Could you be ‘underselling’ your business?
If you’re considering selling your business in the near or distant future, it pays big dividends to do it in an organised and planned manner. What we hear very often is people who get sick of running their business… throw their hands in the air and say “I want out of this business ASAP!!”
It’s understandable to get frustrated, as a business owner, with all the balls you have to keep in their air at once. However if you want to maximise your return on investment for all your time and effort you need to run your business constantly as if it’s ready to sell.
One of our CFOs recently made a comment to me about a client he worked with over a long period. “It’s too late to get ‘Exit Ready’ when you’re ready to Exit!” You need to start at least two years before. He helped one of his clients to run their business as if they were preparing it for sale all the time… When the opportunity arose i.e. when a good potential buyer approached them at the right time, they were able to realise a much better sale price than they could have ever have dreamed of!
If you’re wondering what you can do to run your business as if it was ready for sale all the time… Here are a few pointers:
- Financial Information
Ensure your financials are in order constantly. You need this for yourself in order to properly run your business and your lenders/investors will have much more confidence if they get good quality and timely financial information.
If your Profit & Loss shows declining revenue and profitability, this will not be attractive to a potential buyer. They will want a discount to compensate for what they see as a potential risk. You don’t want to give any reason for discounting. Get it sorted out now so that you benefit from the additional profitability… not the buyer.
- Systems and Processes
If you’re very closely linked to your business, it’s highly likely that it relies a lot on you being there. If you want to sell your business, you must create a situation where it can operate without you. The answer to this is documented procedures and systems. You need to get the knowledge out of your head and into a system. Systems make it so much easier to not only sell your business… but to run it now. Your team will have the benefit of clear guidelines on how the business runs, as well as a system to add to with improvements.
- Management team
A solid, experienced and committed team is an asset to a potential buyer. They don’t want to come in and have to learn and understand every little detail of how the business works.
This means running good HR management. Ensuring all team members have a proper job description and regular HR reviews. An ‘Organisation Chart’ is a great way to get started to ensure everyone is working on the right things and job descriptions work together and not across each other.
Understanding how your business is valued
Depending on the type of business you’re in, there may be various valuation methods.
One example is based on a multiple of EBITDA (profitability before interest, tax, deprecation and amortisation… In plain English!)
There are two important factors to consider here being profitability and the multiple. Profitability is obviously impacted by your revenue less costs and overheads. The multiple is impacted by a huge number of factors.
Just some of these factors relate to your:
- Product/service and risks associated with obsolescence and environmental impact.
- Market share and competitive advantages.
- Marketing effectiveness.
- Sales conversion rate and pipeline management.
- Operational efficiency.
- Team effectiveness and satisfaction.
- Customer service, retention and churn rate.
- Potential litigation or penalties pending against you.
And the list goes on! As you can see there’s a lot to consider from a potential buyer’s perspective and you need to be able to answer all their questions.
The key to achieving a good sale price is to have control of all these factors constantly. It may seem like a herculean task to get all this in order, but if you give yourself a few years to do it, it’s much less daunting and a valuable use of your time.
The potential risk of not getting everything in order before you embark upon sale negotiations is undervaluing your business. If you’re dealing with a sophisticated buyer, they will look for every possible discount opportunity and you don’t want to put yourself in this position.
The best place to start is with a Business Valuation, so you know what your business is worth now and you can use this as a starting point towards what you ultimately want to achieve as a sale price. I don’t mean a quick and cheap valuation done on a spreadsheet… A proper valuation that is calculated in a scientific way and would hold up in court if necessary.
If you’d like to have a chat with a CFO about how you can prepare your business for an excellent sale price click here to arrange an appointment.
