If you ask a number of different people, you will get several different answers. Some people may want to know more about your customers. Some will want to know if you own intellectual property. Some will want to see if you have reinvested in your capital assets and your I/T systems. Analysts will want to look at your revenue and profit trends to see if you are growing. There are many methods and formulas to estimate the value of your business, but at the end of the day your business is worth exactly what someone else is willing to pay you.
Although you may feel this simple answer leaves you with little control over the process, the truth is you have substantial control over the outcome. If you believe you will be ready to sell your business within the next 10 years, now is the time to start working on your business to maximize the exit value.
Most small businesses will sell for some multiple of operating cash flow. One of the simplest measurements of cash flow is Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). Most business owners understand cash flow and profitability, but how is the multiple determined?
Good strategic planning and focusing on a few details will go a long way toward enhancing the value of your business at the time you exit. Here are a few simple things to work on today that will increase the value of your business long term:
1. Financial Clarity – Having the controls and processes in place for timely, accurate financial reporting will provide short-term tactical benefits as well has enhance the value of your business long term. Strong financial systems will allow you to develop detailed financial reports beyond your standard financial statements, including customer revenue and margin, product revenue and margin, and other detail cost reports to support your business plan. All revenue and cost reports should be validated by tying back to your internal financial statements. Annual financial statements should be validated by your CPA firm.
2. Revenue and Profit Growth – Buyers like to see your business growing. Growing your revenue is always a goal for any small business, but at the same time you need to grow your gross profit dollars. Buyers will not be impressed with expanding revenues that are unprofitable. Creating market niches for your product or services that allow you to charge premium prices should be part of your long-term strategic planning process.
3. Product or Technical Advantage in the Marketplace – This is easy if you are holding some type of intellectual property, patent, or trademark for which your customers are willing to pay a premium. Most companies don’t have this clear of an advantage; however, there are things you can do to put yourself in this position. Determine some of the things your competition does to be successful, and then attach that success with your own version. Even if your competition is substantially bigger than you, if they feel you are threatening their livelihood, they will be the first to bring their checkbook and try to put you on their team.
4. Management Team – Who is going to run your business when you are not around? All successful transitions with the highest multiples have this element. Whether your buyers are strategic or financial investors, they will look for the current management of your company to sustain the business. If you tell them you plan to work for a few more years, they will not believe you. It is critical to develop or hire the appropriate management to sustain your business after you are gone.
These are just a few thoughts related to ways you can maximize the value of your business. Actual strategic planning should be done around your specific business opportunities. If you believe you will sell your business in the next 10 years, you should contact a B2B CFO ® Partner to help you build your business today, so you are able to your business on your own terms.