Building a business with the goal of selling it can represent the culmination of years of hard work, including long days, tough decisions, and occasional sleepless nights. This hard work translates into a dollar value that, hopefully, makes it all worth it. The final sale price of a business depends on numerous factors, some beyond the owner’s control. However, improvements can significantly increase your business’ value in some areas. Many of these areas involve strengthening the basic fundamentals.
To create a business that can be sold at the best available price, here are five aspects of the business to pay attention to:
1. Understand and boost profitability
At Oaklyn Consulting, we often work with enterprises that are doing well, though the owners might not be sure exactly how well. A key element of establishing your business’s value is to determine its exact level of profitability. However, that can be difficult if you, as an owner/operator, haven’t distinguished those two roles in a clear way.
If you own the real estate where your business operates, you may not need to pay rent, though it would be an added expense for any potential buyer of that business. CEO pay is another area worth examining. When a business is managed by its owners, they rarely pay themselves market salaries (since both salary and profit go to the same place). For example, an owner might pay herself $100,000 per year, which is probably less than the going market rate for a third-party CEO in the same role. Put yourself in the seat of a potential investor and calculate what it would cost them to run your business, assuming normal salaries and other expenses.
Once you understand your business’s true profitability, you can take steps to boost it, and in doing so, potentially increase your business’s value. The easiest levers are cutting expenses and adjusting pricing to be in line with competitors. This might mean curtailing some past practices that may have distinguished your business in the past, such as giving certain customers discounted or gratis services. Yes, this may sound a bit cold, but remember, a new owner won’t have the same personal relationships you may have built over the years.
2. Strengthen management
For your business to have the most value to a new owner, it must be capable of running independently of you. Often, owner-operated businesses don’t have complete senior management teams because the owner has handled the key management roles. While these businesses typically have qualified staff members to manage day-to-day work, those employees aren’t empowered to make decisions in the owner’s absence.
First, clarify which formal executive roles need to be filled for you to step away from day-to-day operations. Then, focus on hiring additional employees with the necessary skills who can eventually manage the business without you.
3. Be intentional about your customer base
A business’s customer base is one of its biggest selling points as the driver of profits. Sometimes, a prospective buyer will be drawn by the possibility of taking over a relationship with one particular client. More often, though, a diversified client base signals stability to potential deal partners since the loss of a single client doesn’t pose an enormous risk.
Client concentration isn’t always fixable, and if it is, it can take years of focused work. So, don’t delay thinking about it, because that will delay the necessary actions to potentially address the issue and increase your business’s value. If you don’t have years, your best alternative is to look for buyers who value your most important customer relationships.
4. Organize and document everything
In the busy day-to-day operation of a business, not everything gets tidily documented. But owner-operators should be careful not to neglect business administration responsibilities, as the confusion caused will make the process of transferring ownership more complicated and can lead to unwelcome surprises.
The only way for other parties to truly see how your business operates is through your documents. So, be meticulous about preparing and maintaining clear financial statements, tax records, contracts, operational procedures, and intellectual property records. Yes, it’s tedious, but there’s just no way around it, and in the end, it will go a long way toward increasing your business’s value in prospective buyers’ eyes. If you feel overwhelmed and don’t know where to start, Oaklyn Consulting can help identify priorities and a bookkeeper can handle the fine details.
5. Understand and quantify your options
While all of the items above can potentially increase your business’s value, what truly matters in the end is how much you can get for it through the negotiation process.
Most deals are done very close to one party’s walkaway price, which means one of your most important negotiation tools is knowing what that price is for you. If you don’t, you may be pushed into accepting a lower price than you feel comfortable with.
If a buyer can’t, or won’t, offer you a price you’re happy with, it’s sometimes a better option not to sell at all. Be prepared for that possibility and plan for what happens if a sale doesn’t take place right now.
How Oaklyn Consulting can help increase your business’s value
At Oaklyn Consulting, we’re experts in identifying businesses’ strengths and soft spots that matter to investors and acquirers. When business owner-operators want to pursue a sale and receive the best possible value, we can help you evaluate alternatives, explore the best potential buyers on the market, position the company in the best light, and negotiate the transaction.
