With businesses going for much higher prices than they were seven years ago, when we were coming out of a recession, buyers are much more cautious when selecting a business to purchase. If you’re looking into selling your business, you may notice buyers are doing a lot more due diligence to determine if they’re taking the right kind of risk.
For example, buyers want to understand what the business’s customer base looks like (is it made up of mostly one-time customers or repeat customers that deliver recurring revenue?) and predict how the company will perform in the next recession (is the business’s industry closely tied to the economy, and did it perform poorly during the last recession?). Predictable earnings and stable industries are more attractive to buyers.
But no matter if your business is in a riskier industry such as commercial real estate or a safer industry such as consumer staples, there are actions you can take to build value and help sell your business for a higher price.
Build Value With These Five Key Drivers
The most important thing for sellers to note is that optimizing business enterprise value can take three to five years, which means you need to start planning early. Your first step must be to understand the current value of your business so that you can determine how to build further value. Talk to a valuation specialist to both appraise that current value and determine what you can add. Then prioritize value-building initiatives centered around these five key value drivers:
1. A Strong Management Team
It takes a special skill set to lead and manage company growth. Good leaders can make your business successful in a dynamic marketplace and are able to manage disruptors such as technology and nontraditional competitors moving into your industry. You need a CEO and management team that have the vision and strategic skills necessary to navigate the next five to 10 years of disruption and innovation.
Part of having a strong management team is appropriately incentivizing them to focus on your business’s long-term goals. This can be through money, such as putting their compensation on a rolling three-year lookback, and it can be through taking calculated research and development (R&D) risks. Investing earnings into R&D sets you up for future growth, helps your business remain relevant in your industry and encourages your management team to be more forward-looking.
Altogether, a strong management team attracts buyers by lowering their risk. By reducing your business’s reliance on you to form strategy and make decisions, you demonstrate to buyers that your business can still grow and succeed after you sell it. This is real value to them.
2. Predictable, Recurring Revenue
Speaking of lowering risk, buyers like to see predictable revenue. Multiple revenue streams decrease the chance that a product or service will fail, and resistance to commoditization maintains profit margins.
You can reduce commoditization in several ways:
- Understand your competitive advantage
- Innovate to become the leader in your industry
- Strengthen your brand
- Add more value through additional service offerings
- Help customers quantify the value of your solutions
- Compensate your sales force based on how much profit they make rather than how many sales they close
3. A Diverse Customer Base
Having predictable revenue comes with having a more diverse customer base. No one customer should comprise more than 10% of your sales. A diverse base insulates your revenue and earnings from the risk of that one large customer leaving. Without a diverse base, your company will sell for far less than you think.
Before you consider selling, you and your management team should take a look at your industry and your customers and then strategize different ways you can increase customer diversity.
4. A Scalable Business Model
With a scalable business model, your profit margins increase as your revenue increases — and that’s definitely going to attract buyers and drive the price of your business up.
Optimizing business operations and processes can improve margins as revenue increases. For example, adding technology to a platform or process is a simple way to achieve scalability. With the rise of automation throughout different industries, businesses can do more with less manpower, freeing employees up to focus on the core parts of their roles.
5. Strong Financial Systems
Buyers feel more confident when your business has accurate, timely and reliable financial information at the ready. Strong financial systems lower financial reporting risk, tell buyers your management team has a clear understanding of your business’s financial performance and allow both your team and any future management/ownership to accurately forecast future financial needs to drive growth. Plus, it makes the due diligence phase goes smoother and faster.
Help Ensure Your Business Transitions to the Buyer of Choice
Exiting a business takes time and careful planning. You not only want to allow time to correct any business issues and build further value but also prevent a rushed sale that leads to a lower purchase price or even a buyer backing out.
Business owners often view their business as an extension of themselves, which is understandable. With a sale, you want to realize the full value of a lifetime of work you’ve put into your business. Strategizing and taking action to build further value where you can will attract the buyer of choice and increase the longevity of your business.
Interested in transitioning your business? The valuation specialists at Wipfli can start the process by assessing your business and helping you build further value. Contact our team today.