But behind these powerful drivers should be a consideration of your exit plan and how day to day management issues will affect the value of your business when that time comes.
There are many variables and ways to value a business but, here are some key ways you can start to drive that value up.
(1) Increase the bottom line
A simple mechanism for valuing a business is the EBITDA multiple. Agreeing an appropriate multiple is part of the negotiation but, if your multiple is x10, you dont have to be a rocket scientist to ascertain that every 1 you add to the bottom line, has a significant impact on value.
Driving that bottom line is affected by many variables but issues that businesses areas you can think about now include being confident with your pricing strategy and dont undercharge, being aware of profitability of each line and ditch those not doing the numbers as well as maintaining a ruthless eye on costs.
(2) Build recurring revenue streams
Buyers see risk everywhere, particularly with small businesses. Create forward visibility of earnings with recurring revenue streams that start ironing out the risk profile.
(3) Anchor key employees
The more you anchor key employees and deliver a stable workforce, the better chance you have of getting a great deal.
The culture you’re creating within the company will dictate how the employees feel about the business but is that culture you or embedded within the fabric of your business How can you ensure that employees remain committed to the business after you exit Without anchoring key employees, the value of your business might suffer.
(4) Creating barriers to entry
How easy is it for competitors and new entrants to make a big dent in your sales What can you build that makes it more difficult to poach clients and eat into your market share
Look at these barriers. Proprietorial technology and locking in high performing employees through to developing key strategic partnerships are great ways to really strengthen your position.
Why should you clear out skeletons What should you do with regards to due diligence Should you stay involved in your business Read more tips on the next page…
(5) Clear out skeletons
Clear out, settle, remove any ongoing issues with litigation, employee disputes, uncertain liabilities or supplier issues. Whatever they are, and however painful they might be to deal with, deal with them. By not doing so, theyre eating into your focus and almost certainly putting a dent into your value.
(6) Upfront due diligence
This is the phase where a buyer gets under the bonnet of your business, to ascertain the operating truth. So, if due diligence goes wrong then, at best you might suffer a price chip, at worst, a collapsed deal and heavy costs.
The smart business owner thinks about these risks in advance and the really smart business owners conduct their own upfront due diligence providing buyers with a ready made document.
(7) Get out of your own business
A common reason for losing value or even a deal itself, is owner dependency. Build a management team and systems that enable the business to perform as well, if not better, with you out of it.
Get your business into the position where you can take a long holiday, without it impacting its ongoing performance.
(8) Eliminate non-core expenses
Its common for smaller businesses to be lifestyle businesses. While you can camouflage this by creating an “adjusted net profit”, it provides another pinch point for negotiation and potential derailment. Clear out non-core expenses, make the business lean, show that it’s managed for profit, not family.
(9) Diversify product mix and customer base
A narrow mix of products or eggs in one customer basket leads to a big risk to a buyer. Diversify both elements so the business can better absorb unexpected events.
(10) Know your customer
Finally, what do your customers really think of your business Do you know” An active CRM policy of market feedback, viral word of mouth and customer engagement means you’re talking to your customer and understanding their needs.
Providing evidence of this market nous and valuable customer community will further nail your value and future potential to a buyer.
Andrew Weaver is CEO of LawyerFair.
