Exit with Style, Grace, and More Money
The top questions business owners ask me (regarding the value and sale of their business) are:
- What’s my business worth?
- What’s the multiple (of earnings) for my business?
- What can I do to increase my company’s value?
The first two receive the answer, “I don’t know, but if I can ask you some questions about the business, I can give you a guesstimate.” The third question is easy to answer.
The three key value drivers
I’ve always stated the top three things an owner can do are, in no particular order:
- Reduce dependencies, especially on the owner.
What’s a dependency? The category includes customer concentration, one primary supplier with limited alternatives, specialized and hard-to-replace employees, one key machine, and the big one, an irreplaceable owner. If the owner is the only one who can (fill in the blank here) finalize the bids, program the machine, has all the key customer relationships, design the products, or anything similar, a buyer will discount the value or choose not to buy the business. The goal of every owner should be to make yourself invisible to the operation. Go to New Zealand for a month and business is better when you return than it was when you left. That’s value creation (but maybe not so good for the ego).
- Show, not just say, you can grow.
One thing every business buyer, from individuals to private equity, to strategic buyers has heard from sellers is about how easy it will be to grow the business (and therefore, pay me for that growth upfront). The solution to this is to prove you can grow and all it takes is to actually do it. Document your strategy and tactics, record your activities, and grow. Buyers and banks ask for three to five years of financial statements. Show three to five years of growth, top and bottom line, and your value will increase.
- Have solid financial systems and, therefore, accurate financial statements.
The weak step-sister, to all other parts, of a small business, is the accounting department. Small business accounting too often is ignored. One owner said to me, “the numbers must be right, they came from QuickBooks.”There was a nice business recently on the market in Seattle. The owner claimed their earnings were $1.5 million but couldn’t prove it. A sophisticated buyer brought in their financial people, tore the books apart, and killed the deal. On the opposite end of the spectrum, a former client told me he has audited statements just to justify everything when he sells.
Bonus value drivers
- Demonstrate you can attract and retain good employees.
Since 2015 it’s been tough to find people. From restaurants to construction to manufacturing and especially any sales position, it’s ridiculously hard to find good employees. If you can show (and prove) a high employee retention rate, your company is more valuable than otherwise. Years ago I was hired to renegotiate a buy-sell deal, post-close. The bottom line was the buyer did sloppy due diligence but didn’t want to admit it. The company’s selling memorandum said they had unprecedented loyalty. Looking at the employee roster showed an almost complete turnover of people over the prior two years (before the sale), three different GMs, and the last one on the job for three months. Just looking at this information would have lowered the price. Prove it, don’t just say it.
- Stay up to date. Make sure your hardware and software are up-to-date, all products are legal, and security is tight. Every business buyer (justifiably) fears they’ll be replacing technology sooner versus later.