In this article, OnPoint Advisory
Gold Coast Business Accountants, will discuss ten ideas to maximise the value of your business.
Realizing the maximum value for a business when it sells is the goal of all business owners.
Businesses value can exist separately and apart from its owners. This occurs when there are processes, methods, products, property rights or anything else that allows the business to continue without its current owners.
The ten ideas below will give you a guide to help you see if you are on the right path:
1. Have a Stable Management Team
A business with a solid management team, allowing for important activities to operate autonomous of the owner, will command a higher price.
The stability and knowledge of the management team are an extremely important part of the valuation review by a potential buyer.
If most of the main relationships between the business and suppliers / customers, buyers will factor this risk into the valuation or the deal the proposed deal. Part of the proposed purchase price may become contingent on the owner staying with the business for a period to help continuing customer relationships as part of the hand over process.
2. Demonstrate Sustainability of Earnings
Revenue and earnings that have been steadily growing over several years, versus earnings that fluctuate dramatically, will improve the business valuation.
Year over year growth shows a solid business that is attracting new customers and/or market share. Big fluctuations in sales typically indicate that either the businesses products may be subject to outside factors, or the business has experienced other issues, which could indicate that management may not be stable.
It makes sense to have a written plan detailing future growth and how that growth will be achieved based on industry information, increased demand for the company’s products, new product lines, market plans and growth via acquisition.
3. Systems and Procedures
The amount of goodwill that a buyer is willing to include in the purchase price will be dependent upon systems and procedures.
A business must exist separate from the daily involvement of the business owner to create goodwill. If the owner is seldom away from the business for any length of time, buyers will question the strength of the procedures, systems, and the management team.
4. Maintain Excellent Financial Records
Poor financials are a concern for both buyers and lenders. Business Valuation will be based primarily upon the numbers and the more reliable the financial statements
, the more chance they will hold up in due diligence.
5. Keep Personal Expenses Paid by the Business to a Minimum.
When the financials are clean with little “add backs” related to the business owner’s personal expenses, potential buyers and lenders have higher faith in the numbers.
6. Transition Planning
When a seller has a definite plan to “phase out”
of the business over a period of time, a potential buyer will recognize that sound planning and thought has gone into the process.
Developing a transition plan will often generate excellent suggestions for improvement in management’s role in the everyday operations of the business. Many business owners should begin this process by outlining their job description, This will highlight functions that should be delegated more to their management.
Having a concentration of customers
is often a detriment to the value of a business. When the sale to any one customer accounts for a significant part of the sale for the business, the business will be valued down. If you were to lose this one customer, what impact will it have on the business? Working to diversify the customer base will result in a significant increase in the value of the business.
8. Solid Reputation
People looking to acquire a business are constantly searching for “industry leader”. These people now have a wealth of information and feedback about the business at their fingertips, thanks to a multitude of websites where customer can leave comments and feedback about the business.
9. Diversified Suppliers
A for having only a small concentration of customers can be a problem to a business, so can also having a limited number of suppliers. Many businesses buy from multiple sources just to manage the risk that if one supplier experiences a shortages or interruptions in supply, they have a fall back provider. “What happens if…” is a typical question a buyer may ask – and many sellers do not have a ready answer for that question.
10. Secured Premises
A business may or may not be dependent upon its location, but a buyer will not want to take the risk of moving the business right after the purchase. The business should have the right to remain in their current facility for at least 3 – 5 years through an existing lease, or ownership of the building. If the lease is about to expire, and the buyer will have to renegotiate the lease right after settlement, this situation creates uncertainty for the buyer, which will reduce the valuation. Lease options are an excellent method to remove this uncertainty, whereby the business has the right, but not the obligation to extend their lease beyond the current term.
If you want to learn more about how to improve your business value, contact us today