The succession endgame for many small business owners is to one day sell their company at the highest possible price. To do so, you should focus on specific tasks that will build value in the business from the perspective of potential buyers.
The fact is buyers and sellers of businesses usually have very different ideas about how much the business is worth. Sellers often have an inflated view of what their company is worth. This is understandable, but you need to realize that buyers will view your company through a more objective lens than you do. They are looking for certain characteristics in a company they're considering buying that will ultimately determine their potential return on investment in the business.
These characteristics are sometimes referred to as business value drivers. The best way to increase the potential sale price of your business is to focus on these value drivers during the months (and years) leading up to the sale.
What Buyers Look For
Business buyers typically look for three main things when determining the value of a business and how much they're willing to pay for it: the expected amount of future earnings and cash flow, how certain it is that these anticipated earnings and cash flow will materialize, and the timing of future cash flow and earnings. These are driven primarily by:
- The nature of your products and services. Are your products and services new or mature? High-tech or low-tech? Do they address customers' needs or wants?
- The makeup of your customers. Are your customers B2B or B2C? Fast-growth or slow-growth? Cash-rich or cash-poor?
- Your company's geographic sales territory. Is your territory local, regional, national or international?
In short, the best way to maximize future cash flow and earnings (and business value) is to focus on business opportunities that offer the highest possible return on investment. And the best way to minimize the uncertainty of future cash flow and earnings is to diversify your business within these opportunities - for example, to diversify among types of products, services, customers and geographic areas, as noted above.
Five Business Value Drivers to Focus On
Here are five specific value drivers that often have a big impact on the sale price of closely held businesses. By staying focused on these areas, you may be able to increase your company's potential sale price:
1. Financial performance and cash flow - First and foremost, buyers want to see a history of consistent sales, revenue growth, high margins and strong cash flow in companies they're considering acquiring. Choose several financial key performance indicators (KPIs) to closely measure and monitor in order to gauge these critical financial components of your business.
2. Executives and key managers - How strong is your management and executive "bench"? Can they keep the company running smoothly in your absence? Do they have strong relationships with your key customers and suppliers? And do they have financial incentives (including equity) to remain with your company over the long term?
3. Growth prospects - Buyers want to acquire companies with strong growth prospects - they're usually not interested in maintaining the status quo. They will want to see a strategic plan that details how the business can be grown over both the short and long term - by tapping new niches, capitalizing on hot new trends and technologies, or expanding into new territories, for example.
4. Customer concentrations - If your business is heavily dependent on a handful of large customers for sales and profits, this could be a major red flag for buyers. Broaden your client base as much as you can among a variety of different types and sizes of customers in order to reduce the financial risk of losing one or two large customers.
5. Employees and workforce - How stable is your employee base and how skilled and well-trained is your workforce? This is another factor that's important to many business buyers. Try to stabilize your workforce as much as you can, especially during the months before listing your company for sale. And be willing to invest in the training and equipment employees need to perform their jobs adequately.
You have likely spent many years pouring sweat equity into building your business, and you rightly may want to reap the financial rewards of your labor by selling your company one day. Keep your focus on these business value drivers in order to boost the sale price as high as possible.