First, let me state unequivocally that it is an achievement to sell a business. When you look at the number of businesses that fail within the first five years, selling your business for any amount of money is a big achievement. However, if you can sell your business as an ongoing enterprise to a person or another company who wants to continue to operate it, you’ll derive more value from that sale than if you sell your business for its assets to someone who needs your equipment and customer lists.
5 Actions to Take
Here are 5 things you can do to determine your starting point by assessing the value of your business, then strengthen your company into a viable, sustainable entity that operates without you. This will drive significantly more value for your business when you do sell it. Also, remember, if you sell your business as an ongoing enterprise, you can do so as a stock sale or an asset sale, whichever is more advantageous to you and your buyers. Typically, the sale of ongoing businesses with significant value are structured as stock sales, unless there are significant issues with legacy liabilities (i.e., pending lawsuits, environmental lawsuits, and more)
1. Engage a Business Valuation Firm or Person
- I recommend that you engage a business valuation firm or individual to value Company A. A reputable firm will provide you with a valuation based on one or an average of a few different valuation methods which may include a book value, asset-based valuation and a valuation based on the projected cash flows in comparison to industry averages. This will help you decide if you want to still “scale back” if no employee wants to buy, or if you want to offer Company A for sale to the general business buying public (customers, competitors, aspiring entrepreneur).
Examine Your Balance Sheet
- For a quick an easy valuation, look at your balance sheet. The value showing as shareholder’s equity is your book value. For an asset-based valuation, check with suppliers, equipment providers, etc. to get estimates of the current value of your assets, accounting for wear and tear. Subtract the value of all your liabilities from your asset valuations to determine the asset-based valuation. You can also look at your industry-specific multiples for companies that were sold in 2013. I’m not sure what they are for your industry. It could be owner’s cash flow, revenue, net income, EBITDA,… Compare Company A’s multiples with those of remodeling industry companies that sold in 2013.
Hire a Professional Manager
- Hire a COO or CEO. You increase the value of your business significantly when there is someone who will remain with the company who is/was a critical component of driving the success of your business. If you are that person, whoever buys your company must either insert him or herself into that role, while locking you into a two-three year agreement to ensure no knowledge is lost, or the buyer must hire someone who has no previous knowledge of your business. You sell the business, you leave. You have a professional manager on staff, that person stays. Do you see the value?
Reduce Reliance on a Large Customer and Hand off Sales Responsibility
- Reduce reliance on any one customer to under 20% and build your sales team to take over the pursuit and management of all your sales. If you are the sole person possessing all or the majority of the relationships with your top customers, then the risk that you will leave and compete against the buyer is extremely high. Even if you don’t compete, the risk that the customers will leave because whoever takes over the relationship won’t be the same is high, although not as high. You can significantly reduce this risk by assigning other management or sales team members to your customers. You only step in to help close the deal or to address issues your staff cannot.
- Furthermore, you need to reduce the reliance on one customer to below 10%. If this is not possible, lock up a long-term contract. The risk is that the customer will disappear shortly after the sale of your business, significantly reducing the company’s revenues. An astute buyer will reduce the sales price or defer payment to lessen this risk.
Craft Quarterly Financial Reports
- Craft quarterly or monthly financial reports. If you do not have audited or reviewed financials, then obtain a sizable line of credit with a bank. A bank will require that you provide monthly financial statements in order to track your compliance with the covenants in the credit line. This is critical because it is the best means to prove that you are, in fact, generating the revenue and the profits you claim. Tax returns do not tell the real story of your financial performance because revenue and expense recognition differ significantly between the tax code and GAAP. In addition, many business owners drive a number of “personal” expenses through their businesses or use tax rules to recognize a very large expense in one year instead of depreciating it over 5 to 7 years (for example).
Do these 5 things over the next one to two years and you will significantly increase the value of your company and make it much more attractive to potential buyers, whomever that buyer may be (i.e., management team member, financial buyer, strategic buyer, competitor). Increasing the value of your business increases the funds you ultimately receive for your business. Some facet of that net worth shown on your balance sheet begins your actual net worth!