How do you raise the value of your business? How do you create more value when you plan to sell your business? Whenever I meet with business owners, I’m always asked two questions; How much is my business worth and how do I raise the value of my business?
This week, we address that second question. Over the next several weeks, I plan to bring in a guest expert to share some perspectives on how to come up with a value for your business. If you’re thinking about selling your business, it is critical to understand how to increase the value of your business so you get all you can out of it when you sell. For many entrepreneurs, they have invested their lives in their business, but don’t understand what makes a business valuable to a potential buyer. I have been involved in over seventy business buy transactions in my life and share what I’ve learned over the past 27 years.
When a buyer is buying a business, they look for several key attributes:
- Strong management team
- Organic growth
- Strong partnerships
- Good financial practices
Let’s look at each one of these attributes and see how your business does on these key attributes. Every buyer I’ve ever worked with puts a premium on a strong management team. Without good leadership an organization cannot succeed in the market. Even the best ideas need someone to implement them. Your team should be good managers. Many successful organizations have a strong founder but the value in the organization is the individuals in the key areas of the business. Since many founders leave their organizations after 18-24 months, it is critical that they have depth across their organization. While we’re talking about leadership teams, the other key aspect I look for is how committed the other leaders are to being successful for the next generation of leadership. Are the agreements in place to incentivize and motivate individuals to stay in the business? I also want to make sure that risk is minimized when making an acquisition. I remember one deal I worked on that all non-compete agreements became null and void after the founder sold the business. The first thing we did is go back to the owner and have him restructure the employment agreements. It took several more months to get everyone on board with the new agreement and include additional bonus compensation for individuals who stayed on. It was worth it. Several leading employees are still with the organization and have generated millions of dollars in fees for the new ownership. But think how much easier the transaction would have been for the owner if the new agreements were already in place before the sale.
The second attribute is strong organic growth. Does the business have marketing and business development systems that can grow more quickly if the business gets additional capital? When looking at organic growth, I’m looking at several key factors that include profits, customer mix, and future potential for markets you’re selling into. Most smaller businesses have a high concentration in early clients they developed. Many times, those are the clients that are not very profitable. Can they supply additional clients who support higher margins? And just how large of a target market are we talking about? If your revenue is concentrated in fewer clients, the more closely a buyer will look at your market’s future potential. Building a great relationship with clients influences your place in the market. If you would like to know more about building great relationships with clients you might enjoy How to Team up with Your Customers to Win More Business
If you have standard business development and marketing systems in place, how effective are they in getting new clients onboard? I also look to see if you have a number of client reference accounts. I look to see if you have long term agreements to help retain your current client base. If not, can we get several key clients to sign longer term contracts before we buy the business?
The third attribute is strong partnerships. How strong are your relationships with your partners? How effective are your partnerships in generating new income and at what cost to your organization? Can these partnerships be leveraged to grow more quickly and profitably? What role do your products and services play in your partners marketing mix? The more important your products and services are to downstream clients; the more likely it is that the partner will continue buying from you.
When talking about partnerships I look for uniqueness in this sales channel. If you’re a software company, it’s critical to have certain partners to make sure your product is getting wider distribution, but key niche partnerships can ensure sales and profits for years to come.
The final attribute buyers look for is good financial practices. This is the one where many of my best acquisitions fall short. There are many reasons for this but you’ll have to wait for next week to see what you need to do to get the most money for your business. We share how good financial systems can raise the value of your business. See you here.