As you start thinking about selling your business you should also think about how you might make some improvements to the business to maximize business value to a buyer. Identify the company’s shortfalls and consider fixing 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 that may you may want to begin to work on. The key concept is 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 generated. Is it stable with consistent growth?
For the most part, cash flow is what buyers are buying, unless an owner is fortunate enough to have some unique product or other offering. Often, a strategic buyer might only be interested 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 work on those things that 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’ 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.
[Editor’s Note: If you want to read more about how to sell or otherwise exit a business, be sure to read “Business Transition and Exit Planning: Welcome to the Jungle!” It will lead you step-by-step through what you need to know.
For more information on this topic, please check out our “How to Value Your Assets” webinar, or “How to Select the Right Valuation Expert” webinar. Read more about Business Transition and Exit Planning. You may also like “Legal and Practical Advice-Roadmap to Selling Your Business.”]
Editor’s Note: This is an updated version of an article first published on April 3, 2015
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