I talk with a lot of business owners every day. A common question I’m asked is “What do I need to do now to be ready to sell my business?” Here are 4 things to do now to increase business value in a sale, whether that is in 6 months or 6 years.
But first – did you hear I’m presenting at NACE 2016? NACE is being held in Anaheim, California this year next to Disneyland. As a Southern California native I’m extremely excited about this and can’t wait to welcome you to my part of the world. I’m also organizing a craft beer tour and custom craft beer dinner that I promise will be the best event of the week! If you haven’t already, hit REPLY and let me know you’re coming.
1 .Understand the Market
Asset values tend to move up and down together. As the stock market goes up, so does real estate and other assets. But many people are surprised to find out that the prices for businesses move in the same cycle – but with much more extreme swings in either direction. So when the market is up, business valuations tend to increase even more. But when the market goes down, business valuations tend to go down even further. (Don’t just take my word for it though – read the original research).
Why is this important? You can’t control what the market does. But the market has a big impact on the price of your business. If valuations drop 30% due to market factors out of your control do you have the ability to whether the storm? Put differently, it is important know your price and your timeline.
2. Remove yourself from the business
I’ve said it many times before – fire yourself and hire a management team. And while that is a bit tongue in cheek, removing yourself from day to day operations to focus on the larger strategic vision is valuable. This is easier said than done – I worked in my father’s business for many years before moving into the M&A world so I understand firsthand the challenges of letting go. Even if you plan on staying with the company for some time after the sale, having an established management team gives buyers greater confidence in your opportunity. Spend the time making SOPs, delegating, and building out corporate functions like marketing, finance and HR. It will pay off in the end.
3. Increase your customer diversification
Strong referral sources are the lifeblood of any business. And who doesn’t appreciate the account that you have worked with for so long it feels like second nature. But many owners I talk to have 50%, sometimes 80% of their revenues tied up in one key account.
Whether your business is collision repair, paint distribution, aftermarket parts, or even paint or parts manufacturing, selling more than 30% to one customer is risky. I recognize that the dynamics of the industry are such that a high levels of customer concentration is common in this industry. But the greater the customer concentration, the greater your perceived risk. And the greater your perceived risk is the lower the price.
4. Get your financials in order
Clients are sometimes surprised at the amount of time I spend reviewing their financials prior to going to market. But good clean understandable financials that follow GAAP (Generally Accepted Accounting Principals) go a long way in reducing the risk to a buyer in a transaction.
Another common challenge I see in privately held business is to engage in tax minimization strategies to the detriment of retained earnings and future investments. Oftentimes investments are made into assets with limited business value for the sole purpose of tax minimization. While none of us want to pay more taxes than we have to, having a long term perspective on the issue can create substantial value over the course of your ownership.
The Simple Financial Dashboard is an easy, low cost low obligation way to review your financials monthly. If you think you need a bit more hands on help consider bringing on a part time CFO to review your books and suggest improvements prior to a sale.
What sort of business legacy do you want to leave?
Each of these factors will have an impact at some level on your transaction, and together, attention to these four factors can have a substantial impact on your transaction. If you’re interested in learning more how these four factors impact your business, shoot me an email for a confidential, and no cost, initial consultation. If you’re a subscriber, simply hit REPLY to get me directly. Even if you’re not considering a sale any time soon, I’m happy to discuss what I’m seeing in the market and how it may impact your specific business.
Until next week!