By Paul D. Schoessow, CVA
As a small business owner, your business is likely one of your most valuable assets and at some point you may want to either sell your business or establish a succession plan in order to preserve your legacy.
To maximize your selling price and facilitate a smooth transition, the process of preparing for a sale or transition should start 5 to 10 years before you are ready to sell or transition.Some of the key factors impacting the value of your company include:
- Financial Performance
The value of a company is largely driven by its ability to generate a profit and demonstrate that it can consistently do so. As such, anything you can do now (increase revenues and/or decrease expenses) will help to drive the value of your company upward in the future.
- Financial Position
Does the company have adequate capital for current needs and growth? The healthier a company the more attractive it is to a potential buyer because it demonstrates the viability of the company. To the extent possible, you should shore up a company’s capital position well in advance of a sale or transition.
Does the company rely substantially on one customer or vendor? Diversification of customers and vendors is a key variable that a potential buyer will look at in determining a purchase price. As such, anything you can do now to diversify your customer or vendor base will help to drive the value of your company upward in the future.
- Keyman Risk
Is the business dependent on one or few employees? Would the loss of those employees put the company in harms way? To the extent possible, enter into noncompete agreements and begin transitioning relationships and knowledge to someone you can groom into your successor.
- Growth Potential
Does the company have the ability to grow with either its current product offerings or new product offerings? Typically a prospective buyer is looking for the ability to grow the company’s top line revenues and bottom line profits.
- Recurring Customers
Does your company have a healthy mix of continuous, recurring revenues or is every year a continued marketing effort to drum up new business? To the extent
you can, develop a revenue mix that includes a recurring revenue stream from existing customers. A buyer may find your company more attractive.
- Continued Investment and Improvement
Continued investment in the company and improvement in processes can help show the company’s commitment to its industry and a company’s ability to stay technologically ahead of or in-line with its competitors. This will keep the company better positioned to be an industry leader and demonstrate its expertise.
- Developing a Strategic Plan and Implementing It
A strategic plan can often help keep a business on track to achieve its goals. It can provide your company credibility as a professionally managed organization and its overall ability to achieve its long term goals.
- Complete and Reliable Financial Information
Not having correct and accurate financial information can be a non-starter for many potential buyers. Why? If a buyer can’t rely on the information provided they will be unable to analyze your company and its potential as a viable investment.
- Be Prepared
Consider seeking advice from your attorney, your accountant or a transaction professional to help identify areas for improvement to drive the value of your business higher and position it for a transition. This exercise can provide an objective view of your organization in order to set realistic expectations and help to achieve the goals you’ve set.
Whether you are selling or transitioning your business, the above concepts and action items can help you build a more efficient, stronger, diversified and valuable company and legacy.