With an aging baby boomer population, more businesses than ever will be looking for an exit. Buyers will have their pick of the litter, so to speak. That's why it's imperative that sellers make their businesses as attractive as possible. The strategies presented here will not only help maximize value but will also be necessary to ensure that your business is salable in the future.
Simple Keys to Maximize ValueIt can be hard to focus on increasing the value of your business if you have no immediate intention of selling and there are so many other competing demands for your time. But for those proactive business owners that see the end game of cashing out at some point, there are three simple concepts that will help you maximize the value of your business:
- Focus most of your efforts on increasing cash flows
- Put yourself in a buyer's shoes
- Pick the best exit strategy when the time is right and execute
Focus on Increasing Cash FlowCash flows are the No.1 factor that potential buyers look at to determine the valuation placed on an acquisition target. Buyers calculate the value of a business by estimating future cash flow and assessing the risk associated with generating that cash flow. A business that has a track record of sustainable or growing cash not only validates its product or service but also demonstrates the management’s team’s ability to drive growth. Buyers pay more for the higher likelihood of future growth. Historical financial results are important because they provide a good indication of what is possible.
Because of the importance of determining value, I can't stress enough the need for owners to prepare future cash flow projections for their business. Let's look at this logically. Would you rather have a potential buyer determine the value of your company from cash flow projections that they prepare, or from ones that are prepared by you, with detailed support around why your projections are achievable? I think the choice is obvious.
Put Yourself in a Buyer's ShoesEven owners who are not planning on selling their businesses can learn a lot from how potential buyers perceive an acquisition target. Based on my experience, these are five areas that buyers scrutinize most when buying businesses:
Strategic PlanningQuality businesses have a well-thought-out and documented strategic plan. A written plan gives any outside party (be it a bank, investor or potential buyer) the confidence that a business owner knows where a business is going and how it is getting there. If your business doesn't have a strategic plan, make one.
Strong ManagementA properly trained and widely knowledgeable management team is desirable for any company. A truly valuable team is deep and the knowledge of the business does not reside with any one individual. It is important to honestly assess the strength of your management team.
Are you able to leave the business for extended periods of time and feel comfortable that the business will run as efficiently or even better than if you were there? If not, start building a deeper management team through training, improved corporate alignment and, if needed, hiring. It may impact profitability in the short term but it will more than make up for it by creating future value. On top of that, wouldn’t it be nice to take an extended vacation with that peace of mind?
Diversified and Recurring Revenue BaseA company that has one customer representing 30 percent or more of its revenue is too risky for most potential buyers. If that customer were to leave, it would significantly impact revenue and cash flow. As such, customer concentration is an area that can have a significant impact on value.
Review your sales per customer. If any revenue is too concentrated among a few customers, find a way to get more revenue from others.