After years of dedication and investing the majority of their wealth in their company, no business owner wants to settle for less than the full value of his or her business. According to a study by the Small Business Administration (SBA), many owners are counting on their company to provide a nest egg for retirement. When they decide to sell the business, owners need to maximize the company’s value to generate the greatest opportunity for liquidity on one of their largest assets.
Another study by the SBA showed that small business owners plan on retiring at age 72 on average, compared to the average age of 68 for non-owners. A number of factors contribute to identifying the right time to sell a business. If business owners could exit the business sooner than later, they can create more leeway when it comes to selecting buyers.
Interested in learning more about the importance of pursuing a valuation? Flip through the SlideShare below:
Here are four ways to increase a company’s valuation before a sale:
1. Increase profitability
While the goal of every business is to increase profits over time, special attention should be paid to demonstrate to potential buyers the current profitability of the enterprise and its projected growth. Reducing overhead and improving efficiencies are surefire ways to increase the value of the company. In addition, owners should identify key growth markets to show buyers that the company has the potential to expand and continue to boost profits.
2. Develop recurring revenue agreements
Finding new clients and establishing sales agreements, or shoring up pending customer and vendor contracts, will help potential buyers understand the company’s revenue trends. Understanding how and when a business makes money must be clearly demonstrated to potential buyers, which often entails using generally accepted accounting principles (GAAP).
“Buyers want to know the best possible people are in charge.”
3. Build a dream team
Buyers want to know the best possible people are in charge of the company. Business owners may need to either hire new talent, shuffle around the existing management team, and possibly evaluate their recruitment, training and retention practices. Since the owner wants to maximize the company’s value, they may want to consider offering stock options or other plans designed to act as golden handcuffs to members of the executive team in order to remain with the company long term. In other situations, owners may have to “promote” themselves to a new position, like Chairman of the Board, to open up a seat for a new CEO.
4. Perform sell-side due diligence
Any serious buyer will go through the due diligence process to obtain a realistic valuation of the company and establish its assets and liabilities while analyzing its potential for continued success. Middle Market Growth recommended that sellers also go through the due diligence process as buyers. This will provide a consistent and validated figure of earnings before interest, taxes, depreciation and amortization (EBITDA) that investors are likely to bid on, which reduces the chance of receiving disappointing offers while identifying serious buyers.