Learn how to maximize business value before selling so that your company or business is attractive to potential buyers and will fetch a good sales price. While there are different ways to value a company, there are key factors that buyers are looking for in an investment regardless of the type of business they’re buying. The following criteria provide a roadmap for how to add value to your business.
Present all business infrastructure in good working order
A business that shows well, sells well. Much like selling a home, businesses need curb appeal too!
The physical appearance of your business — both exterior and interior — is important. Improving and updating the overall appearance, as well as investing in operational system improvements help demonstrate that the business supports continuous growth and pride of ownership.
Shoddy upkeep, outdated technology, or disorganized stockrooms may give potential buyers a reason to pass on the sale or will play a factor in sales price negotiations, with buyers looking to offset costs associated with bringing the business up to better aesthetic and functional standards.
Demonstrate profitability with provable books and records
Every buyer will expect to verify financial details and records. The buyer will be given access to these records during the due diligence process, which happens after an offer to purchase is completed and accepted by both the buyer and seller. Typically the due diligence review is completed by the seller’s financial advisor or chartered personal accountant (CPA).
When determining the profitability of the company, the financial advisor will assess: the pre-tax earnings of the business before non-cash expenses, one owner’s compensation, interest expenses or income, as well as one-time and non business-related income and expense items. If there are additional owners working in the business, their compensation will need to be adjusted to market rates. It is also common practice to add back any interest paid and depreciation on equipment during the period of time being analyzed.
Determine a reasonable price and terms of sale
While not directly tied to adding value to a business before selling, establishing an appropriate price and sales terms is one of the most important things you can do to make your business attractive to serious buyers.
A Broker’s Opinion of Market Valuation (BOMV) will review current and accurate information on your business and assess the value of your business based on assets, as well as market and income approaches. A fair asking price will be mutually agreed upon and based on a weighted average of several industry methods. Buyers will also evaluate their return on investment (ROI) to establish if the price and terms are reasonable, based on the amount of time it takes to recoup their investment.
Offer a transferable lease
Buyers are typically looking for the property lease to be assigned at the current operating cost of the current tenant. If the lease is not assignable to a new business owner, then a new lease must be negotiated, typically at market rates.
Prior to selling the business, clarify the terms of the lease and be transparent from the outset. If possible, a transferable lease will be more desirable to potential buyers.
Include a non-compete covenant
Buyers will want some assurance that you’re not planning to open up shop a few doors down and take your customers with you — particularly for retail or restaurant businesses.
When presenting the terms of sale, it helps to include a non-compete clause that outlines that you, the seller, will not be in direct competition with the new owner within a certain distance of the business for a specified period of time. This is important to buyers who want assurances that they are acquiring your customer base as part of the sale.
The five tips above will certainly help add value to your business before selling, but the key is to continue to do the things that strengthened and built your business from the start. Don’t veer off your successful path just because you’re planning your exit! Stay the course and continue to make improvements and find ways to increase sales while reducing expenses — all of which will help boost the efficiency, desirability, and value of your company.
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