Boost the value of your small business before it’s time to sell
A survey of 230 of America’s fastest growing companies (according to Inc.) indicated that more than one in three business owners plans to sell their company within five years. Yet a recent survey by Securian Financial Services found that more than 60 percent of business owners don’t have an exit plan, and 78 percent anticipate the need for the business sale to fund their retirement.
It’s time to get smart. Five years may sound like a lot of time to develop an exit plan, determine the value of your business and find the right buyer. I can tell you, though, from my years of working with businesses of all sizes—it’s not. Selling a business is hard work. Waiting until you’re actively selling should not be the first time you think about how much your business is worth.
While this may seem counterintuitive, the ideal time to start thinking about your business valuation — and planning your exit strategy — is when you start your business, especially if you have one or more partners. And if that ship has already sailed, then the time is now.
You may be thinking, “But I just started!” or, “I’m going to pass this business down to my children, and their children.” Or, like many owners, you may believe YOU are the source of any value your business might have — you see yourself as the “secret sauce.”
The truth is, this kind of thinking too often means business owners leave money on the table, missing key opportunities to increase the value of their business that could lead to bigger profits when it’s time to sell. Another scenario we see all too often is a business owner closing up shop without exploring the possibility of selling the business, ultimately losing out on a major liquidity event they have been working towards for many years.
What are some things a small business owner can do to increase the value of the business now, in order to maximize its potential down the road (ideally three to five years out)?
1. Understand your “magic number.” To fully fund your retirement goals you must understand the amount of funds you need overall to live off of into retirement (aka your “Magic Number”).
2. Understand company value now. Studies show that for most entrepreneurs, their business is their largest asset in their portfolio. Armed with your magic number, the next critical piece of information is understanding what your business is worth. In a best-case scenario you’ll find that you can comfortably retire today.
3. Gap analysis and value enhancement. You’ve found that exiting your business will not fully fund your retirement. It’s time to quantify the extra value you need to build into your business and implement a plan to achieve it. This might include revenue growth, new product development, or simply risk reduction in certain critical areas.
Now that you have a sense of how much additional value you may need, it’s time to think strategically about HOW to boost value.
Strategies for boosting value.
1. Clean up your financial statements. This is particularly important if you are starting to think about selling. Regardless of the method used to value a company, the number one concern for a buyer is the ability to generate profit. Period. The most reliable indicator of this ability is your company’s past performance. Often obscured in past performance are items like “non-operational” expenses, one-time or unusual expenses, personal expenses run through the business, shareholder perks, etc. A valuation professional can work with you to document those and build them back into the value of your business. This has a direct, significant impact on increasing both actual and perceived value.
2. Implement your value enhancement plan. Grow revenue. Add product lines. Reduce unnecessary expenses. At the most basic level, the keys to enhancing value are increasing profits and reducing risk. Begin every major business decision by asking: “How will this increase profitability? And how does it impact our risk profile?” Overall: execute, execute, execute.
3. Control costs and keep your financial statements in good order.
4. Market the business, not the business owner. This speaks to risk as well. It may seem counterintuitive, but the more important an owner is to the business personally, the more that detracts from enterprise value. The goal should be working your way out of a job to facilitate a smooth buyer transition.
5. Hire the right employees, and recognize their efforts. Retaining great people is far less expensive than recruiting and training new ones.
6. Develop and embody an organizational culture and brand that is authentic, consistent and resonates with your clients, employees and other stakeholders. A company that feels solid and is built on a sound culture helps mitigate risk as well, which of course enhances value.
About the author
Dan Doran is principal of Quantive Business Valuations, a professional business valuation practice based in Alexandria, specializing in small to medium-sized closely held and family owned businesses.