There’s a difference between generating cash and building business value that someone will be willing to pay for. Here are a few ways to boost your future purchase price and increase your business valuation:
Buyers are most comfortable when no one customer exceeds 15 percent of your revenue. Concentration on a few major clients will scare off buyers and their lenders, as one lost customer would create a sizable revenue drop.
Enjoy your success with large customers, but stay focused on expanding your customer base—particularly in the few years leading up to a sale.
Buyers won’t pay a premium if they have to rely on you for success. Build value beyond your own services and develop key staff.
Compare two plumbing companies. When you call George’s Plumbing, George himself comes out and always does a top quality job. But when you call Port City Plumbing, you could see four different plumbers on four different calls.
As great as George is, his company isn’t worth nearly as much because the business doesn’t extend beyond George.
No matter what size your company, focus on training staff prior to a sale. Step back from some of your regular activities. Give employees greater responsibility and foster new employee-client relationships.
Cash is KING. In most cases, a substantial portion of a company’s value is based on cash flows. The more discretionary cash, the more debt service a buyer can pay and the higher the purchase price can be.
Drive all income to the bottom line—the buyer wants to see the true cash flow. A few years prior to a sale, start cleaning up your financials. Make sure all revenue is recorded and eliminate personal perks buried in company financials.
While you may be saving in taxes by running expenses through your business, you could lose $3 to $6 in sale price for every $1 claimed as a business expense.
Outline the company’s market position and show how it could grow. This means spending some time working on your business, not just in it.
Consider this, if you know ten years ago what you know now what would you do differently? What would you do to grow sales and profits over the next three years,
We recently talked with private equity funds at a symposium, and they said they rarely look at companies that don’t have projections and a growth story already laid out.
Just as when you wrote your first business plan to secure financing, buyers (and their lenders) want to see the same kind of growth strategy.
Plan ahead. Begin working to add value at least three years before putting your company on the market. It can mean thousands—if not millions—of dollars in difference for you and your family.
Scott Bushkie is the Managing Partner/Founder of Cornerstone Business Services, a Lower Middle Market Boutique Investment Banking Firm serving the Midwest. Reach him at 920-436-9890 or email@example.com