Get More For Your Business

With millions of baby boomers nearing retirement, thousands of businesses are about to be put up for sale in the next few years, which could result in an oversupply, forcing the price of businesses down. In a previous post, I discussed the impact on family businesses. The situation could possibly escalate to the point where some businesses end up closing up shop because they are unable to get a good price for their life’s blood, sweat and tears.

Small business owners should start planning at least three years before retirement to get the best possible price for a business. This is to ensure profitability is satisfactory, the risks that can be mitigated are addressed for the future owner and most importantly, the tax implications of a sale are properly considered and planned for.

5 Tips “How to get the top price for your business”

  1. Understand HOW your business will be valued by the buyer(s). Business owners notorioulsy have an inflated view of what their business is worth, but an operating business is typically valued by applying a multiple to the earnings achieved by that business where past results are a guide to future earnings, with the multiple representing the perceived risk in the business. This is easier said than done. In our Business Mastery Platinum Program, we’ve shown people how to ensure this is done methodically and systematically – WITHOUT hiring an expensive business broker.
  2. Look at it from the buyer’s POINT OF VIEW. All buyers are cautious and seek to assess the likely future levels of profitability and how much risk will be taken on to achieve that profitability. It’s often beneficial to engage a third party, such as an accounting firm, to undertake an assessment and valuation of your business. Ideally, they should act as if they are acting for a potential buyer with all the apprehension, doubt and cynicism that involves. This process helps determine readiness for sale by identifying issues which, if rectified, will increase the value of the business for sale. I don’t suggest you use a business broker to do this – remember his/her vested interest is to lure you into selling AT ANY PRICE so he/she gets a commission!
  3. Identify risks to your future profitability. This is called Sensitivity analysis is the study of how the variation (uncertainty) in the output of a mathematical model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of the model. Put another way, it is a technique for systematically changing parameters in a model to determine the effects of such changes. That mathematical model is what I call Management By Metrics™ that are derived from your Pathways To Profits™. Typical risks you need to include are shown below. If not rectified, these factors could have a significant impact on the value of the business.
  • Dependence on a few key customers and suppliers,
  • Revenue streams not protected by contracts,
  • Intellectual property which has not been protected,
  • Insufficient diversification of products or services and
  • Dependence on key employees who are not locked in.

4. Can the business operate without you? Most small business owners are very hands-on in their business. They hold all the key relationships with customers and suppliers, hire and fire all the staff, control the finances and set strategy. An owner-centric business will not be attractive to a buyer because the risk to future profitability after the owner’s departure is too great. While there is some value and risk reduction in key employees holding some of the key relationships, this is what I call building a business no one wants to buy. With enough time, you can properly structure the business to transfer those key relationships to key employees which brings us to the last point.

5. Consider KEY employees in your exit and sale of the business. Retention of key staff is paramount for a new owner. This reduces the risk and flows on to an increase in the value of the business for obvious reasons. It’s important to communicate any exit or business sale plans with key staff as early as possible to gain their support and avoid any unexpected surprises. Ensuring that staff transferring to the new owner are looked after will assist in any transition and enhance the value of the business. Who knows, existing key staff might be prospective buyers of the business! “People buying a business are looking for traps or hidden risks. The quality of the information you provide to a prospective buyer  about your business must be truthful and fully transparent. You have to be able to provide a credible answer as to why you are selling, be prepared to be restrained from acting in competition to the purchaser among several other considerations.

If you get started now, documenting your Management By Metrics™ and Pathways To Profits™, you’ll not only substantially increase the value of your business, you’ll attract more buyers, potentially eliminating the need to deal with an expensive business broker.

1 Response to “Get More For Your Business”

  • MUCH food for thought throughout this piece. I know of a person who sold his “owner-centric” business a couple years ago. Once he left the scene, the business struggled and became much less profitable. (I think the arrangement was that the buyer would make payments to him over time. That’s another whole lesson, I’m sure….) In order to for the buyer to be able to continue to make his payments to the prior owner, the prior owner remains involved in the business at a distance, something I know he did not foresee.

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