How can you drive value in your business to maximize all your hard work and effort?
There are many opportunities to drive value in your business. Like most things, it becomes a factor of time and money. When possible, planning ahead to work towards a sale will give you, the business owner, the time needed to work on key value drivers as some factors require more time than others. Defining a timeline to drive value will reward you, the seller, by increasing value so you derive the benefit from all the years of hard work.
A sale of a business typically takes 6 to 9 months from initial listing to close, There are additional factors that may affect this timeline, including financing, but generally a business owner should plan on a year to list, sell and transition the business to the new owner.
So where should you focus your time and energy?
Areas to Focus on in the Short-Term:
If your timeline is short, (e.g., less than six months to list), there are two primary areas to focus on to support the sales process:
- Financials: work with your accountant to discuss your goals and address any aspects of your P&L and balance sheet that will draw the attention of a prospective buyer. If you have any outstanding PPP loans, get those forgiven so as not to delay a closing. Buyers are looking for clean financials so having your financial house in order needs to be a top priority.
- Taxes: Buyers expect to review your most recent tax return. If you are considering putting your business up for sale in the coming months, you want to avoid an extension as that will adversely affect the timeline. Avoid having any outstanding tax liabilities.
Value Drivers to Assess for Longer Timeline:
If your timeline to list your business is more than 6 months from now, you have more value factors to assess to help you increase the value of your business.
It is no surprise that having your financial house in order always matters.
Financials: as you plan on a future transaction, work with your accountant to get your financials ready. The due diligence process will require you and your team to provide in-depth reports, monthly financials, year over year analysis and ‘clean’ financials. Discuss with your accountant any past transactions that may be questioned and address such items in advance. A common area that can raise a red flag is the level of personal expenses being run through the business. If the buyer is financing the purchase of your business, a lender is likely involved in the transaction and they will be doing in-depth analysis of cash flow.
Taxes: Tax liabilities need to be paid with no outstanding issues. As noted above, tax filing extensions will adversely affect the timing of a closing, so consider that when working with your accountant.
State Filings: Make sure annual state filings are current to avoid affecting valuation and timing of a sale.
You: An essential value driver is you. As the business owner you need to make yourself the least important factor in transferring the business to a new owner. This may sound counterintuitive, but the more reliant the business is on you, your capabilities and expertise, the less attractive the business is to a buyer.
How can you make the business less reliant on you to drive value? Some business owners develop an owner’s manual, documenting everything they do including processes. In addition, look at the talent on your team: who else can help support the new owner; taking on new responsibilities that you currently do? This value driver is a key factor that takes time to think about, plan for and work on to help make your business more attractive to a prospective buyer.
People: In this challenging labor market, your employees are even more valuable to a potential buyer. Evaluate your team and develop a plan to retain those who are essential to running the business. Where are your weak links that you need to work on replacing? Who is the talent that can be developed and groomed? Identify training opportunities to help develop key team members. Is the majority of your team over 60 and likely to retire in the next few years? A buyer will assess the strength of your people as a key factor in valuing your business as many firms are acquiring businesses today to acquire the talent. Make sure your team is developed to increase value and not detract.
Equipment: If your business operations depend on heavy machinery and equipment, assess the age and marketability of these key assets. An equipment appraisal may be useful. Planning ahead will give you more options to evaluate if investing in new equipment makes financial sense or not.
Clients/Customers: Many businesses have experienced a shift in their client base as a result of the pandemic. Evaluate your client base to assess if you are too dependent on a small number of clients or too concentrated in a sector. A potential buyer will evaluate the risks inherent in your client base so it is best to proactively develop and implement a strategy to diversify if you have heavy reliance on one big client or exposure to a highly cyclical industry.
Buildings and Office Space: Inspect your buildings and walk through your office space through the eyes of a potential buyer. Things you walk by daily without even noticing may appear differently to a buyer. Is the space tired? Dirty? Does it appear disorganized and chaotic? Like selling a home, identify areas of your physical property inside and out that need attention. An organized clean workspace conveys attention to detail that will reassure a potential buyer as they evaluate your business.
Revenue opportunities: Do you have opportunities to drive value by adding additional revenue streams? This is a great way to drive value in your business. We worked with a product company whose business focused solely on installations. They then realized they were overlooking an opportunity for an annuity stream by adding service contracts. Adding this recurring revenue drove up the value of their business. Are there opportunities in your business model to increase revenue within your current client base?
As you think about planning to sell your business, BayState Business Brokers is here to listen, advise and guide. We can provide insight into timing and the marketability of your business. We will not put a business on the market if we believe the timing is not right. The earlier we are involved in the discussion, the more we can help you develop a plan, a timeline and help you focus on the key levers that will drive value for your business. Sometimes a great place to start is to get an initial business valuation.
When you are ready to start putting a plan in place to sell your business, please contact us.