Work to increase business value long before a sale

December 18, 2017

Lay the groundwork to increase the value of your business before you start transition planning.

Getting to the football championship is never easy. While a player’s talent is a major factor in their success, even more important is their intense focus and drive to improve. Likewise, years of preparation and practice play into a team’s success even before the game clock starts ticking. Game planning certainly doesn’t start the day of the game.

Much the same, the preparations for a business transition don’t start the day you decide it is time to start the transition process.

Setting goals is great, setting plans is better

If you want to meet your goals, you need to give yourself enough time to consider all options and determine which transition option is right for you, whether it’s a transition to a family member or your current leadership team, or exploring options for an outside strategic sale.

Years of planning and process enhancements help drive your business value, and that means taking a deliberate approach over time. That advance preparation is what will help you best meet your sale objectives.

Understand where you currently stand

Your first step is to have a good understanding of what areas create value. Then find ways to enhance these areas to grow your business strategically.

Consider having a business valuation performed by an accredited professional. This process will help you identify areas that can positively affect your organization’s value. It can also help you determine which areas may pose an increased risk in the eyes of the buyer.

The business valuation process looks at many areas, including financial results, and compares your data to industry benchmarks and economic forecasts. In the end, you should have a fair market value (FMV) of your business.

What drives risk—and value?

The buyer’s interest and the value they place on your business ultimately drives the selling price. Buyers evaluate the risk versus the potential reward, so when you reduce the buyer’s perception of risk, it can increase interest among buyers and provide you the opportunity to secure the highest possible sale price.

Buyers are looking for a business that offers stability and future growth opportunities. Being able to show value over time, rather than in the immediate time before you’re looking to sell, increases trust and minimizes the sense of risk for potential buyers.

Look at these value drivers to find ways to increase your business’s appeal. It provides a thorough road map for identifying what steps you need to take to ensure you can attract the right buyers when the time is right.

  1. Cash flow. You want to be able to show an increasing—or at least steady—cash flow as this is one of the basic elements that increases perception of value. It truly is a key metric that demonstrates your business’s sustainability. Can you demonstrate your business’s ability to generate revenue and maintain profitability over time?
  2. Financial integrity. This is an area buyers use to evaluate their risk. Financial controls help protect your business’s assets, but they also help demonstrate that you have solid business practices. A financial statement audit offers the highest level of verification of your controls and provides opportunity to identify and address any deficiencies.
  3. Human capital. Do you have an effective leadership team who will remain in place after a business sale? Are they ready to take the reins and continue managing the business seamlessly? An experienced leadership team is invaluable. And high turnover is often cause for concern, so address any employee retention issues long before you’re ready to sell.
  4. Diversification of customers. Does your success rest with a few key clients? Buyers see risk when a majority of your business rests with one group, whether it is in one industry or one geographic region. Think about it—a hit to that industry could have signification ramifications on the entire business. Find ways to broaden your customer base.
  5. Growth opportunities. Your strategic plan should address your predictions and goals for future business growth. Demonstrate and explain how you will achieve and measure that growth to provide confidence that you’ve fully assessed your industry, technology and possible expansion in a deliberate and thoughtful manner.
  6. Systems and processes. Beyond showing that your financial controls are properly planned and implemented, can you confirm your other systems are sustainable? Look at areas such as quality, customer relationships, HR and more.
  7. Goodwill and intangible assets. What is your competitive advantage and what key elements contribute to that? Whether it’s your brand recognition or reputation for quality, these market differentiators create value in their own way.

Find a way to make your business shine

Pay attention to these key value drivers to leap ahead of possible competitors. Then assess where you can make improvements and develop an action plan. You may not be able to significantly enhance each and every area, so select the top several that can make the most impact in your business performance.

Schenck’s Business Strategy team has the expertise to guide you through this process. Contact Lisa Horn at 800-236-2246 to learn more.

In addition, Schenck, through its affiliation with Taureau Group, offers investment banking advice and has successfully completed hundreds of M&A transactions for clients in virtually every industry.

Adapted from an article by The SuccessCare Program.