‘Housekeeping’ Tips To Consider To Maximize Business Value Before You Sell

Identifying Improvements You Can Make To Your Business To Maximize Value

As you start considering selling your business, consider what improvements you can make 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:

• Can this business operate independently of the owner?
• Does the business have a unique differentiator that sets it apart from all others in the industry?
• Is the business generating consistent, sustainable profits?
• Is the customer base well-diversified and capable of further business development?
• Are the systems and processes considered first-rate for the industry?
• Is the right team in place to grow the business?
• What are the strengths of the management team?
• Are there proprietary assets that have future value?
• Does the business have contracts with key stakeholders (i.e., customers, suppliers, employees, and other owners)?
• Is there a business plan in effect that demonstrates the business’ potential?

By determining how your business stacks up against the questions on this list, you can identify critical areas to address. 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 generated. Is it stable with consistent growth?

Stable Cash Flow Attracts Buyers

For the most part, cash flow is what buyers purchase unless an owner is fortunate enough to have a unique product or other offering. Often, a strategic buyer might only be interested in the business’s 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. The key here is for the business owner to pinpoint ways to reduce buyer risk. The lower the assessed risk, the higher the multiplier will be, which results in a higher business value.

Reducing Risk for the Buyer

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 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, a strong culture, lean and efficient processes and systems, etc.

Every business owner hopes to monetize the business’s value to meet their desired retirement lifestyle. To successfully build the required value, one should begin by obtaining a formal business valuation.

 We think you’ll also like:

1. How to Conduct Due Diligence Before Buying a Business
2. Steps for Protecting Business Sale Confidentiality
3. The Purchase Agreement Essentials: Representations and Warranties

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selecting the Right Valuation Expert
2. Common Issues and Strategies in Business Breakups
3. Post-Closing Issues: Integration & Potential Buyer/Seller Disputes

This is an updated version of an article originally published on April 3, 2015 and updated March 25, 2019 and April 30, 2022. This article was most recently updated by the Financial Poise Editors.]

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