7 Action Items to Increase the Value of Your Business in the Next 12 months

If you are considering the sale of your business in the next year or two it is imperative that you begin taking the steps to maximize the sale price now. Are asking yourself how to increase the value of my business? Like any journey with a destination you must know where you are at the beginning. Where to start? Start with an objective understanding of what the value of your business is today. Not your ‘gut feeling’ or what your friends or even your accountant tells you.

Once you know what the likely sales price of your business is today you can begin taking steps to grow the value of your business to reach your exit objective. In my world we call this a Benchmark, or Broker’s Opinion of Value. Engaging with a competent and experienced Business Broker who has intimate knowledge of the business sale marketplace is a logical place to begin. An industry-credentialed business broker will conduct a thorough analysis of both your financials and your entire business operations to arrive at a most probable sales price range. Once completed and you have established the benchmark you can begin the process to move the price needle to meet your exit objective.

Let’s begin by dispelling the number one myth that sellers have been fooling themselves with for years. ‘My business is worth $X because it would cost a buyer hundreds of thousands of dollars to get the business to where it is today, not to mention the 80-hour weeks I’ve put in and all the vacations I never got a chance to take’. None of these matters to a buyer. 80% of the value of a business is based on financial performance over the past 3 years. The remaining 20% will be a combination of both hard and soft factors such as customer concentration, competitive landscape, staffing and organization, process, and how the business presents itself in the marketplace.

Recent Financial Performance: buyers like to see steady upward trends of revenue and profit over the past 3 or more years. Any downturn in either category within the past 3 years will create uncertainty in the mind of the buyer and result in the buyer walking away or re-trading (a reduction) the price. A significantly strong year of profit followed by a return to the average growth rate over the prior few years can be more easily explained than a significant drop in revenue followed by a rebound. Doubt and uncertainty equal risk for a buyer. Begin by looking at your performance over the past years and document the reasons for the peaks and/or dips. Documenting these factors will enable both you and your broker to address and remove the perceived risk in the mind of the buyer – and the other party to the transaction, the absolute most risk adverse, and the bank.

Future Financial Performance: let’s remember that the objective of this article is to provide individuals with a roadmap to help them increase the Value of Their Business for a future exit. You must increase both revenues and profits. Whether profits are measured by what you see on your tax return or on an adjusted basis – Seller’s Discretionary Earnings (SDE), you must increase both to demonstrate growth. Begin to look at ways to increase revenues while taking a hard look at expenses. We strongly recommend reducing or eliminating personal expenses run through the business to improve the bottom line in the years leading up to bringing the business to market. Increasing revenues concurrent with decreasing expenses only leads to one thing: increased profits. Increased profits equal a higher selling price.

Customer Concentration: if your business has hundreds of customers where the loss of a handful of customers will not impact your top line revenue you are in a much safer position than if 20% or more of your revenue comes from a single customer. The key to reducing customer concentration is attracting and retaining more customers.

Competitive Landscape: it’s likely that you know who your competitors are. Many business owners make the mistake of dismissing their competitors and the impact on their business today as well as when it’s time for their exit. Begin by listing each of your competitors and rating them objectively without being blinded by your pride and ego. Understand that your competitors exist because there is enough business out there to enable them to survive. Take a hard look at each competitor through the eyes of a buyer and be honest about how they stack up against your business. If your heart (and mind!) tells you that they appear to be more efficient, successful, or organizationally strong than your business, take the steps to equal the playing field. The most successful businesses always are keeping an eye on their competitors. Monitoring your competitors closely can pay big dividends in improving your business. Your competitors are likely to identify and take advantage of opportunities in the market and there is no reason that you cannot or should not imitate what may be working for them. It’s not a sign of weakness to imitate a successful competitor – it’s smart business.

Staffing and Organization: think back to when you began your business and how you have grown over the years. It goes without saying that you had to increase staff to increase your revenues. For a majority of reasons business owners create a flat organization where virtually everyone reports directly to the owner. I will emphatically tell you that without creating management hierarchy you cannot operate most efficiently to grow revenues and profits. Successful business owners leverage their time and expertise to maximize their efficiency. The acid test is to understand what happens to your business when you are away for a day, week, or month. If you can take a month-long vacation and your business does not miss a beat, then you have likely built a team that can function fully in your absence. No matter how experienced the buyer for your business is, they will always be considering what will happen the day you depart, and they take the reins. If you do not have a competent second in command or general manager then you must take steps to identify or hire, and groom that person to assume day-to-day management of the business when you are absent. We have always secured the highest sales price for our clients when they have a competent general manager in place because the buyer is confident that they will have time to learn the business without harming it during and after the transition period.

Process and Procedures: this is simpler than it sounds. Document every process and procedure of your business’s operations. This means documenting every step of every aspect of your business. You must create an Operations Manual or Handbook. You can do this across each department and a great starting point is to ask the person who has responsibility for that role to write down all the steps they take to accomplish their job. An added benefit to you will be that by thoroughly reviewing those steps with that person you will better understand not just all that their job entails but also identify areas for improvement for better operational efficiency. Greater efficiency equals greater profit and greater profit equals a higher sales price. The reason that so many franchises have been successful is not just because they have a good product or service, but because they are able to attract buyers for their franchises who will expand their network. McDonalds would not be a household name if they only had one location! Why do people who have no experience in an industry buy a franchise? Because all successful franchises provide the buyer with a roadmap for success. A written manual outlining every step of every activity for the new owner to follow provides both the confidence and recipe for success. Create a comprehensive roadmap for success and not only will you realize the highest price at your exit, but you’ll fatten your bank account in the process.

Presentation: How the business presents itself in the market is no different than when you want to Sell your Business. Two homes identical in size and layout can and have significant differences in selling price. The home that is clean and neat with great curb appeal will sell for more. How does your business look to the public? More importantly how does it look to a prospective buyer? I would recommend that you take an objective look at your business and identify areas which make it shine. This not only includes how your business looks from the street but how your phone is answered, how your employees dress, the appearance of your vehicles, and the customer experience. If you and your staff are not proud of every aspect of your business, then include this in your plan for improvement. I recommend that in addition to you taking a hard look at the appearance of your business that you assemble your staff and ask them for their objective opinions. You will find that they are eager to improve your business and will help if given the opportunity. Make no mistake, appearances count.

Rocky Mountain Business Advisors is one of the best Business Brokers in Coloradobecause we are  focused 100% on selling our clients’ business. We apply a proven process to educate, prepare, and guide our clients through the sales process so that they can focus on managing their business while we focus on a successful sale. We bring a strong sense of urgency and tenacity to every engagement to realize the highest sales price in the shortest period of time. We bring buyers and sellers together. Contact us at 303- 474-5582,  https://rockymountainba.com/, or schedule a free 15-minute consultation to learn more.