How to Increase the Value of Your Business Before You Sell

We recently looked at the dangers of streamlining a business for the purpose of selling it. Today I’m going to discuss how to increase the value of your business long before you pass the torch on… in ways that won’t hurt it.

Have you ever wondered what makes one company more valuable than another despite the fact that they are in the same industry? I’m going to give you several points you can work toward achieving. However, the most vital component is honestly and planning years in advance. 

When I work with business owners, there is nothing that excites me more than to show them how the value of the company directly affects their net worth. According to the Exit Planning Institute, 80 to 90% of a business owner’s net worth is tied up in their business. Many times business owners, especially in the beginning stages, focus only on driving the revenue up. While profits are what one the most important factors when it comes to selling your business, it’s not the only one. Focusing solely on making income might line your pockets while you own the company. However, this won’t attract a buyer that will offer you the maximum sales price when you’re ready to transition out. The most important decision you will make as a business owner is striving to add value to your business so that you can capitalize on it later.

Get Help with a Strategy

So let’s set the thought aside, that revenue will up the value of your business because that’s simply not 100% accurate. There are advisors known as Certified Value Specialist (CVS) and Certified Exit Planning Advisors (CEPA) that exist solely to help you develop a growth strategy and execute it well so that the valuation of your business is maximized when the time comes that you’re ready to step aside. So employing the services of a CVS or CEPA could give you a better return on your investment, your business.

A private company is not valued the same as a public company and there are many reasons. However, the cost of capital is one of the main factors responsible for this disparity. Currently, the price per earnings ratio (PE Ratio) is 15 -30% depending on market cap. A private company just is not going to beat that. So, let’s say, for example, we have these two private companies that are similar to each other in the products and services they provide. However, one ends up more valuable…why?

Why is One Company More Valuable Than Another?

For starters, a company that has a more robust product development program is going to be more valuable than a company that doesn’t. If one company’s equipment is state-of-the-art, while the other still has its original equipment in place, the latter’s value will suffer. When it comes to management, the company with the deep bench, or more experienced team, will be more valuable. On the other hand, the thin, inexperienced or non-existent management team has little value compared to the former.

Additionally, a strategic plan or a highly developed strategy that shows a projected future for the company increases value. It shows where the company is going and provides a map of how is it getting there. A company that has all this laid out is going to be far more valuable than one with no blueprint and is tossed around by the wind.

Another key component is the information system. If you have a state-of-the-art information system like a CRM which controls all your prospects and clients, your company will look more valuable than that of one with an old antiquated system. If there is a highly disciplined financial reporting system or an audited financial statement, this one will be far more valuable than one lacking a good, reliable financial statement. Businesses that operate out of a shoe box or on the back of a napkin just aren’t going to bring the same amount as those that have their finances in order.

LEAN

If there are LEAN initiatives in place, where the company manages to cut waste while increasing efficiency, then the company with a fully developed, implemented program will likely outperform the business with no initiative program. That’s going to enhance the value of that company tremendously. When a buyer looks at a company, which do you think they will want to buy – the one that managed to implement LEAN with great success, or the one just muddling through?

Sustainability is also a key factor. Buyers are looking at a company and asking questions like:

• Are they an industry leader?
• Did they build this company to be sustainable?
• Or do the company dynamics hinge on the presence of the current business owner?

Basically, if you are the owner, operator, chief bottle washer, chauffeur, everything and every phone call comes directly to you then your company is not nearly as valuable as a company which is leading the industry and has sustainability in place. If your company regularly trains employees, then you’re more valuable. Whereas a company that isn’t and has no plan to do so will not be that valuable.

EBITDA

So, we know that many times companies transact or trade in a range of three to seven times EBITDA. According to Corporate Value Metrics, about 71% of companies transact between about 4.5 times EBITDA to 7.7 times EBITDA.

Let’s say, the two companies we’re talking about, the EBITDA of each is one million dollars. The range of these companies is between 4.5 to 7.7. That means we are dealing with a $3.3 million dollar swing in the value of the companies. So, a business that is not operating efficiently, where the owner didn’t invest in the value of the company, may sell for $4.5 million. On the other hand, the business owner that did invest and built an incredibly strong company may sell for $7.7 million or greater. If an owner is living a luxurious lifestyle off the profits, well, that owner may not even get $4.5 million. They may end up with a much lower number like $2 million.

RECOMMENDED READING: Everything You Need to Know about Business Valuation

So, if your goal is to increase the value of your business, then there are many points to gauge the value of your company. No matter how you measure it, the bottom line is this – if you strive to grow the value of your company, the company’s value should increase. However, if you just attempt to gain income, many times, the value may not increase. No doubt income is a measurement of value. But many times, it is the intangible assets that drive the value up for our eventual exit.