As you start thinking about selling your business, you should consider what improvements you can make to your business to maximize business value. The first step is to identify the company’s shortfalls and consider how to address them. Look at your business through a prospective buyer’s eyes, and ask:
By determining how your business stacks up against the questions on this list, you will be able to identify areas to begin working on. The key concept is gaining an understanding of the company’s value drivers. Perhaps the key driver is the history of the normalized earnings and cash flow the business has been able to generate. Is it stable with consistent growth?
For the most part, cash flow is what buyers are purchasing, unless an owner is fortunate enough to have some unique product or other offering. Often, a strategic buyer might only have interest in the business sales volume or the specific sales territory footprint.
The second driver is the earnings multiple. This is determined by the buyer’s assessment of risk. Hence, the key here is for the business owner to pinpoint the ways in which they can reduce buyer risk. The lower the assessed risk, the higher the multiplier will be, which results in a higher business value.
As a business owner, how do you reduce this risk? Make sure your business has few, if any, dependencies. These could include dependencies on a single customer, supplier, employee, or on you, the owner. Buyer’s risk can also be lowered by referring to the questions above, and having as many ‘built-ins’ as you can; a strong management team to take over, a motivated and fully engaged team, strong culture, lean and efficient processes and systems, etc.
Monetizing the business’s value to meet desired retirement lifestyle needs is every business owner’s hope and desire. To successfully plot the path to build the required value, one should begin by obtaining a formal business valuation.
This is an updated version of an article originally published on April 3, 2015 and last updated March 25, 2019]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Terry Shepherd has advised small and medium-sized, family-owned/closely held businesses for over 30 years. His particular business areas of expertise are business exit and transition planning, building business value, increasing profitability, strategic planning, business development, customer service, and team development. In his business exit and transition consultation work, he is a catalyst in guiding owners…
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