If you are planning to sell or exit your business, it is best if you do not wait until the last minute to take measures to increase its value. Selling a business takes time, and so does driving up its valuation. Taking the time to improve the company wherever possible will help you a great deal in the long run. That, and buyers are more receptive to sellers who appear to be taking the sale seriously by making sure everything is in order and running smoothly. While the market can affect pricing—and that’s not something you can control—what you can control is how prepared your company is for a merger or acquisition. Better planning and proven investments in a business’s infrastructure and operations often results in a significantly higher valuation. Plus, you gain the peace of mind knowing that you are actually prepared for your exit, making for a more secure future.
Six months to a year is typically a good timeframe to allocate to getting your business ready for market. Enlisting an experienced M&A advisor can help you through the preparation process, taking some efforts off of your plate, and even moving things along more quickly. Another set of eyes can help you identify areas you might not realize need a little help, and when it’s something they do every day, they are going to know exactly what to look for. Just be sure to find someone who actually cares about the end result and doesn’t just want you to sell the business for the sake of selling. They should be invested in your best interest, whatever the final deal may entail.
Diversify Your Customer Base
Buyers look for companies with a broad customer base that can be relied upon to deliver recurring revenues and cash flow. You should be able to truly understand your customers and have a plan for addressing any vulnerability. This means knowing who your ideal customers are and why, and how you will maintain their loyalty.
When it comes to customer concentration in business, there is commonly an 80-20 rule. This rule basically states that when 80% of your business stems from 20% of your customers, you have a high customer concentration. This red flag indicates risk, and you will need to be able to justify the 20% subset. A solid explanation regarding your mix of customers and a clear plan that addresses any risks will go a long way with potential buyers.
Get Your Financial House in Order
Buyers want to invest in businesses that are well managed and positioned for future success. No one wants to acquire a company whose books are a mess or their financial controls are lacking. You should have a very well maintained financial documentation system that dates back several years and is maintained by a properly experienced person, such as a CFO or controller.
But it is about more than just financial statements. You will need an established and accurate cash flow forecast that is supported by your company’s financial history. You should also have an effective system in place for collecting the cash that you are owed. It is important to demonstrate that you can cover payroll and still be profitable.
Consider how closely your business monitors its finances, and how consistent you are in staying on top of key performance indicators. Buyers prefer sellers that can speak to their numbers, so you need to have your finances in ship shape before attempting to sell.
Any business is going to experience some level of volatility, but you need to show buyers that you know your risks and are in control. If you want to increase your company valuation for a sale, you need to have a plan to minimize risks in your business, whether its in regard to profit margins, or substandard relationships that can lead to high customer, supplier, or staff turnover. Know where the problems lie, and have a plan to fix them. This will go a long way with potential acquirers. Think about:
- Physical risks, such as to your people and your property
- Technology risks, such as cybersecurity and power outages
- Strategic risks such as diversification issues
Risk prevention can be carried out in several ways, such as liability insurance, computerized back-ups, safety checks, and employee training. The nature of your business will dictate what areas of risk prevention you need the most and to what extent.
Strengthen Your Leadership Team
Having the right people running the show is incredibly important for a business at any stage, but especially when it’s time to sell. This is something that sophisticated buyers will look at closely because management is critical to the success of a business. Investing in the right management team and ensuring they are motivated will drive up your company valuation.
Additionally, if you are the CEO or president of your company and you plan on exiting upon a sale, you need to clearly identify successor and get them in that role for at least six months before selling. Buyers need to see that the business will stay on track once the owner is gone. If you, as the owner, are considered to be indispensable to the daily operations of the business, it is seen as a huge liability that could lower your valuation.
Also, keep in mind that communication is key at all levels of your organization. You leadership team should share your vision and carry it out in their management of staff. Clear and consistent messaging goes a long way to making sure everyone is on the same page. If employees catch wind of a possible sale before they are properly informed about it, it can cause rumors, panic, and unrest throughout the company. People will worry about their jobs and could look elsewhere. You should also consider if you have family members working within the ranks, what your plan is for their future with the business, and if that needs to be negotiated as part of a deal.
Invest in Marketing
Never underestimate the power of marketing, especially in today’s social-media driven world. Your reputation should be in solid standing, and you should have a detailed marketing and sales strategy, as well as a strong online presence. Your messaging should be consistent, and kept fresh. This means you’ll need to really understand your customers and how they communicate. But not everybody is good at this. Having a marketing team, whether they are in-house or an outside advertising firm, can provide a huge boost to your business and its value. Taking the steps to maintain a steady source of traffic and revenue growth will be highly encouraging for buyers.