Strategies for Boosting Business Value Before Selling
Business owners looking to sell in the short- to mid-term should do everything in their capacity to boost value when the time comes around to closing a transaction. There are numerous ways of doing so, and thankfully, most of them are more implementable than the commonly cited “increase profits.”
Below, we look at just a handful of those steps:
1. Have a strategic plan in place
The importance of this step cannot be overstated. It doesn’t necessarily involve any blue-sky thinking. Think of it as a to-do list for the new owner to grow the business as soon as they take over. It typically involves plans to increase investment in areas with high ROI and doing the opposite in those areas of the business with low ROI.
A well-crafted strategic plan makes it easier for the buyer to believe in the future of the business, thus incentivizing them to pay more. The number of buyers who are happy to buy into a business where income appears to have flat-lined is considerably smaller than the buyers of a business with valuable and implementable opportunities on the horizon.
2. Improve the quality of earnings
As a previous article outlines, the quality of earnings of a business is essentially a measure of how sustainable the income of a business is. This means everything from renewing buyer contracts to diversifying your source of revenues and even reducing exposure to price rises in your inputs (a commodity price rise, for example).
The importance of improving the quality of earnings, rather than just the earnings, underlines how unwise the often doled-out advice, “increase profits” really is. A sophisticated buyer will pay little attention to a company whose profits have jumped in the year or two before a transaction, unless the jump was due to sustainable factors.
3. Reduce overheads
The age of a business is directly proportional to the likelihood of it putting on unnecessary fat (in the form of overheads) along the way. The emphasis here should be on reducing wasteful expenditure rather than looking to cut everything down to the bare bones. Buyers don’t like extravagance, but they won’t appreciate scrimping either.
When cutting overheads, owners also need to think of unintended consequences and look at what other parts of the business the cuts are impacting. Reducing entertainment expenses may well save a few thousand dollars a year, but it might also lead to discontent among your staff. In some cases, increasing overheads before a sale can even generate value, so finding the right balance is key.
4. Ensure buy-in from key employees
How often have we heard that the strength of a business is its employees? It may appear a tired cliche, but in the same vein, buyers will often see the people in the business as being an integral part of its value. This is especially true in industries such as IT or marketing where competition for intellectual and creative capital is high.
A recent interview in a Financial Times article with Julia Hartz, CEO of EventBrite – a business which the article makes clear grew to be an industry leader through acquisitions – emphasizes the importance of this buy-in. Without it, you could just be buying what amounts to an office full of overpriced desks and computers.
5. Establish processes and controls
Outside of poor financial performance, perhaps nothing raises a red flag with a buyer more than a company without proper internal controls. The less idiosyncratic and ad-hoc the processes in your business, the better. If there’s someone at your business who you consider a “jack-of-all-trades” it’s likely that you need to improve processes somewhere.
In smaller businesses, this is more likely to occur in the interface between various stakeholders – customers, clients, suppliers and even between employees within the business. The new business owner lacks these relationships so they will need a guidebook to help understand and navigate these relationships. The “guidebook” in question is provided by clear and repeatable processes and controls.
6. Remove yourself from the equation
Businesses where a majority of the value is tied up in the owner don’t achieve very much value at sale. A good way of seeing whether you are in fact the company is by being honest with yourself about how many of your ongoing contracts were signed on the basis of your personal relationships with the clients in question. If the total is more than 30% of the last year’s revenue, you’re the business.
Thankfully, rectifying this situation to boost value before a sale is not as difficult as one might think. While there will always be one or two business relationships that may involve close attention, most contracts can be passed into the hands of a different member of management simply through an introduction and some assurance that the client is still in very capable hands.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
