7 value drivers to consider as you prepare to sell your business
What are value drivers? Why does one business have potential buyers lining up and another seemingly successful business sits on the market for months?
Value drivers are the characteristics buyers look for as they research a potential business to acquire. Value drivers typically either reduce the risk associated with owning the business or enhance the prospect that the business will grow significantly in the future. It is your job as the owner to create value within the business before considering a sale. Here we outline seven value drivers to consider.
1. Stable and increasing cash flow. It is the cash flow that determines what a buyer will pay for your company. How do you increase your company’s cash flow?
- Concentrate on operating your business more efficiently.
- Spend more time trying to understand all processes and focus on ways to increase productivity, decrease costs and increase cash flow.
- Closely evaluate all spending.
2. Experienced and motivated management team. This team is responsible for setting your company’s objectives, monitoring activities and motivating workers. Surrounding yourself with quality people whose skills are different from yours is key to driving value. A solid management team helps buyers gain confidence that customer relationships can be maintained, the company’s reputation will remain intact and the company will continue to grow.
3. Business systems that improve the sustainability of cash flows. Developing, documenting and maintaining business systems that generate recurring revenue from an established and growing customer base is important. Buyers want the assurance that the business will continue to move forward under new ownership and that operations will not break down. It is key to have documented systems in place that will enable the buyer to repeat your actions, as the previous owner, to generate income and grow the business.
4. Solid, diversified customer base. A good rule of thumb is to develop a customer base where no single client accounts for more than 10% of total sales. A diversified customer base helps insulate a company from the loss of any single customer. If you find yourself in the situation where your cash flow depends on one or two customers, consider reinvesting your profits into additional capacity that will make developing a broader customer base possible.
5. Business facility with a physical appearance consistent with asking price. If a buyer is being asked to pay millions of dollars for your company, they will want it to look like it’s worth it. A well maintained facility shows buyers that you respect every aspect of your company and have made the needed investments to keep it going. It also shows that you have not deferred making necessary capital investments only to create future capital-investment requirements for the buyer.
6. Realistic growth strategy. A realistic growth strategy must be easily communicated to a buyer so that the buyer can see specifically how cash flow and the business itself will grow after acquisition. Your growth strategy could consider industry dynamics, increased demand, new products, market plans and expansion.
7. Effective financial controls. Financial controls are not only a critical element of business management but also safeguards for a company’s assets and support the claim that the company is consistently profitable. When purchasing a business, buyers will perform some level of due diligence. If the buyers and their auditors are not completely comfortable when reviewing past financial performance, it will greatly impact the sale price.
Whether or not a buyer will pay a premium price for a business depends, in large part, on the efforts of the owner to adopt and implement value drivers. Closely considering the value drivers outlined here can help you prepare your company for a successful sale.
At LWBJ, we work closely with business owners across Iowa to help them plan for every stage of the business lifecycle. From start-up to exit we help clients build better, more profitable and sustainable businesses.
Please contact us for more information.