We know how much time, effort, and dedication it takes to create a successful business. At the end of the day, you want to know how to maximize the value of your business in order to meet your personal financial goals. It’s never too early to begin thinking about exit and the ways you can increase how much your business is worth.
Here are 5 ways to make your business more attractive to potential buyers:
- Standard Operating Procedures (SOPs) – The difference between your business simply being an extension of yourself as opposed to a self-sustaining entity comes down to the systems you have in place. Have you created workflows, checklists, and procedures to ensure that the business can run like a finely tuned machine without you being a bottleneck to the process?
- Management Team – The successful implementation of SOPs is contingent on your business having a motivated and stable group of key employees that have the judgement and experience to autonomously run the business.
- The ultimate test of the effectiveness of your management team and your systems is whether you can take a one-month vacation and come back to a business that is operating smoothly and even growing.
- Diversification – Having a diversified base of customers, suppliers, and products creates more value in your business because it reduces the risk for a buyer. Imagine a business whose cash flow is dependent on one or two customers… Why would a prospective buyer spender millions of dollars only to have those customers go elsewhere after acquiring your company? Too much reliance on a single customer, a single supplier, or a single product line can threaten the viability and value of your business.
- Growth Potential – Buyers pay a premium for businesses with a realistic strategy for growth. Often the best way to do this is to focus on a certain niche of customers and differentiate your business by creating a unique product or service to serve that niche. This is what investors sometimes call a moat – or a sustainable competitor advantage against similar firms.
- The wider the moat – the more sustainable growth potential a company has. The size of the moat is driven by things like brand identity, intellectual property, and technology.
- Financial Statements – Put yourself in the shoes of a potential buyer… After hearing that your company is generating revenues of so many millions of dollars per year, their response is going to be “Prove it.” This requires that you get your financial house in order ahead of time so that your organization and record-keeping is consistent, easy-to-understand, and accurately reflects your company’s cash flow and balance sheet.
- In an effort to make these numbers as favorable as possible, don’t forget to focus on the bottom line rather than just the top line.
- For example – Let’s assume we have a business with $70 million in gross revenues & $4 million in gross revenues that is worth $30 million. By reducing the indirect operating expenses by $1 million, you can increase the value of the business by $5 million in this case (assuming a multiple of 5 times EBITDA).
In other words, a relatively small reduction in expenses can result in a significant increase in business value.
One thing to keep in mind is that all of this comes down to buyer perceptions of both risk and return. Higher perceived risk and low return potential leads to a lower EBITDA multiple for your business while a lower level of risk and higher return potential will lead to a higher EBITDA multiple.
This visual recaps those areas we covered with higher risk / lower return aspects on the left side and lower risk / higher return on the right side. Moving from the bullet points on the left to those on the right should translate into business that is more attractive to buyers and, consequently, a higher EBITDA multiple for your business.
Read this case study for more information about how we help business owners who are preparing to transition their business.