Does the value of your business reflect all the work you put in? Probably not. Shouldn’t it? Absolutely.
Business owners sacrifice for their business – no nights out with friends, skipped weekends with their kids. All to grow their business.
Owners look to the business’ ultimate selling price as the reward for all their work and sacrifice.
Then comes the offer: “That’s all??”
Owners who poured their heart and soul into their company often do not get the return they expect or deserve. Owners who were selling rethink that decision.
The worst in our view is when owners reached a burnout point where they just want to move on. At any cost. Right now. Some are willing to just walk away.
That’s the worst time to realize you could have taken steps to improve today’s profits and increase tomorrow’s selling price.
Can this be avoided? Yes.
Is it easy? Nope. But when is being an owner easy?
These are some key factors buyers will consider in making an offer for a company. By proactively addressing them, owners can refine their business so it has the most value possible. The bonus is their profits will increase near term, too.
Buyers acquire companies with the least amount of risk. Reliable recurring revenue streams greatly reduces risk.
Recurring revenues assure the company will have predictable cash flow. To optimize your revenue stream, identify and focus on recurring revenue opportunities. Not so simple but very valuable.
You have developed relationships with recurring customers. You’ve marketed to them once. Keep them happy and they stay. Marketing to a new customer often eats up 10% of revenues. Marketing to existing customers is much less costly.
Predictability is crucial in running a business. Processes contribute to predictability.
Repeatable processes assure the buyer the company will function effectively without the direct involvement of the former owner.
A business with no documented processes holds a lower value. The value it does have is associated with not the business but with the employees. Only they know how to handle the workflow. This is a risk to a new owner.
With repeatable and documented processes, the value belongs to the business. New people can readily learn how to best perform their jobs. There are fewer opportunities for error or “I forgot” situations.
The goal of creating and documenting processes is to keep it simple. While it sounds harsh, any individual employee should be dispensable. Especially you.
Diverse Customer Base
There’s no bigger red flag for a buyer than a company that relies on a few (or even a single) customers. If those customers move on (and it does happen), how much is your company now worth? Little to nothing.
To be attractive to potential buyers, diversify your customer base. Diversity applies to the industries served as well as the customers themselves.
The more diverse your customer base, the more options a company has when external challenges arise. The COVID pandemic, for example, slammed some industries and led to explosive growth for others. Spreading your risk leads to more stable sales and profits.
How to diversify? Look to expand into new sectors. One way is to simply expand geographically. Then, think outside the box. How could my service or product provide value to a completely new set of customers or industries? What about complimentary services? Is there something close to your core competency that is an obvious add-on?
Let’s say you produce hinges for kitchen cabinet makers. Why not sell to cabinet makers for marine applications? If your products can be easily adapted for use by a new segment, go for it!
Think like the potential buyer of your business. Would you want a business that has room to grow or one that has reached its ceiling? The choice is an obvious one though few business owners consider this.
Investopedia defines scalability as “a company’s ability to grow without being hampered by its structure or available resources when faced with increased production.”
Scalable businesses have higher profit margins. Overhead increases at a much slower rate than sales.
Improving Cash Flow
Buyers like companies with a stable cash flow but LOVE those with rising cash flow.
Addressing the suggestions in this article will create higher cash flow. Look for profit leaks (those practices your business has that leak cash but do not improve the bottom line). One example is addressing slow paying customers. If they consistently pay late and require a lot of follow up, are they worth being your customers?
Your CPA can assist finding these leaks.
Entrepreneurs should think about the end value of their business throughout their business’ life. Steps such as these not only add to the endgame sales price, but they also increase your profits today.