Even if you have no plans to sell your business in the near future, building a business that is highly saleable and running it like you are going to eventually sell it will grow a strong business. Most business owners want their company to be successful; that’s why we entrepreneurs work so tirelessly to build our own businesses. We believe in our product or service so much that we dedicate our lives to it and go for it.
When it is time to exit your business, you want to be rewarded for all of your hard work and years of dedication. So, there are some great things you can implement and work on now, in order to build the most valuable business. The value here we are talking about is transferable value. This transferable value is what the business is worth to someone else with the current owner no longer part of the business (what it is worth to a potential buyer). Here are our best suggestions for how business owners can build transferable value in their business now.
Established and Documented Processes and Procedures
One of the most overlooked part of having a strong and valuable business is documenting all of the business’s processes and procedures. Most owners get so busy with the day-to -day operation and growing the business that they often don’t have time to document everything. However, it’s something that creates amazing transferrable value when the time comes to change ownership. Examples of these documents are a company handbook or training manuals for each role in the business.
If you, the company owner, don’t have the time or expertise to create all of these documented processes and procedures, then give ownership of it to your key employees in each role. Have them document how to do their job, and outline each of their responsibilities with details on how to carry out each task. Then you can compile each of these resources to use for training future new hires in those specific roles or use in an eventual handover of ownership. Make sure to keep these documents updated as things evolve and change in your business. They should be living documents that are consistently referred to and utilized regularly.
Management Structure and Trained Employees
One of the main things that today’s business buyer is looking for in a company that they purchase is some kind of management structure or employee hierarchy in place. They want to walk into a business that is ready to go on day one and could even operate without them as a necessary part of the day-to-day operation. The more you, the business owner, can take yourself out of working IN the business, the more valuable and salable your company will be. Furthermore, if you had to step away for a moment due to health reasons or you took an extended vacation, your business would continue to operate as normal for a period of time without you there. That would be a huge weight off your shoulders, and is another good reason to remove yourself as a necessary piece of the operational puzzle. Train managers or key employees to carry out your daily responsibilities and delegate some of your tasks to another member of your team. Focus more of your work ON your business. What are some of the things that you can do to drive it forward or take it to the next level? How can you make your company even better than it is now?
Diverse Customer Base
One of the biggest mistakes a business can make is putting all of its eggs in one basket. When that basket is just one customer who makes up the majority of your sales, what happens if you lose that client or account? Your business is in big trouble. That’s why it’s supremely important to make sure you have the most diverse customer base possible, with the percentage that you do business with them spread as evenly as it can be. You want to set yourself up so that if you do end up losing a customer from time to time that you have plenty more to make up for that lost business. So many business owners celebrate when they land a huge contract or finally win over that big client, but that revenue can be lost just as quickly as it was gained. So, it’s important to keep up your sales activity, and always be working to attract more clients so you can keep adding to your current customer base.
This question comes up during the due diligence period in almost every business sale transaction that we handle. The buyer will want to know how many of the business's customers make up more than 10% of their revenue, for example. They will also want to know if you have any customers or accounts that represent the majority of your sales. If you only have a few customers and they each make up a large percentage of your revenue, that will be a definite red flag to a buyer. What happens if one of those customers is lost? Suddenly the business isn’t making the owner benefit it once was, and the value of the business has decreased dramatically. That’s how having a diverse and healthy customer base directly relates to the value of your business. So, if your business only has one or two key clients that drive most of your sales, it’s time to draw up a plan to diversify and grow your client base.
Year on Year Recurring Revenue
How much you are making in annual owner benefit translates most directly to how much your business is actually worth. So, we couldn’t talk about increasing your business’s value without touching on the financials. One of the financial aspects that is going to make your business the most valuable is consistent or increasing revenue amounts year on year. Coupled with expenses that are reasonable and as minimal as possible, this is what will make your owner benefit as good as it can possibly be. Buyers want to see a track record of financial success, year over year. Getting your bottom line to a place where it is steadily increasing or at the very least staying consistent for the past 3-5 years is the ideal situation to see the most value.
Clean and Accurate Financial Records
In addition to showing strong revenue and owner benefit numbers consistently year after year, a business who’s books are clean and accurate is going to be much more valuable to a buyer than a business who’s financial records are a bit of a mess. In order to clean up your books and add the most value as possible here, at least 3 years before you are ready to list your business for sale, you will want to scale back on running your personal expenses through the business, as much as possible.
Most small business owners try to minimize their tax liability, so they find all the ways they can to run personal expenses through the business. This is something that we are all well aware of and are prepared for, and that’s why your business broker will do what’s called a financial recast. This recast essentially adds back all of those expenses that are not essential to the operation of the business. That way a buyer can see the true owner benefit. However, to get the most value possible, the goal is to have the most minimal add-backs on your financial recast as possible. That instills buyer confidence, and it makes the due diligence period much easier for both parties, since there aren’t a bunch of expenses that the seller must prove are actually personal. We’ve seen it all, from home mortgages being paid as rent, to family car payments being paid for as company vehicles. This just makes your business’s financials quite messy.
So, when the time comes to prepare for a sale, in order to maximize your transferrable value and your desirability to buyers, clean up those expenses. You want your books to be as accurate as possible, reflecting exactly what the business is bringing in and spending. Clean and accurate books give the buyer a true picture of the business and it makes the whole selling process much smoother.
Scalability and Growth Potential
One last thing that you can do to add value to your business is to identify ways that you can scale your business and map out its potential for growth. This will add value in terms of perceived value from the buyer. There is an old saying in the business sales industry. “The buyer pays for the past (the purchase price is based on past financial performance), but the buyer buys the business for the future (the potential for growth).” You as the seller want to make it very clear to a buyer where they could expand and scale up or out. Be prepared to share this with them, and be ready for them to ask you why you haven’t done this yet. Make your story compelling, but honest. Give them the ideas that you’ve had to take this business to the next level, and hopefully they will be able to picture themselves taking the reins and leading the company to new heights.
Buyers are looking for a business that has been performing well historically, but that is the safety net of buying an existing business. They will want to find a business that they feel can grow and expand with them at the helm. That is where they will see value in your business, so prepare your business for scalability. Put processes and procedures in place that will lend themselves beautifully to scaling up. Train employees to be ready to open new locations or cover more territory. Get the business in tip-top shape, so it is ready to fly when a new owner comes along.