|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
 |
How to Add Value to a Business Guest column by Scott Bushkie, CBI, M&AMI SOURCE: BAY BUSINESS JOURNAL, JUNE/JULY 2004 Your business has two values—an “academic” one arrived at by a professional business valuation and another, the “true market” value. The hypothetical academic value is based on hard assets, cash flow, industry averages and multiples. The fair market value takes all of that into consideration, but reflects what buyers are actually willing to pay. Small and mid-sized businesses often have limited hard assets like equipment, vehicles, land, buildings, and inventory. Some small business don’t have any hard assets at all. Instead, their value is based on intangibles like location, employees, business processes, customer lists and other relationships. In order to maximize the fair market value of your business, you must capitalize on and develop these intangible assets. I’ve been involved in more than 70 transactions, and I consistently get the same message from buyers regarding what they are willing to pay a premium for: Develop key employees. Buyers will not typically pay a premium if the business is reliant on you for success. Delegate responsibility to key employees and involve them in the decision making process. Provide cross-training. It might not be good for your ego, but being able to demonstrate that the success of your business is reliant on your capable, well-trained employees—not just on you—will pay off in the end. Document your business. Don’t keep your secrets to yourself. Put employee job descriptions, operation processes, and strategic plans on paper. These give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Keep your business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean and well-organized. Neat and readily available financial records convey a sense of quality management and develop a buyer’s trust. It’s not necessary, but mid--sized companies will benefit from having audited statements for the last three to five years. Remodel, clean, and organize. Though it’s the first thing people do when selling a home, few business owners take the time to do this before selling their business. This is especially important for businesses that own their own building. A modern, well-maintained facility will get the best price. Even businesses that lease space can benefit from a thorough cleaning and organization as this too conveys quality and efficiency. Most buyers are looking for organized companies and will be put off by the perception that a company runs by the seat of its pants. Build your relationships. Whether your business has a lot or a little in the way of hard assets, much of what you have to sell is your relationships. Name recognition, customer awareness, and your reputation are all part of your business value. Diversify both supplier and customer accounts. Concentration on a few major clients will scare off many buyers. Likewise, reliance on a supplier is a concern. If your success is dependant on just one supplier, a buyer will be hesitant to take on that risk he or she has no control over. Improve cash flows. CASH IS KING. Drive all income to the bottom line—the buyer wants to see the “true cash flow.” Eliminate perks the business provides you and your family, ideally for the last three years before you sell your business. While you may be saving 35% in taxes by running expenses through your business now, you’ll lose $3 to $6 in sale price for every one dollar claimed as a business expense. The buyer must be able to see how they can pay the debt service payments and pull out a reasonable salary or return on their investment. More cash flow equals more debt service they can pay which equals a higher purchase price. Improve your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use. Replace or repair equipment near the end of its lifecycle. Many buyers and lenders want to know that limited capital expenditures will be required in the first few years after the sale. Build your niche. Don’t try to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry. These are some of the more concrete ways you can improve the value of your business. Buyers will typically pay a premium for a profitable turnkey business with a good growth story. A “fixer-upper” might not even obtain fair market value for equipment or real estate due to lack of cash flow or growth story. They want to know that the business is in order and that your existing revenues can be maintained by sustaining what you already have in place. Even better, they want to see a vision and a plan to take the business to the “next level.” Communicate your growth story and your competitive advantage. Highlight these intangible assets. They convey a value financial statements alone do not. Make a plan to sell your business. Begin working on these factors at least three years prior to the sale to maximize value. Too many business owners get burned out, tired, or complacent and then psychologically retire early, before the sale. Instead, you need to stay focused until the end. When the time for a sale does come, surround yourself with the specialists you need—an attorney, an accountant, and a business intermediary to name a few. After all your hard work and effort, you only get one chance to sell your business right. It can make the difference in hundreds of thousands, if not millions, of dollars for you and your family. «Back |
|