7 Factors to Maximize the Worth of Your Business

Starting a business looks easy but scaling and creating long term sustainability is easier said than done. That's one of the reasons why many entrepreneurs form such an emotional bond with their company. They pour in their blood, sweat, and tears to grow the business, compete against established rivals, while hopefully accumulating wealth in the process.

Eventually, every business owners will entertain the idea of selling their company. You might find yourself in a similar position right now. Whether it's because you want to focus on launching your next startup or just retiring - selling the business is a significant decision and one that can't be made lightly.

Your primary concern would be to ensure that the company is sold for what it's truly worth so that no money is left on the table. You might also wonder whether it's the right time to exit the market, what will become of the company once you leave, and whether you should reconsider the decision.

That's why the best advice for business owners looking to exit their companies is to sever the emotional bonds that they may have with their company. It's vital to approach the process as just another business transaction. This will allow you to remain objective and enable you to make informed decisions.

Why you should look at your Business as a Buyer

As the seller of your business, you’re going to have an inherent bias. You’ll feel that a certain valuation is accurate, that the business still has considerable room to grow, that the market dynamics are favorable, and that buyers will be jumping at the chance to acquire your company. Buyers will hope that you are correct , but that’s not the right mindset to kick off the process.

When preparing to sell a business, it’s important to look at your business like a buyer. Cash flow is what buyers buy businesses for. That’s the primary objective for them. They will only consider buying your company if they feel that they can grow it even further after taking over the management.

That’s why during the due diligence process, their focus will largely be on ensuring that the cash flow doesn’t dry up before they’re able to execute their plans to grow it. For example, if they feel that the owner’s personal brand is a significant driver of revenue for the growth, acquiring the business may make little sense.

As the seller, you should help them see the growth opportunities and soothe their fears by addressing these seven value factors in your business.

1. Financial Performance

Are you able to demonstrate stable revenues and profits for at least the past five years? This is the number one indicator of company worth. If there are significant year-over-year fluctuations in the numbers, buyers are likely going to feel uncertain about the financial performance. It adds another element of risk to the deal.

If the fluctuations were caused by one-off events, such as the extended closure of business during the pandemic or a big drop in revenues due to supply chain issues, ensure that you explain these inconsistencies thoroughly to remove any doubts.

Buyers will appreciate it if your revenue and profit have been growing consistently. It's relatively easier to make buyers interested in a company that's seeing its top and bottom lines grow. However, if the revenue and profits are falling, ask yourself why that's happening and what you need to do to reverse that trend.

No business is immune to financial risk. What buyers want to see is whether a solid financial risk management plan has been put in place. This will provide them with confidence that the current leadership is doing everything within its power to mitigate risk. To them, this will be a good indication that the company has been managed very well.

Financial performance is a major consideration when buyers are conducting their due diligence. During the process, they'll ask you for revenue and profit figures going back several years. This will enable them to have a holistic view of the company's performance, allowing them to make any necessary assessments about future performance. Therefore, addressing this value factor is crucial if you want to clinch a good deal.

2. Quality of Financial Information

As they say, the first impression is the last impression. Even before prospective buyers dive into the numbers they'll look at the quality of financial information that they're presented. You can't seriously expect someone to buy your company if all you're providing them are the revenue and profit figures written on the back of a napkin.

Typically, a buyer is going to ask for profit & loss statements for three to five years, bank statements, and balance sheets at the very least. When you hand over these records, ensure that they're properly organized so they can easily find what they're looking for.

Ideally, you should be able to provide audited financial statements, since these are the best resources you can offer

to potential buyers. However, audited financial statements can be expensive to obtain, and most small to medium-sized companies don’t opt for them unless it’s absolutely necessary, which may not be in the normal course of business.

Reviewed financials provide a middle ground. Those who are conducting the due diligence will at least have some comfort that a professional has looked at the books and made relevant observations. Again, that’s something that will cost money, but it should pay dividends in the long run.

If you’re able to obtain neither, then ensure that at the very least, your financial record keeping is accurate. Invest in Quickbooks and work with a Quickbooks consultant to ensure that any inconsistencies in the financial records are removed before they’re shared with the buyers.

3. Diversification Factors

Supply chain/customer concentrations can make it difficult for you to secure a preferred valuation from the buyer. It's like how the old adage goes, "don't put all of your eggs in one basket." If the majority of your revenues come from a handful of customers or it's just one single supplier provides crucial materials for your products, the buyer will view this as a major diversification risk.

This is what's also called concentration risk. It highlights a single point of failure that could negatively impact the financial health of the business either due to the customers attrition or supply-side issues.

A. Customer Concentration

This is quite simple to understand. Your business has a customer concentration risk if the majority of its revenues are generated from a very small number of customers. For example, if over 50% of revenues are generated from five or fewer customers, your business is at risk of a revenue catastrophe. Even if one of those customers takes their business elsewhere they encounter financial difficulties, your revenues could see a major decline.

Customer attrition is one of the most likely results of the sale of your business. The risk can be further mitigated by signing long-term contracts with customers and adding deal protective measures like holdbacks, escrows, and earnouts. A diversified customer base will give buyers confidence that revenue shocks will be limited even if there's some customer attrition.

B. Supplier Concentration

Buyers take supplier concentration very seriously. Your entire business depends upon its ability to secure what it needs from the supplier. If there's a supply-side disruption, you can't meet customers' needs and consequently, your business ends up losing customers.

What happens if the supplier goes under? If they ask for a significant cost increase that the business can't bear? If they start selling to competitors? These are a few of the worries that buyers will have if there's significant supplier concentration in your business. For example, if you're sourcing more than 70% of your products from less than three suppliers, you have a concentration risk and little leverage on suppliers to extract better pricing. It's always best to diversify your supplier base to mitigate this risk.

4. Management Risk

Business owners who are looking to exit often talk about ensuring that their employees are taken care of once the business is sold. After all, these are the people that have helped them grow the business so naturally, it would only be fair that they continue to have a future at the company even after it's sold and the original owner bows out.

There’s always the apprehension that the buyer will come in and fire all of the existing employees to bring in a team of their own. While we have all heard these horror stories, it rarely happens.

For most buyers, the strength and stability of the current team is paramount. Most buyers will come into a company looking for hidden talent who can help grow the business.

In order to maximize the value of the company, business owners should begin investing in their team early. Develop in them skills to serve the business in many different areas. Create employees who could run the company if something were to happen to you before you sell the business.

Employees at a business that's in the process of being sold are already apprehensive about their future at the company. They may actively start looking for opportunities elsewhere. As a business owner, there are certain steps you can take to ensure that they don't leave during the process.

For example, having them sign a stay bonus agreement ensures that they remain with a company in exchange for a financial incentive. Additional perks and higher salaries may also be offered to improve employee retention.

5. Industry Factors

The ability of your business to grow depends on the state of the industry that it’s in. Buyers will not pay high multiples for companies that are in industries clearly in decline or with limited growth potential. For example, if your business sells men’s dress suits and ties, there’s a very limited expectation of growth. However, if you’re in the robotics business, that industry has much better growth potential.

If your business is an industry that’s evidently not going anywhere, then you might find it difficult to attract buyers and your valuation may be less than you expect.

It might be useful to think about a pivot. A realignment of the business could help put it on the path of sustainability and even if it doesn’t see much growth initially, the higher growth potential would be enough to entice buyers.

Strategic business buyers are particularly looking out for companies that may not be growing as rapidly as they could be, as long as there's potential for growth in the industry. If the buyer is convinced that favorable conditions exist, they may even leverage some of their assets to help the business grow more quickly than it would under previous management.

6. Competitive Factors

If you've managed to build a successful business in an industry with a high barrier to entry, this will drive your value higher. A higher barrier of entry impedes newcomers and limits competition, thereby tilting the balance in favor of the incumbents. This is one of the primary forms of competitive risk that buyers will evaluate before deciding to how much to pay for your company.

A. What Is The Barrier To Entry

If everyone can do what you're doing fairly quickly and easily then it doesn't put your business in an advantageous position. What incentive would the buyer then have to acquire your company if countless other options exist? For example, starting a medical practice is much more difficult than opening a smoothie shop. One requires years of education, practice, and licensing while the other requires some equipment and fruit.

Most buyers will prefer a business in an industry with a higher barrier to entry as this guarantees protection for the revenues and profits that your business generates. It also makes it harder for other companies to steal your market share, ensuring that their investment in the company will be able to yield the desired returns.

B. What Product Or Services Does Your Company Provide

As a business, you must be able to differentiate yourself from your competitors. This is largely done by offering unique products and services that competitors are not able to provide. It’s this competitive advantage that your sales team can leverage to educate customers about why they should be spending their money with you and not with your competitors.

Ultimately, this competitive differentiation is about making a case to customers about why they should choose your business over the others that offer similar products. It's not about being different just for the sake of being different. A well-planned strategy needs to be the core of your competitive differentiation.

For example, if you're selling physical products, obtaining design and utility patents will ensure that your products aren't copied. Software companies have proprietary code that makes their software better than the competition. You can also offer exceptional customer service that rivals can't match and adopt a more aggressive pricing strategy to undercut competitors.

7. Growth Assessment

Buyers want a sense of what the future holds for your business. They would look at the growth potential very closely to understand whether their investment in your business will yield the desired returns. There are many factors that they might consider when making this crucial assessment.

They would likely be interested in finding out how much more can your business sell to its existing customers. Acquisition costs are lower for repeat customers compared to new customers, after all, so extracting more value out of existing customers is of vital importance. They will seek to understand if there could be an element to customer fatigue in your business, in that those who purchased once may not return. Buyers will also be interested in looking at any plans or products that you've created to further increase revenues from existing customers.

Your ability to capture market share from your competitors will also figure in their deliberations as they try to figure out the growth potential. This will involve a review of your market position and products in comparison to the leading competitors. You can assist them during this process to identify the opportunities that the business can take advantage of to expand its existing market share at the expense of its rivals.

Lastly, your ability to profitably expand operations to another geographic location will be reviewed to make a growth assessment. Is there enough demand elsewhere for your products? Can operational costs be kept in check while expanding operations to another region? Would such an expansion require costly resources and whether there's enough depth in the new market to generate a return on that investment? These will be among the many questions that buyers will consider.

Business owners who can demonstrate thoughtful, detailed growth plans will warrant a higher valuation for their company than a similar business who only provides growth ideas.

None of this sounds impossible, right?

That’s because it isn’t! Business owners can often feel overwhelmed when the discussion inevitably turns to value factors during a deal, but don’t these sound like the business factors you already think about every day?

Remember, buyers are concerned about the same things as you because they are looking to grow your bottom line and create additional wealth for themselves. The more clearly you can demonstrate that you have acted on these matters, the higher a valuation you will receive.

Chuck Harvey, is the owner of International Business Exchange, Inc., one of the oldest, largest and most respected M&A Advisories in the profession. Prior to IBEX served as CEO, COO and CFO’s of Fortune 500 Companies, thriving middle market companies and start-ups. His extensive financial experience with the public market, private equity and venture capitalists includes more than three dozen buy-side and sell-side transactions on three continents. He is also the found of Infusiac, LLC and The One 21, LLC.



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