In a previous blog, I covered business valuation methods to answer the frequent question from business owners, "how much is my business worth?"
MDs looking to sell their company often follow that question with another -
"How can I add value to my business before I start to attract potential buyers and 'put it on the market'?"
Take a few minutes to discover key ways you can affect your business value. Plus immediate actions you can take now!
Improve your Business Value
Using the profit based valuation model (see business valuation blog) as a framework, there are three areas to work on to improve your business value:
1. Increase the quantity of profits.
Most business owners are already well aware of the things they need to do to increase the net profit or EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) of their business.
Strategies might include:
- grow the revenue (add new clients; new markets; new products; or just increase prices)
- improve the gross margin (automate systems; outsource some delivery tasks; become more efficient; renegotiate supplier deals; realise economies of scale in a growing business; focus on higher margin products/services and/or clients)
- cut fixed costs (outsource back office functions; move to a lower rent/lower salary location; review marketing spend, maintenance, entertaining, etc.).
2. Improve the quality of profits.
Not all profit is equal in the eyes of a buyer. They will generally pay more for a business that has better quality profits. Better quality profits will mean a better multiple in the valuation model.
Strategies for a higher multiple include:
- having as much revenue as possible from long term client agreements
- ensuring that no one client represents more than 10% of revenue or profit
- not being dependent upon any individual employees (especially owner-managers)
- systemising business processes (marketing, sales, delivery and finance)
- owning and protecting Intellectual Property (patents, operating manuals, training materials, brochures, etc.)
- growing the business to a significant size (a 1 or 2 person business is unlikely to achieve a multiple above 2, whereas a larger business could well achieve a multiple of 6+).
3. Improve the cash position.
Improving the cash position is probably the hardest of the three to influence and could in some cases be detrimental to value in other ways e.g. giving a discount for early payment helps to increase cash, but will also reduce the profit which may have a greater (negative) effect on valuation.
Strategies for increasing cash/decreasing debt include:
- strict management of credit control. If clients usually pay 15 days late, the buyer may demand that more cash is left in the business to cover the reality of 45 days credit rather than the contractually agreed 30 days
- agree (and take) the longest possible credit terms from suppliers
- getting sales paid up front rather than giving credit.
Six additional ways to increase the sale value of your business:
- Sell to a trade buyer, rather than a financial buyer. The business may well be worth more to a trade buyer who can realise synergies, cross-sell to both sets of clients, etc.
- Plan for big growth. Your business may be held back by a lack of resources that a buyer could introduce. Produce a plan to show how the business could grow significantly with access to those resources.
- Get at least 2 buyers interested. A single buyer may drag out the sales process and chip away at the original, conditional, offer price. Some competition will generally speed up the process and bolster the final price.
- Tie in key employees. Use a bonus structure to ensure that the key employees remain with the business until at least 6 months after the sale.
- Use a specialist broker who knows your market and has access to buyers within that market.
- Sell the business at the right time in the economic cycle.
What you can do now to influence your business sale price
Whilst the true value of a business is only known when a willing buyer and a willing seller agree a deal, there are lots of things that a business owner can influence in order to improve the (theoretical) value of their business.
If a sale is being considered the owner should start thinking about all of the above as early as possible (up to 3 years before the sale) so that value can be optimised. Even if a sale is not currently being considered, getting a valuation and reviewing progress on an annual basis is good practice.
If you would like your business valued, with or without a sale in mind, contact Michael Cartwright who can put you touch with a FinanceHead who’s right for you and your business.