We often get asked by owners about what they can do now to maximize the future sale value of their business. Here are five general areas where an owner can create exceptional value outside of the more traditional ways of doing so.
Calculation of business enterprise value consists of many factors and inputs, both internal and external. However, most variables fall under two primary categories: (1) estimated future cash flows and (2) future risk factors. Owners tend to focus on the more traditional drivers of value such as increasing sales, profit margins, and reducing expenses. What they many times overlook is the value created from reducing future risk, which can result in receiving a premium value when one decides to sell their business.
Actions an owner should take now to ensure they command a premium price from a buyer are summarized here:
#1 DEPTH & BREADTH OF MANAGEMENT TEAM
- Minimize your role as the center of the universe. The buyer must know the business will continue to succeed without you
- Develop leadership, skills and knowledge below owner
- Retain and motivate teams in place with employment agreements, incentives
#2 WELL-DEVELOPED, DOCUMENTED BUSINESS SYSTEMS
- Organize records, documents, files, processes
- Ensure financials, tax returns, board minutes are accurate; filed timely
- Document and organize customer, supplier, and employee agreements
- Establish operating and IT systems/procedures sufficient to sustain growth
- Maintain/update shareholders’ and Buy-Sell Agreements among owners
#3 DIVERSIFIED CUSTOMER BASE DELIVERING RECURRING REVENUES
- Mitigate customer concentration issues
- Focus on customer retention showing recurring revenue base
- Place emphasis on large, growing market; understand economic cycles
- Try to secure long-term contractual agreements
- Define your market leadership and keep updating marketing plan
#4 PRODUCT/SERVICE MIX AND DIFFERENTIATION
- Develop wide array of products and services which are unique and not easily replicated
- Keep up with and invest in technological advances
- Fix any supplier strangulation issues
- Emphasize Delivery, Execution, Service
#5 SUSTAINABLE, “DISTINCTIVE” ADVANTAGE
- Develop/enhance brand recognition among products/services
- Create barriers to entry for competitors; defensible deliverables
- Establish proprietary processes/technology to distinguish yourself from commoditization
- Secure trademarks, patents, copyrights, trade names/secrets
Aside from the premium sale value you will receive for mitigating future risk of revenue and business loss, you should discover that the process actually leads to extraordinary growth of revenues, profit margin and expense efficiencies. You may be asking yourself – how did that happen!
Written by Steve Zacharias, Managing Partner at Transact Capital. Please contact Transact Capital if you would like to meet or zoom to discuss this topic further. All communication would be held in strict confidence and with absolutely no cost or obligation. 804.612.7102. www.TransactCapital.com.