Waking up one morning and deciding to sell your business and actually being in a position to sell your business are two very different beasts. Having a business that is eye-catching enough to sell easily is an appealing prospect to any business owner. Whether you plan to sell your business in a few years or a few decades, here are some tips to improve the production and value of your business so you can land the highest quality buyer.
Tracking
The first questions any prospective buyer has are whether the business makes a profit and if it will continue to make a profit. You need to be able to provide empirical evidence that your company is successful. Having everything organized ahead of time will save you headaches and embarrassment, and help keep you on schedule. Tracking several years of key performance indicators (KPIs) will give you the clear numbers you need to prove the reality of your success. KPIs are quantifiable measurements that track the progress you have made toward your company goals. For instance, what is the client acquisition cost? What is the lifetime value of a client? Being able to identify and track your own company’s individual KPIs will provide you with the data that makes potential buyers willing to invest.
Understanding your business’s numbers is crucial. The more data you gather, the easier it becomes to enhance its value over time. With years of documented data, you not only demonstrate that your business is profitable and well-managed but also that it has consistently improved. This track record of progress increases the likelihood of continued success, which quality buyers will recognize and value. Quantifying and verifying your company’s standing minimizes risk for buyers and enhances the overall worth of your business.
Defined Business Operations
Understanding Your Business’s Functionality
Once you’ve established your business as productive and profitable, the next question inevitably arises: how does it operate? While you may keep certain details confidential until due diligence, it’s crucial to have efficient systems in place. Buyers prioritize operational efficiency and thorough process documentation. They seek a business ready to function seamlessly, sparing them the burden of building from scratch. Reassure them that you have a reliable formula for running the business.
The Value of Well-Defined Operations
Establishing well-defined business operations is an important practice to have in place whether you sell your business or not. It is vital for any industry to identify the best practices in that business. What works the best in any situation?
A great example of this is McDonald’s. Their systems are so well laid out that they know how to put every pickle on every hamburger. The business has succeeded and grown to the point where everyone world-wide knows what McDonald’s is.
Another example is an accountant friend of Melissa’s who has broken down his operations to the point of telling stroke by stroke what to do. He has such an incredibly designed system that anyone could learn how to do accounting. It is the process documentation that makes the difference.
Clearly defined operations are a valuable asset: with meticulous documentation, anyone can step in and replicate your success with minimal training. Your systems should be easy enough for a ten-year-old to grasp, ensuring the continuity of your hard work and dedication even after the sale.
An Exit Strategy
Time and Preparation
A good exit strategy takes planning and time, generally at least 2-3 years. You need time to plan on how to make your company the most valuable it can be. One key element to making a marketable business is maximizing the value of the company. There are many diverse ways to increase the value of any business. If you have already been tracking and improving your company, and setting in place defined operations, you have increased your business value substantially. Your exit strategy should also include some changes in how the business has been running.
Strategic Changes for a Smooth Transition
One such change many businesses need to make is to stop minimizing taxes and start maximizing value. If you have only been focused on minimizing taxes, when the buyer sees those tax returns it may look as though your company profits are much less than you really value them at. How much the business reports making will be a huge factor in selling your business. It is worth paying more taxes for a few years to sell your business at a much higher value. If your accountant can not change his methods from decreasing taxes to raising value, you may need to consider hiring a new accountant.
To facilitate a smoother transition, consider gradually stepping back from day-to-day operations. A business capable of operating independently, even when the owner is away, is highly appealing to buyers. For instance, Erin successfully implemented this strategy with her tutoring company. By the time she sold it, she had streamlined operations to the extent that she could train the new owner in a single Saturday. Buyers appreciate the opportunity to swiftly acquire the skills and tools needed to achieve the company’s goals. Erin was relieved she didn’t have to commit months of unpaid time to train her successor.
Maximizing Company Value
Valuing your business will also depend on how many hours you, as the CEO, are working. The less hours you can work while still maintaining a good profit, the higher the value of your company. Part of the value of a business is determined by projecting what profit a full working schedule would yield. For example, if Business Owner A works for 10 hours a week and earns $100,000 annually, projecting a working schedule of 40 hours a week would result in a projected income of $400,000. However, Business Owner B works 60 hours a week and makes $500,000 each year. While Owner B earns more money, his business is valued at only $333,000. Not only is Owner B valued less, but he is also slaving away each day while Owner A lounges about sipping punch on a tropical beach. Training or hiring others to take over certain aspects of the business facilitates a smoother transition, boosts company value, and reduces headaches for you.
