When you started your business, it was obvious that you needed a plan to make it thrive, but have you thought about your exit strategy for when the time comes to sell? The reality is that every action you take during the life of your business has an impact on your departure down the road.
Getting Full Value
Third-party buyers will tend to look at objective, quantifiable facts when deciding how much to offer for your business. Employees, family members, and co-owners will want to feel confident that they are taking over a healthy and stable enterprise. Buyers compare the relative strength of your company’s value drivers to those of your competitors. They commonly look at all of the characteristics to ensure your business is a well-managed operation. Businesses that plan ahead to build their value drivers early may carry less risk. Being deficient in just one or two value drivers can impact business value or deter potential buyers. This realization may come as a shock to many business owners. Even if the business is profitable, they may have overlooked an important area that ultimately affects the value.
This Process Takes Time
Implementing strong value drivers is one thing. Having the ability to sustain and grow each area over time can demonstrate the strength of your business and the potential growth it represents. By demonstrating the strength and stability of the value of your company, you may be able to boost your sale price, streamline your exit process, and find the right successor on your timeline.
We know change takes time and results can fluctuate over the years. Buyers keep this in mind and can appreciate steady growth. It’s a good idea to actively review your progress years before you think about selling. The idea behind a value driver is that it can improve cash flow, expand your competitive advantage, and/or grow your business.
When unforeseen circumstances arise, you won’t need to worry as much about the health of your business with strong drivers in place. Unexpected changes may not shake your company’s performance. Businesses that run more efficiently can also give owners more time in their days. You may find yourself exploring strategies that you may have otherwise ignored, such as growth through acquisition.
Common Value Drivers
Consider the following important value drivers common to many industries and some ways you might leverage them.
- A Stable and Motivated Management Team – You may benefit from an incentive compensation system that is either cash or stock-based, and rewards key employees based on how the company performs (usually measured by increases in pre-tax income).
- Operating Systems That Improve Cash Flow Sustainability – Investigate technology stacking options that streamline and connect different systems and processes, with integration that can allow you to demonstrate to a buyer that the business can continue (and grow) profitably after the sale.
- A Solid, Diversified Customer Base – It may be possible for you to expand geographically or purchase the customer list of a competitor that is closing its doors.
- A Realistic Growth Strategy – Develop a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, and other expansion plans. Then share the plan with a trusted advisor or investor who can help you identify weaknesses in the plan so that it can be improved.
- Effective Financial Controls – Upgrade to audited financial statements to get the scrutiny of trained professionals. Alternatively, engage an independent firm to conduct a quality of earnings report, verifying the sources and consistency of your income.
- Stable and Improving Cash Flow – It is important that your company’s cash flow remains substantial and continues to grow, especially in the two or three years preceding the sale of the business. You can begin working to increase cash flow today by identifying ways to operate your business more efficiently by increasing productivity and decreasing costs. Many business owners find that eliminating their least profitable products or services can free up attention and capacity for more profitable areas.
Installing value drivers in your company might be one of the best things you can do to increase the scalability of your company but doing so takes time. Let us help you prepare, get organized, and move this process along. Schedule a complimentary confidential discussion with our Exit Planning team at your convenience.
Material discussed in this communication is provided by Business Enterprise Institute, Inc. Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser. Financial and exit planning services offered through Alliance Private Wealth LLC are separate and unrelated to Commonwealth.