You, as a business owner, should have the goal of creating the most value possible in your business. Likewise, an owner should be thinking about their exit strategy from the day they start or acquire the business.
As a wise business owner you will build to sell and time your exit to coincide with the most value created in your business. The psychology involved is much like selling in the stock market – the time to sell is when things are going great, not when they are spiraling downward.
Your business has value when it can exist separately and apart from its owners, when it has taken on a structure and culture of its own, or where there are processes, methods, products, property rights or anything else that allows the business to continue as a going concern as its own entity.
Other things you can do to increase value are: Make certain you have verifiable cash flow. The more cash the business can prove that it generates annually, the more value your business will have to a buyer. That means keeping accurate financial records in the business that can be verified during the due diligence part of the business sale process.
If your business has a history of sustained annual growth it will have increased value to a buyer. If your company is growing profitably at very strong, consistent rates of growth and you can accurately project those rates to continue or even increase in the future, then you have created a lot of value in your business. Likewise, if your company is perceived as recession resistant and you can show years where you have not only weathered a bad economy but have actually grown during troubled times, then you have created more value for a buyer.
Your reputation and image in the marketplace also create value. If you have branded your company and it is recognized and well spoken of in the community then you have added value to your sale. Along with a great reputation you should naturally have customer loyalty with many continuing customers. This gives a buyer comfort that the business will continue to have revenue from customers after the sale and this certainty adds value for the buyer.
You will add value to your company if your customer base is diverse. Buyers are fearful of one giant customer controlling much of the company revenue because there is great risk to the buyer should that one large customer take their business elsewhere after the sale. You should mitigate this concern by adding numerous customers and working to lower the percentage that any one customer controls of the company’s revenue.
Your operational policies and procedures can add value to the business if they are well-conceived and provide a good roadmap to operating your business for new employees and new business owners. That means you should have good systems in place and provide logical training that gets people up to speed quickly when taking on new tasks or business operations.
By hiring and retaining great people in your business you can add much value. The more management depth and breadth that exists in the business, the more valuable the business is to a buyer.
Your market size and penetration rate also affects your business value. Buyers want significant upside potential so the larger the market the greater the value. Also, if the buyer perceives an ability to obtain a higher penetration into the market after the sale, the value of the acquisition increases.
It is also useful to look at what decreases value in order to avoid certain pitfalls. For instance, worn out assets are not desirable to the acquirer. Another value detractor is earnings that are unpredictable, rising and falling drastically from year-to-year. This uncertainty will give a buyer concern and lower the value of your company, as well as the ability to finance the acquisition. If your revenue and profits are descending instead of ascending, the value of your business is declining as well.
A business owner should develop a realistic expectation of the value of the business as it relates to the earnings. Earnings drive value and they must support the price of the business.
You want to create value above and beyond just the value of the tangible assets of the business. This value is referred to as the goodwill of your business and can include many things such as: your customer relationships, advertising campaigns and marketing materials, computer databases, contracts, training procedures, trademarks, copyrights, trade secrets, supplier list, management, tooling, name recognition, location, reputation, delivery systems, proprietary designs, loyal customer base, low employee turnover, know-how, credit files, favorable financing, employee manual, procedures and policy manual, skilled employees, technologically advanced equipment, and favorable comparison to industry ratio’s to name a few items considered as part of goodwill. We sometimes refer to these assets as “Phantom Assets” because they tend to be hidden and must be uncovered when analyzing the value of your business. Some of the items in the list simply add value to your business while others are actually considered intangible assets applicable to Code Section 197 of the IRS – Amortization of Goodwill and Certain other Intangibles.
At Corporate Investment, our grasp of intangible elements as well as our thorough analysis of your historical financial performance enables us to fairly value your business in the current marketplace.
Understanding what creates value, and how to present those items in a positive manner, is the role of the intermediary. When you have built a significant amount of value into your business and are ready to proceed with the sale, the professionals at Corporate Investment stand ready to assist in this complex marketing, financial and legal transaction.