For most business owners, their single largest personal asset is their business. If you ever intend to sell your business—or need to sell it—you’ll want to maximize its value to prospective buyers. Being deliberate about this process is essential to getting the most out of the transaction.
But even if you don’t intend to sell your business, it’s a good idea to build it as if you were going to do so. Why? For one, you might change your mind later. For another, you might end up in a situation where you don’t have a choice. But mostly, it’s just a good idea to build your business as if you’re going to sell. You and your company will benefit from this mindset, even if you never do end up selling.
Over the course of my forty-plus year career, I’ve bought or sold more than a dozen businesses. Those transactions ranged in size from $1 million to $500 million. In every case but two, I worked with investment bankers or business brokers who’ve overseen the sale of hundreds of businesses. I learned from them what to do and what not to do.
Basically, the more buyers at the table, the better. Competition drives up the purchase price. Here are eight value accelerators that will maximize the value of your business and make it uber-attractive to prospective buyers.
Value Accelerator 1: Determine an exit date.
Begin with the end in mind. This will inform everything you do from this point forward. Even if you don’t plan to exit, this will put you in a position where you could sell if you had to in an emergency. Nothing focuses your effort like a deadline.
Value Accelerator 2: Remove yourself from the business.
Start thinking about this now. Nothing will suppress the company’s value like making it dependent on you. As a good friend once told me, “Ego is dilutive to net worth.” In other words, the more dependent the business is on you, the less it will be worth.
Value Accelerator 3: Build a dream team.
Prospective buyers rarely want to run your business. Instead, they want a turnkey operation with an outstanding management team in place. This is one more thing that reduces risk and makes their lives easier.
Value Accelerator 4: Focus on key financial metrics.
The value of your business is typically going to be a multiple of your trailing 12 month’s EBITDA. You want to focus on EBITDA as a net number and as a percentage of net revenue. This latter one is important, because prospective buyers don’t want you extracting profit at the expense of investing in the business.
Value Accelerator 5: Identify your proprietary advantage.
This is how you build a moat around your castle, so it’s impenetrable by the competition. This could take the form of copyrighted intellectual property; trademarked brands, products, or services; or patents—or some combination of all three. It could also be a process that differentiates you from the competition.
Value Accelerator 6: Diversify your customer portfolio.
Dependency on one customer or customer class adds risk to prospective buyers. You need to reduce that risk by diversifying your customer portfolio.
Value Accelerator 7: Diversify your product suite.
This is just like your customer portfolio. You don’t want a business that depends on one product or service. You also don’t want a hodgepodge of products that don’t really go together. There has to be some internal logic that explains how the parts work with each other.
Value Accelerator 8: Recession-proof your business.
You need to consider what happens to your business in recession. Do sales decrease or increase? You need to be honest with yourself. If they decrease because customers see them as nonessential, you need to find a way to make them essential.
Depending on the industry you’re in, not all these value accelerators may be relevant, or you may need to consider others. Regardless, I’d encourage you to embark on this journey now. It’s going to take time to build into your business those attributes that make it as attractive as possible to prospective buyers. Taking steps in this direction will make your business more profitable, more predictable, and less risky. That’s good for everyone—you, your employees, your customers, and your vendors.
Last modified on October 3rd, 2022 at 1:35 pm
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