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 matching up how your business stacks up against the questions on this list, you can identify areas that you may want to begin to work on. The key concept in working on this list, is your understanding of your 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; 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, after many years of hard work, is every business owner’s hope and desire. To successfully plot the path to build the required value, it all begins with obtaining a formal business valuation. With so much on the line, business owners cannot afford to not get this first step right.
For more tips from other experts on this subject, we recommend this webinar and this webinar. You may also be interested in this webinar on selling your business and this webinar that focuses on valuing your soft assets.
Terry is a Principal with ROCG which is an international professional service and consulting firm with offices throughout North America, Europe and the Asia Pacific region. ROCG is the only international firm specializing in the areas of business transition strategy, finance and operations for privately owned and emerging growth enterprises. Terry Shepherd has advised small…
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