What is the best way to increase the value of my company?
If you are contemplating the sale of your business, it is critical to begin thinking about its value. In the world of valuation, there are typically two separate values for each company. The first is the “academic” value. The academic value is determined by a by a professional business valuation or appraisal. The academic value is typically used in relation to questions arising from estate and gift taxation, divorce litigation, for establishing the value of partner's ownership interest for buy-sell agreements, and many other business and legal purposes.The second value is the “true market” value. The academic value is derived using an analysis that incorporates a firm's hard assets, cash flow, revenue, industry averages and multiples. The fair market value utilizes the same analysis, but also considers what buyers are really willing to pay.
Many small and mid-sized businesses have limited hard assets like equipment, vehicles, land, buildings, and inventory. Some small businesses may have no hard assets at all. Instead, the value of the company is based on a combination of intangibles such as employees, business processes, customer lists, location and business relationships and financial performance such as revenue and discretionary cash flow.
In order to maximize the fair market value of your business, it is important that intangible assets and the company’s financial statements be cultivated. The following tips will assist you in adding to the value of your company.
- Develop key employees. Generally, buyers are not interested in paying a premium for a business if the business relies on you for its success. Owners must delegate responsibility to key employees and involve your key staff members in the decision making process. If you can demonstrate that your company’s success the the result of your capable, well-trained employees and not solely you you will be able to command a higher sales price.
- Document what you do. Ensure that job descriptions, operation processes, and strategic plans are well documented. Documented records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help a potential buyer obtain financing. Also, the your business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns should be clean and well-organized.
- Build relationships. Name recognition, customer awareness and your reputation all contribute to the value of your company. When a company lacks hard assets, your relationships are that much more important. A well diversified set of vendors and customers will be attractive to potential buyers.
- Improve cash flow. Most buyers of small businesses are buying a stream of income. The income stream is used to provide a living for themselves and their family. Therefore, a potential buyer will want an accurate picture of the “true cash flow” or discretionary cash flow. Remember that the value of any investment, businesses included, is the present value of its future cash flows.
- Review your assets. When preparing your business for sale it is good practice to to divest of unproductive assets or un-salable inventory. Also, buy off or remove from your balance sheet any assets that are primarily for your personal use.
- Remodel, clean, and organize. The adage, you never get a 2nd chance to make a 1st impression is absolutely true when selling a business. So, make an effort to spruce up your place of business. Potential buyers will pay more for a clean well-maintained facility.
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