If you’re like a lot of business owners, you react passively to inbound letters and phone calls that announce “someone wants to buy your business.” This is fine if you have no plans to sell your business, have not been trying to build business value and are not interested in maximizing your potential take from such the sale of your business. However, if you believe that some day you will want to sell your business, you are better off taking several proactive steps to build business value that will pay dividends in the future.
Business buyers continually do a balancing act that weighs their anxiety and uncertainly on the one hand against their greed and confidence on the other. Your job as a motivated business seller is to help these business buyers gain confidence in their decision to buy your business and to incite their greed factor leading to a higher take for you. How is this done?
Two significant steps can be employed to build business value and at the very least enhance your perceived value in the buyer’s eye. The first is to improve earnings and cash flow. The second is to decrease risk.
Let’s take a look at each factor. In order to improve earnings, you may first need to change your mindset from one of managing income for taxes—most likely trying to reduce reported income to reduce the tax bite—to one of maximizing reported income for a sale. This is done since many business buyers base their offers on a “multiple of cash flow” in which each dollar of reported income can become worth anywhere from $4 to $8 in multiplied value.
In order to improve earnings, you will need to develop goals for profitable growth. These goals should encompass all areas of your business from HR to marketing, finance and operations. Continue to focus on increasing cash flows in ways which are transparent and easy to comprehend by a buyer. Trim non-operating and excessive discretionary expenses while paying down debt to shareholders and related parties. You should also focus on improving asset management, freeing up additional reported cash flow. Ways to improve asset management include faster inventory turns, quicker accounts receivable collections and reduced accounts payable turns. Be sure to document these improvements with reviewed or audited financial statements. This lends further credibility to the financial improvements that you’ve made.
Buyers are reluctant to bid high prices for businesses they consider risky. Your job is to demonstrate to skeptical potential buyers that your business is actually quite safe. Ways to show this include reducing funded debt, building a strong professional management team separate from ownership, diversifying your products and services to minimize customer and product-concentration risks, and implementing solid internal controls. These measures underscore to an outside buyer that your business is balanced, predictable and likely to continue prospering.
Additional measures you might consider to build business value include getting a formal business valuation and market value asset assessment done, collecting accounts and data about other sales in your industry, understanding and being able to explain to a buyer how they might capture synergistic benefits and being flexible in how you are paid, whether its all cash up front—likely a lower value—or some combination of cash, note and future incentive if you stay involved subsequent to a sale.