Selling a Business – How to Maximize the Transaction Value
It takes many years for an entrepreneur to build and establish a small business concern. Given the time, effort, and sweat equity expended, it is critical for this business owner to be aware of the business and market drivers that are factored in performing business valuations in addition to which elements can help to maximize the transaction price. Ten of the more common factors driving business worth are detailed below.
- Prepared Financial Statements
Presenting a buyer with clean, accurate, & detailed financial statements helps to increase the confidence of both buyers and lenders not to mention assisting the owner better manage opportunities for growth & improvement. Eliminating any non-reported cash from the company is necessary as any off the books “cash” will not be factored in the business valuation.
- Stability of Earnings
Small businesses are valued on a multiple of “adjusted” income versus the earnings reported on the tax return. Establishing a stable and consistent stream of income over a three to four year period will be one of the most essential factors in maximizing the value of a business. Buyers will be more likely to compensate the sell more for the company with growing earnings and lenders will be more willing to fund the deal.
- Gross Revenue Growth
Representing to the buyer that there is recurring gross revenue from existing customers in addition to illustrating a stable and growing top line will be important to maximize the value of the company.
- Varied Client Base
Making sure that a company’s client base is spread out without a heavy percentage of gross revenue with one or two customers will help to increase the business’ going concern value. When a significant percentage of revenue rests with a handful of clients a component of risk is created for the acquirer.
- Experienced Management Team
Small companies generally lack a deep management team as they are usually managed by the owner/operator. For these business concerns, it is recommended that key staff members be thoroughly trained to manage the core elements of the company. In a variety of instances, the success of the company is hinged on the experience, industry contracts, and competency of the business owner. The business value will be enhanced when the company is being sold in those instances when the enterprise has a trained and capable staff in as buyer recognizes that this valuable knowledge is leaving with the owner. Additionally, it also mitigates the requirement for a protracted transition period encumbering the seller.
- Contracts – Customers/Vendors
Business that have customer and vendor purchase/supply contracts in place will enhance the business value. These contractual agreements provide assurance to the buyer that this company has established business that is likely to continue after the company is purchased.
- Sector Growth Forecast
Businesses residing in a sector or industry that has strong growth prospects will generate strong interest from prospective buyers and enhance the value when the company is sold. Ascertaining the industry forecasts and specific company growth and value drivers will be essential in promoting the forecasted value. It is important to keep in mind that while future growth is very important, the majority of business valuations are calculated on a historical 3 year period.
- Employee Job Descriptions & Operation Procedures Manual
Creating job descriptions for all employees as well as producing an operations/procedures manual adds tremendous value to the company. Having step-by-step instructions on the company’s procedures provides confidence to the buyer that they have adequate data on the inner workings of the business once the owner exits.
- Diverse Products & Services
Companies who have built multiple streams of revenue involving a breadth and depth of products or services assist to reduce the risk of income loss for the buyer in a transaction. While exceptions will always come up, as some companies can be very prosperous when they are the dominant product or service provider. As a general rule it is beneficial to not have all of the eggs in one basket.
- Strategic Marketing & Business Plan
There is a variety of elements involved in establishing a profitable and successful company, most of these revolve around strategic planning and the establishment of achievable goals. A strategic business plan should be viewed as a written road map typically created over a moving three year period. This document assists the owner in planning the business operations, sales forecasting, budgeting, and managerial tasks necessary to achieve the forecasted sales and earnings. This document is also a requirement by nearly every lending institution who is asked to provide capital or funding for either an acquisition.
About the Author:
Michael Fekkes is a Senior Broker at Enlign Business Brokers in Nashville, TN. Michael is a Certified Business Intermediary CBI®, a member of the International Business Brokers Association IBBA®, as well as a former business owner. He can be reached at 910.691.2202 or mfekkes@enlign.com. ENLIGN Business Brokers (www.enlign.com) is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC with regional offices in Nashville, TN and Atlanta, GA. providing business intermediary services ranging from valuation and sale to growth through acquisition strategies.
