How to maximise the value of your company
Looking at the picture of this old car, what is your first reaction? Some might think it's cool, others may think it is just scrap metal... Either way, for it to survive, it would require money and time to get it back on the road. Now most people who were wanting a car to drive on a daily basis wouldn't even consider this, it would be too much hassle and cost too much to fix. The exception would be where the buyer falls in love with the idea of the car, has the vision of what it will be like in the future, as well as the finances and resources to make it happen.
Regardless of what stage your business is at, any buyer is only going to acquire it where they see robust value in the current business and potential for future growth after the acquisition. It is therefore important to take some steps to make it an easy decision for the potential buyer.
This means that you need to present the key attributes in a clear way. Looking at most websites or even listening to many business people, they often focus on the features of their business.
Henry is spot on. The value of a business is not simply assessing the revenue, sales and profitability. These hard facts are simply one of the quantitative measures that can be used to assess the potential value of a business and represents an overly simplistic valuation that should form part of the conversation. Therefore it is important to address where other value exists in the business and try to make the best of these areas.
The key areas to consider are:
- Sales and marketing
Sales and marketing
- Diversification - If you have a strong customer base, highlight the strength of these revenues. If you have only a small number of customers, you really need to reduce your dependency on a small number of customers
- Leadership - If the business is reliant on an individual for the majority of it's sales and particularly if that person is you, find the person who can replace you and make them an important part of the future of the business
- Recurring revenue - try to build recurring income, as this is the true indicator of a valuable business
- Find new channels - Develop other ways of selling your service or product to a new market, or a new way of expanding it's existing reach
- Create sustainable growth - A business that is growing is much more attractive to a buyer, so creating growth that is sustainable is key. The classic mistake is selling a business when growth is high, only to fall off a cliff shortly after the deal is done which can out an earn out agreement at risk
- Reporting - Ensure you make it easy for a potential buyer to obtain all the historic financial data. They will often want to look at previous years when the business had particularly good or bad periods, so be prepared to provide the full picture
- Show them the future - Any buyer will try to negotiate the price based on the previous performance of the business. However, if you can build a picture of the future growth, this will improve the price they are willing to pay. Provide structured forecasts and the route to achieving them and they will want to be part of that future
- Provide data on your clients - If you can show what a typical client looks like and what their future value is, this is a powerful way of showing where future developments can be made
- Reduce cash - Keep working cash flow to a minimum, as there is no point retaining cash in a business that is going to be acquired, as it may complicate the sale negotiations
- Be transparent - Some business owners use company money for non-core activities and hold private assets in the company, don't let these become the elephant in the room
- Manage your debtors - No buyer will want to take on a business that cannot manage it's accounts properly and not being confident in dealing with problematic clients can mean you're storing up a problem in the future
- Lock in your key staff/suppliers - Give them an opportunity to gain from the acquisition and secure any suppliers that are fundamental to the business
- Review your contracts - Make sure that there are no potential issues in your documentation, as these could be a risk to the future stability of the business
- Ensure you are not the business - If the business relies on you, build a process and find the right people to ensure that it can function without you on day-to-day issues
- Use culture and policies to create the right behaviours and outcomes - This will allow everyone in the business to understand the vision and be able to manage situations without the need for management to step in
- Pass on your knowledge - Ultimately, you are looking to make yourself dispensable after the sale and proving to the buyer that there is breadth of talent in the business is vital. Start this process early!
The secret to a successful exit is to create a desire to acquire your business and a vision of what the future looks like, as well as trying to make life easy for the buyer. They will want to acquire a business and grow it, not have to fix problems and create work for themselves.
The ideal sale is one where the buyer gets as good a deal as the seller, as well as ensuring you get the best valuation. Never underestimate the value of the first impression, as this can set the tone for who you attract as a buyer and the value they see in your business.
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