Seven Ideas to Increase the Value of Your Business
1. Boost earnings at least 1 year before the sale
Whilst easier said than done, finding ways to boost profits a year before hand can make a large difference in the final sale price. This does not mean cost cutting that destroys value in the business (such as slashing stock levels at the expense of being able to supply customers), but trimming costs that will not add value to the sale of the business, and finding ways to boost sales prior to going on the market.
2. Structure the business to highlight the value
The primary factor in any business sale is to make the value of your business crystal clear in the hands of the buyer. This means they must be able to see where they can increase profits and cash flow. Ideally the management accounts and financial statements should be structured to show the sales and profit performance of each business segment.
Even if total sales are not increasing, show the product or market segments that are showing an increase. A buyer will be attracted to the potential and be willing to pay more of a premium.
3. Develop succession plan that reduces reliance on key staff
Whilst strong cash flows really boost the value of a business, having minimal reliance on key staff helps the value just as much. Having a documented succession plan that shows the skills and experience that key staff currently has and a plan for other staff to be trained up means the business does not rely on the owner, and a prospective buyer will be much more eager to pay a premium.
4. Clean up the balance sheet
A clean balance sheet helps the buyer to see exactly what they are getting.
5. Have well developed strategic alliances
- Consolidate any directors or shareholder loans into one section of the balance sheet.
- Write off any goodwill or intangible assets that you cannot justify its value
- Remove or clear slow moving stock, but do NOT impact your ability to supply customers
- Reduce accounts payable and accounts receivable – this reduces the working capital requirements for the buyer and makes the business more attractive
- Set up clear recognition of assets for sale – plant and equipment, buildings and identify extent of depreciation
- Consolidate debt – reducing any overdraft or short term credit (this is only necessary if the debts are being sold with the business)
The best price for your business will come from someone who knows and understands the business. This means that any strategic alliances you currently have can also be prospective buyers.
Document these alliances in terms of the objectives of the alliance, what each side offers, the key contacts in the alliance and key development opportunities. This document can help demonstrate the upside potential of the business to a prospective buyer.
It is also worth identifying what other strategic alliances can benefit your business and assist in adding future value. If you start early enough, you can plan to have these alliances in place when you do sell the business. More importantly, if done correctly one of these alliances may prove to be a prospective buyer.
6. Document business systems and procedures
Well documented systems and procedures will add significant value to any business because it tells the buyer that the business runs smoothly and efficiently and does not rely on the business owner or key staff. It provides a level of confidence to the buyer that they can run the business better than the current owner.
It also allows the buyer to identify potential improvements and opportunities, as operations are no longer “stored in employee’s heads”, but open for everyone to develop and improve.
7. Develop and document all IP
Intellectual property (IP) has the potential to add a lot of value to any business. But it is no good if the IP is not sufficiently documented and implemented within the business. IP can include processes or procedures that you use in your business, registered trademarks, designs, logos or products.
Development of IP can also include development of your brand, how your customers perceive your business and its products/services. Making the value of your brand visible is a detailed process, but can substantiate any estimates you have for goodwill.
Buying a business is rarely an impulse or “on the spot” decision. Getting a quick sale usually means giving up value that could be in your bank account. The key message in this is to BE PREPARED!
The first step is to understand what the value of your business is now and where the profits are generated. Knowing this allows you to develop plans to increase the value and to structure the business to make the value crystal clear.
It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.
Executed properly, this can take up to two years before you are really ready to sell. But the increase in value can be many times over if done correctly. And that could mean having enough funds to buy into your next business or retire in comfort, rather than scratching around for your next job.
Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.
We offer a free assessment of your situation and review what potential value exists within your business.