This seems simple enough. If you want your business to be worth more, then just increase the revenue and profit, right?
While that’s an obvious, simple answer to Seller Question #1, it’s not necessarily the most realistic solution. It’s also not what we’re examining here.
I’m sure you’ve seen or experienced a situation where two businesses from the same industry and relatively the same size ultimately sold for very different amounts. Why is that? In most cases the difference between these two businesses will lie in their intangibles.
What I mean by intangibles are those aspects of a business that aren’t necessarily noticeable on an income statement or tax return, but significantly impact a business’ value nonetheless. These intangibles really boil down to two issues – buyer confidence and perceived risk.
Here are some of the most important intangibles relating to your business’ value, along with some perspective on how to address them to increase your final sale price.
If a significant percentage of your revenue comes from only a few customers, your business’ value will be hurt. From a buyer’s perspective, if, for example, you have one customer that accounts for 50% of your revenue, there is a tremendous amount of risk in buying your business. By losing just that one customer, the business’ revenue would be cut in half. So a buyer will likely try and mitigate that risk by reducing the offer price.
With this in mind, take a look at your customer concentration and see if you have a potential problem. Do you have a few customers that account for a large portion of your revenue? Are the same customers at the top of that list year after year? Do you have any sort of contract with those top customers that ensures they won’t leave you?
Once you’ve identified the issues, you can begin to take steps to reduce your concentration problem by focusing on adding new customers, or growing existing, smaller customers. By finding a solution to this issue, you will be able to reduce a buyer’s risk potential and increase your business’ value.
Owner’s Role & Responsibilities
We’ve all heard business owners use the expression, “I’m the chief executive office and chief bottle washer” when talking about their duties within their companies. While most business owners use that expression tongue-in-cheek, you should really give some thought to what it is that you actually do for your company. Are you really the chief bottle washer?
Buyers have a tendency to adjust values up and down based on how involved the owner is in the business. If you are intimately involved in just about every aspect of your operation, buyers see that as a negative, while they appreciate and add value to companies with owners who have delegated themselves out of menial day-to-day tasks. Buyers want to see companies with empowered and responsible employees filling assigned roles, where the owner is the conductor of sorts, as opposed to trying to conduct while playing several instruments at the same time.
Take a hard look at how your business is structured, what responsibilities you still cling to and if it makes sense to let go of some of those tasks. You can still effectively manage a successful business without controlling everything that goes on. Buyers will recognize this structure and feel more confident they can achieve the same success you’re having, which makes your business more valuable to them.
Transferrable Knowledge & Business Systems
There’s something special and unique about your business that makes it successful. It could be a specific product you manufacture, it could be a prime location your business operates from, it could be a marketing program that has built your brand name, it could be a series of processes and systems you’ve developed to make your business efficient – whatever that “secret sauce” happens to be, to truly add value to your business that knowledge has to be transferrable to the next owner.
If a buyer can’t understand what makes your business unique and successful, he/she is not going to have confidence in the ability to replicate the results you’ve produced. And if a buyer is worried about replicating results, you can expect a reduced offer to account for that added risk.
So take some time to examine your company and its operations, focusing on how you do what you do. Make sure the knowledge, processes and systems you use to run your company are not only present, but are also transferrable. It wouldn’t hurt to even make an “owner’s manual” of sorts that spells everything out. Your business is more valuable to buyers if they believe they can learn what you already know.
Clean, Accurate Financial Records
Nothing hurts business value more than poorly managed financial books and records. You could have a wildly successful business with great employees and an impeccable reputation, but if a buyer has to spend an inordinate amount of time trying to understand and get comfortable with your financials, your business value will be hurt.
There are several issues surrounding your financials that buyers have to concern themselves with. Can they follow the money and identify the cash flow that’s driving the business value? Can they trust a business owner to be honest and forthcoming about his/her business when that same person has not been truthful in reporting their financials? Can they be confident in financials if they have to reconstruct them themselves?
These are all good questions, and they are all real questions buyers have to deal with. Unfortunately, when the answer to any of these questions is “no,” the business value will be severely damaged.
Maybe the most impactful thing you can do to improve your business’ value is to clean up your financials. All things being equal, if buyers feel supremely confident in the accuracy and transparency of a business’ financials, they will be more likely to accept the risk associated with the other intangibles about the business that may giving them pause.
While every business is unique and has its own circumstances driving value, these are four intangible factors we see impacting value time after time. Whether you’re considering selling your business this year or in 10 years, it would be prudent to contact a reputable business broker, like Sigma Mergers & Acquisitions, today for a no cost, no obligation business valuation. This is a great way to examine your business’ value and identify things you can do to ultimately increase your sale price.