By following a few basic principles you can create the kind of value that truly attracts buyers. To maximise value and sell at the price you want, you’ll need to demonstrate profitability, identify potential and reduce risk. Read on for our quick guide to creating value for buyers.
Maximise your Business Value
As obvious as it seems, it’s vital to remember that for buyers, value is all about the balance between opportunity and risk. This means that you should aim to present your business as an opportunity for stronger growth and less risk than similar businesses on the market. Get this right and buyers will have every reason to offer a premium price.
It’s also important to bear in mind how you present your intangible assets. Customer contracts and relationships, a strong brand, unique intellectual property and future potential are where buyers see real value. If you take the time to spruce up your business, boost profitability and mitigate risk, you could increase its value even more.
Broadcast the Benefits
In Part 3 of this series, we spoke about how businesses offer different kinds of value to different buyers and how a high synergistic value often translates into a higher price.
Make sure that potential buyers are made aware of the value of your business, both during negotiations and through marketing materials. Some of the most important areas to highlight are your business’s competitive advantage, growth potential and possible synergies.
- Competitive advantage: Be clear about what makes your business stand out from the rest. Draw attention to benefits such as exclusive products or concepts, flagship customers, a strong brand and a desirable location.
- Growth potential: Most buyers use future earnings potential to work out the value of a business, so make sure to emphasise prospective growth opportunities such as new stores opening or expanding services.
Synergies: Buyers are often attracted to synergies between businesses on the market and their existing businesses. These could be cost synergies (removing role duplication and logistics cost savings, for example) or revenue synergies (access to new customers and adding new capabilities, for example).
Step up before you step out
It’s all too easy for potential buyers to see when business owners have lost focus and commitment to their business before selling. An ailing customer list, disengaged staff and ageing assets are uninviting and translate into lower offers.
Make sure that your dedication shines through to the end by taking steps such as incentivising staff, offloading obsolete stock and cleaning up warehouses. Also, upgrade any systems or processes that could improve efficiency and address structural or cultural obstacles for better performance.
Chances are you already know what needs to be done to take your business up a notch. If not, contract an external advisor to work out a business improvement strategy.
Improve Profitability
A common way for buyers to calculate the sale price of a business is as a multiple of EBIT (earnings before interest and tax). Boosting profits by increasing revenues and decreasing costs will add measurable value in the run-up to the sale. A consistently healthy EBIT gives buyers the confidence they need to commit.
Increasing revenue could mean expanding your customer base, rethinking your pricing strategy or upselling to existing customers.
Decreasing costs might include renegotiating supplier contracts, restructuring your organisation or increasing labour efficiency.
For best results, increased earnings should be genuine, not just short-term “window dressing”. Better earnings should not come at the cost of customer service or harm staff morale or your business’s reputation – this will lead to a reduction in your business’s value.
Reduce risk
Although most buyers are risk-averse, you can help make their decision easier by reducing or removing potential risks.
Retaining key customers, staff and suppliers is vital for the new owner. Unlike hard assets, however, relationships cannot simply be transferred. To reassure buyers, show how you nurture people, making buyers aware that you intend to help transition relationships. To reduce the impact of staff leaving, record the responsibilities and functions of each role and document every policy, procedure and rule.
Have a clear plan in place to make yourself gradually redundant if a sale takes place by handing over your responsibilities to other managers or appointing a CEO. Alternatively, work out a clear transition plan so the buyer can be confident there will be no loss of relationships or productivity when you exit.
As outlined in Part 4, up-to-date paperwork is important too. Formalise any informal supplier or customer agreements and ensure that your tax records are complete. Sort out outstanding legal or OH&S issues and have up to five years of financial accounts ready.
Additionally, you can talk to your advisor about retaining an appropriate level of working capital. We will discuss this in more detail in Part 6 of this series.
Start now
As you can see, grooming your business to maximise its value can take several years and may involve structural changes. So, start now. In this way, you’ll reap the rewards of improved profitability and reduced risk both before you sell and when you exit.