If you hope to sell your business someday – even far into the future – the time to think about increasing its value is now, not when you decide to put it up for sale. CPAs and business brokers say that too many business owners are shocked to find out the business they’ve been building for years isn’t worth nearly as much as they thought. But there are things that you can do along the way to boost the value of your business, and make it more attractive to potential buyers.
Here are 10 ways to make your business more valuable:
1. Don’t let it be just you.
Many small businesses suffer from the all-controlling owner who not only knows how to do everything but also insists on being part of everything. But overreliance on a single individual – you or anyone else – can be a red flag to potential buyers if the shoes they have to fill appear too big, or it appears that the business model itself can’t stand on its own.
2. Avoid excessive customer concentration.
Buyers dislike seeing a small number of key customers accounting for the bulk of sales. Work to diversify your customer base – by size, numbers, geographically and other factors. You should also know that if you have a highly concentrated customer list when your business sells, you may be asked to include a so-called “erosion clause” in the deal that lowers the price if a top customer leaves.
3. Keep financial statements and tax returns in line.
It’s vital to have good accounting systems and financial safeguards in place, and to keep accurate records and statements. Any buyers will want to examine these records as part of a due diligence process. Also try to avoid adjustments or add-backs, which don’t look good.
4. Don’t be too dependent on a key employee.
It’s not unusual for a small company to encounter problems if a top salesperson leaves and takes along some key accounts. The problem can also arise with a technical expert, machine operator or “indispensable” office manager.
5. Negotiate the right kind of lease.
You might think a month-to-month lease is great because it offers flexibility. But buyers and banks think more about how expensive it is to move a business. In fact, for other than professional type businesses, banks are reluctant to lend for longer than the term of a lease, including options. No lease can mean no sale.
6. Keep your technology up to date.
Use the expertise you have in your industry to get technology up-to-speed, show increased efficiencies (and profits) and sell for a higher price. A business that seems stuck in the technological past will be a turnoff to potential buyers.
7. Avoid any “off the books” cash.
There isn’t a CPA around who will let a business buyer pay a price based on unreported cash. Don’t consider this part of the value of your business.
8. Grow your revenues.
This one’s rather obvious, but true. A business doing $500,000 in sales won’t sell for the same multiple of profits as a similar business doing $5 million. There are simply more risk factors associated with a smaller business. A minor hiccup to a larger operation can be a major disruption to a smaller one.
9. Keep business and personal matters separate.
Many small business owners have received lower prices or haven’t been able to sell a business at all because they’ve co-mingled their personal and business finances. Sure, it’s sometimes easier to pay for things out of your own pocket, or have your business cover expenses that are really personal in nature in order to get the tax write-off. But, the bottom line is that banks and buyers want to see profits. Show a lot of profit, pay some tax and it will come back to you in multiples when it comes time to sell.
10. Make it a business, not a 24/7 commitment.
Maybe you’re willing to work all the time, but most buyers aren’t. They may not have the same passion for your product or service; instead they have business skills to leverage what you’ve done. Hire employees and learn to delegate.
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