aspect of the customer base that can be a serious issue is if you have just a few top customers who contribute a large proportion of the revenue. This is a potential risk that you should have dealt with years before and naturally this serious issue is likely to reduce the value of your company. If 80% of your income is coming from just two or three major customers, then the question a buyer will naturally ask is what happens if they suddenly bail out..? Frankly if you had been a client of ours for a year or more you would not be in this perilous position anyway because not only does this reduce your value, the chance of failure of your business is very high.
4. The Entrepreneur And Your Influence Within The Business
How much the running of the company depends on you personally as the entrepreneur is also another important factor. Buyers don’t expect the entrepreneur to hang about when a company is sold and needed to replace you will impact on the value. As mentioned earlier, the less dependent your business is on you, the higher you should expect the valuation.
Another side point to this is that if some of your top customers are only doing business because you own the company, they might well want to shop around once you leave. That may be a risk a potential buyer doesn’t want to take on. So ensure that you bring on a team to manage the business on your behalf and to pass over much of the client contact to them. Fine be a figure head, just don’t make yourself too central to the value of the service offering.
At least one year prior to putting the business up for sale, start going on lots of holidays and make sure that your team run the business really well. In fact, after your first few holidays, I would hope that your team start to improve your business more than if you had been present.
I did this and it was just great! The year before I sold my business I took 5 long holidays and spent increasing amounts of time running around the UK away from the office. The team simply loved having the autonomy and we doubled in size that year.
This shows to a buyer the quality of your team and the systems in place and commands a premium.
5. Take profits out of the business and accrue your personal wealth
When you are enter the sales process the buyers solicitors will conduct due diligence. During the process, they will find out how much profit you have invested outside of the business. If you have been foolish enough to ‘bootstrap’ and have failed to build up your personal wealth outside of the business, expect a blood bath. They will know that you will accept a much lower amount and they may take some liberties ie offer you an ‘earn out’ and far less than your business is worth. So why do they do this? If you have not been taking out your profits and investing the money, they know that you not yet financially secure and that you are relying on the sale of the business.
The sensible strategy would be to build your personal wealth as a priority. This may reduce the size of the business a little however you are likely to get more for the business and you will already be wealthy.
6. Prepare your Business Plan for The Sale.
If you are serious about selling your business at some point in the future, make sure you plan well in advance. In other words you should be planning your business with selling in mind.. I believe this is key to achieving a premium valuation; and ensuring your deal completes quickly.
Of course, there are many other factors that affect the value of your business. These six points are crucial though when you are preparing to sell — understanding them means you can put in the processes and changes that are more likely to ensure that your business is an appealing asset and improve the price you receive for it.
Charterhouse have considerable experience in preparing your business to maximise its value.
There are only two events where you are going to relinquish your shares; either the company fails or you sell. If you are going to sell and you wish to maximise the value you need to plan for the sale event well in advance. The sooner you do this the better because retro fitting your business to maximise the sale value is almost impossible.
Selling your shares is inevitable, after all you only exit under two circumstances; sale or fail.
If you are planning to avoid failure then a sale should be planned and my guide should help you achieve the maximum out of your venture.