Selling a business can be exciting, since it gives you the chance to get a return on the biggest investment of your life. All too often, sellers are left disappointed by that return. As Baby Boomers age into retirement, more businesses than ever are hitting the marketplace. That means buyers can afford to be picky, and sellers who don’t give them what they want may be left in the lurch. Even if you don’t plan to sell right now, a little planning can offer a tidy return on your investment down the road. Here’s how to improve business value.
Simple Strategies that Drive Value
Running a business is challenging, requiring you to simultaneously juggle many rules. So it’s tough to focus on maximizing value if you have no immediate plans to sell. But businesses who adopt a proactive approach will reap plentiful rewards by embracing three simple concepts:
- Increase cash flow.
- Understand the buyer’s perspective
- Devise and execute the right exit strategy.
Increasing Cash Flow
Cash flow is the single most important factor to most buyers. Buyers typically assess future value by estimating cash flow and calculating risk. Businesses with sustainable or growing cash flow are less risky. Buyers are willing to invest more for lower risk and higher future potential earnings. So they’ll look to historical results to predict the future.
Owners must prepare reliable cash flow projections rooted in reasonable calculations. Don’t let the buyer determine value. Work with a valuation expert to assign a price yourself.
Understand the Buyer’s Perspective
Many owners make the error of assuming the buyer will see the business as they do, placing a high value on the owner’s work and emotional connection to the business. Buyers have a much different relationship to your company. They view it as an investment, and like all investors, they want a high return with little risk. To decide whether your business is worthwhile investment, most buyers look to a few factors:
- Strategic planning. Do you have a clear, actionable plan against which you can measure results?
- A strong team. Are your managers well qualified, and capable of running the business without you? Do you have the right employees in the right positions?
- Owner dependence. Can the business function without you, or will the company’s value immediately decline upon your departure?
- Recurring revenue base. A diversified, recurring base of revenue protects against market uncertainty, and means you’re not unnecessarily dependent on a single customer.
- High entry barriers. The harder it is to enter your niche, the less likely it is that you will eventually be overtaken by a competitor.
- Scalability. Investments that serve customers and build better products appeal to buyers. Your company should be ready to grow and scale to a larger geographic reach or more diverse customer base.
Devise and Implement Your Exit Strategy
Begin exit planning from day one. You can create more value as long as you have more time to implement wise strategies. So working out these strategies now gives you the chance to measure results and make future decisions based on past performance. Once you are ready to exit and know that the time is right, you’ll be better equipped to create a competitive bidding process that attracts well qualified buyers and drives the final price higher.