There’s no arguing that banks, potential investors and creditors look heavily to a company’s financial statements to determine its value. However, past financials often aren’t the whole story. Here are some additional factors to consider as you seek to maximize your company’s value – whether you plan to sell soon or simply want to be ready when that day comes:
- Proven Potential for Increased Profitability
Perhaps the most important aspect of making a business attractive to a potential buyer is building their confidence that the business has the potential for increased profitability. Of course, step one is to produce documentation showing steady, reliable revenues and cash flow, but other steps can help paint a picture of untapped potential. For instance, highlighting (and proving) key advantages inherent in your [INDUSTRY business] such as a history of the sector outperforming the economy at large or examples of recession resistance will demonstrate that your business carries less risk. Regardless of your business’ financial track record and your sector’s inherent advantages (or disadvantages), a key way to build value into you business is to create a plan that will drive future growth. If you plan on continuing to operate the business, such a plan will help you think strategically and advance the business despite day-to-day operating demands. If you plan to sell your business, experience has shown that owners who offer a clear, focused plan for growth have an easier time generating buyer interest and closing the sale. Your plan might detail strategies such as acquiring competitors, expanding to a complementary product or service, or implementing operational efficiencies.
- Be Organized
It sounds simple, but it’s hard to do. Good organization will help you run your business more efficiently and reduce employee (and customer!) confusion. When it comes time to sell, potential buyers will find the business and the operations easier to understand. At such a point it will be especially critical to have your books in order to provide credibility and to instantly make your business more attractive to potential buyers. No buyer wants to take over a disorganized business. Prepare historical financial documents (ideally 2-3 years of tax returns and financial statements) and other important documents in a binder, with tabs and an index. This will serve as a great resource for you, but it will also provide potential buyers with easy access to the information they’ll need to make a buying decision. To build future value, ensure your client and vendor contracts, employment agreements and other business documents are written so that they can easily be transferred to a new owner. Additionally, it’s wise to create an operations manual that outlines how the business operates including work flow, decision making processes/authority and key relationships. This will be helpful to existing employees and managers and will be of great value to potential buyers, thus adding significant value to the business. Finally, don’t forget to organize and touch up the physical facilities of your business. This will ensure a professional impression to customers, employees and, one day, potential buyers as soon as they walk in the door.
- Focus on Physical Assets for Debt Financing
Unfortunately, many banks are still hesitant to lend money for business purchases. As a result, buyers of businesses with tangible assets – capital equipment or owned real estate for example – are having greater success securing purchase loans. Though intangible assets, like intellectual property, knowledge and relationships, are all important parts of your business, they often don’t come through in a financial statement. Tangible assets, on the other hand, can be used as collateral to secure lending from banks. Focus on highlighting the tangible assets within your business, and supply potential buyers with a comprehensive list to give them a leg up when applying for loans.
- Offer Seller Financing
Going hand-in-hand with the difficulty of securing a loan, it is more important than ever that you are willing to finance at least part of your business sale. Banks are currently very reluctant to lend for a business acquisition without some level of seller financing included in the transaction, and in today’s market it’s a rare buyer who can purchase a business without some form of financial help. The economy is still tough and as a result buyers have limited access to Small Business Association-backed commercial loans. Sellers willing to finance part of the sale price and have buyers pay them back with interest over time are having the best success, while also creating a nice fixed income annuity stream. Offering seller financing has the additional positive impact of showing that you have confidence in the future of your business and that you will help the new owner succeed.
- Highlight the Positive
Finally, when the time comes to meet with potential buyers, concentrate on the strong points of your business. You know the business better than anyone else and there are bound to be some areas where your business excels, so make sure you highlight those. For example, perhaps your business is established within its trade sector and known throughout the community or maybe your customer base is widely diversified, providing security against any one customer having too much leverage. Highlighting what makes your business special will make you stand out to buyers and illustrate why your business is a good investment.
Whether you are ready to take steps to sell your business today or just wanting to build value for a future sale, following the tips above will help ensure success.