Previously we talked about valuation methods. Valuation is great, but like any tool, only as good as the person using it.
Anyone can tell you that your business is worth $10 million. But if you can’t find a buyer at that price, is it really worth that much? An investment banker once told me that a business is only worth what a buyer is willing to pay for it…PERIOD.
In order to maximize what a potential investor or buyer is willing to pay for your business you must be able to demonstrate the value of your business to them.
Understanding valuation methods is important (common valuation models are discussed in this article).
You also need to pay attention to recent comps. Know what other businesses in your industry sell for. If possible, know the profitability and size of those businesses so you can compare them to your own business.
But in addition to the above, here are six more ways to maximize the value of your business:
First, know your accounting. Proper accounting can add millions of dollars of value to your business. Close your books every month. Learn a bit about accounting rules and conventions. Understand the difference between cash and accrual accounting. Know what GAAP stands for. Do not rely exclusively on a CPA or book keeper once a year. In short, think of accounting as a way to ADD value rather than a year end expense.
Second, have really clean financials. Clean financials means that every sale and every expense is accounted for. Tax plan – but do not use your business as a tax planning vehicle. If there is a one time expense or an expense not directly related to the day to day business, classify it accordingly.
Third, know what your EBITDA is and how you calculated it. You can read about how to calculate EBITDA here. Should you need financing, take on investors, or sell your business you will be expected to defend it in any negotiation you undertake.
Fourth, don’t fudge your numbers. Your bank/buyer/investor will find out and that will cost you dearly. It’s not worth it.
Fifth, demonstrate growth over time and your ability to execute according to a plan. Set a marketing plan, follow through on it. Create a budget. Track your sales growth. Show, through numbers, that your business is professional. That adds value.
Sixth, understand the value you bring to a seller or investor. See your business from their point of view. Understand what you are worth to them. Understand how your business would change under new ownership or through the result of a partnership. Know which expenses would be recurring and which expenses would not. You business may be much more profitable and valuable under a corporate umbrella than as a stand alone entity.
An investment banker will call those items “cost synergies”. Cost synergies can be thought of cost reductions that accrue as a result of a merger. A common example is a CEO salary or perks that would not recur under new ownership. Other examples could be life insurance policies the company holds on key executives, cars or travel perks the company provides for key executives, or even redundant administrative staff that would be unnecessary in a merged company.
On the surface, identifying potential cost synergies is relatively straight forward. But if you have never done it before, you may not realize all the expenses that can be eliminated by partnering with another firm, or by selling to a larger MSO. Sometimes there are additional costs to consider as well as a result of a merger or sale.
It’s possible that when you tell your buyer what you think you are worth they will make you feel that you are being unreasonable. They may also provide an offer that makes you question everything you have worked hard to achieve.
It’s critically important to know how to demonstrate your value to a buyer. That means that you have to know what is worth as a stand alone entity, as well as an entity in their organization.
And always, if you have questions or need help executing the above strategies, you can get a hold of me by filling out the contact form at https://supplementcollision.wordpress.com/contact/