Selling a Business and Maximizing Its Value

Selling a Business and Maximizing Its Value

If you’re selling a business, then you probably know that you should do everything you can (within reason) to raise its value before closing. However, there’s more to valuing a business than just looking at its profits. Below we’ve outlined a few strategies that you can use to get the most out of your sale.

Offer a Strategic Plan

The plan you draft for selling a business isn’t going to be as comprehensive as your original business plan. Instead, think of it as a guidebook or checklist for the new owner. Make sure to include strategies to increase investment in areas with high return on investment (ROI) and how to decrease investments where the ROI is lower. If you do it right, this framework will give the Buyer confidence in the longevity and profitability of the business. Buyers will be much more open to paying a higher price for businesses that they believe to be solid, long-term investments. After all, no one wants to waste their hard-earned cash on an operation that could go under at any time!

Focus on the Quality of Earnings — Not Just Profits

For those not in the know, a business’s “quality of earnings” refers to the sustainability of a business’s income. This is more of a measure of profits alone. Buyers place tremendous value on businesses that can stand the test of time. One popular avenue for increasing the quality of your business’s earnings is to diversify its revenue. This helps protect your business from going under in case a particular market dries up. Staying on top of your buyer contracts will go a long way, too.

Trim Unnecessary Costs

There is a big difference between cutting costs and enforcing outright austerity measures. Your goal here is to reduce waste, not to transform into the office bean-counter! Overhead has a way of accumulating over time, but that doesn’t mean that younger businesses aren’t guilty of loading themselves down with expenses, too.

Keep in mind, however, that much of a business’s components and personnel are deeply dependent upon one another, often in ways that aren’t immediately obvious or even apparent on your bottom line. Cutting costs in an area that will leave employees so unhappy that they leave the business, for instance, can end up costing you more on hiring and training replacements.

Encourage Employee Buy-Ins

Buyers typically pay a lot of attention to a business’s employees. This saves them the cost of new hires while retaining the information and experience that only skilled employees have. Employee buy-ins signal to the buyer that the business really is a sustainable, worthwhile investment. A fully-functioning operation is far more attractive of a purchase than an unstaffed warehouse stuffed full of old equipment!

Establish Your Process

The “internal machinery” of your business is of the utmost importance to a Buyer. This is demonstrated by detailed, all-inclusive processes for each “task” in your business. They exist to standardize the operations of a business, minimize mistakes, and to fill in the gaps for new or forgetful employees. Not only do established processes make it easier to take over the business after the transition but are indicative of a well thought out and viable business model. If your operation is run on the fly, then Buyers are likely to see that as a red flag.

Take a Step Back

If you’ve been acting as the face of the business that you’re now looking to sell, then you might want to take a step or two back while you’re getting the transaction in order. The value that the owner brings to a business is of little interest to the Buyer. They are purchasing your business and its employees – not you and your vision.

A good way to measure your involvement is to examine how much of your business is brought in by you personally. If more than a third of the business is carried on your shoulders, then you’re responsible for most of its value. The good news, however, is that most of your contracts and relationships can be passed on to your successor.

For insight into the Buyer’s perspective when selling a business, you can read more here.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.