THINGS TO DO NOW TO INCREASE THE VALUE AND MARKETABILITY OF YOUR BUSINESS
I get asked often “how do I increase the value of my business?” These are the 6 things I would do right now if I were planning to sell my business. Doing these things will immediately increase the value and marketability of your business.
- Increase Your Level of Financial Reporting. Buyers rely heavily on the financial information provided when they consider buying a business. If the financials are inaccurate, then doubts are raised about the integrity of the owners and management of the business. The lower the level of reporting, the greater the risk of inaccuracies. Buyers know this, and they will heavily scrutinize internally-prepared financials and tax returns. Audited Financials are scrutinized the least. The levels of financial reporting are as follows:
- Audited Financials. These financials are the highest level of financial reporting. Publicly traded companies are required to have audited financials which are used for investment decisions by investors. Buyers and investors alike have a higher level of confidence in audited financials than any other level of financial reporting. Audited financials include a CPA cover letter. The numbers are tested and verified.
- Reviewed Financials. This level of reporting is higher than compiled reporting since an independent, 3rd party CPA firm reviews the financials and performs reasonableness tests for accuracy. These financials will include full disclosures and a cover letter detailing the nature and scope of the review. Banks will often require this level of reporting to assess adherence to loan covenants and the financial health of a company.
- Compiled Financials. A compilation by a CPA – includes a Cover Letter on your accountant’s letterhead and may or may not include disclosures. This level of reporting adds credibility to the numbers because they are compiled by an outside 3rd party and not internally-prepared.
- Tax Return Reporting – mandatory reporting for the IRS. The second lowest level of reporting requires minimum record keeping to satisfy the IRS. The tax return is the financial.
- Internally-prepared financials. The lowest level of reporting. Buyers often see these financials as inaccurate. Buyers will scrutinize these the most.
- Focus on Increasing Net Income and EBITDA. Gross income is about ego and Net Income is about reality. Focusing on increasing the bottom line will increase the value of your business. If your business would sell for a 4x multiple, then every $1 that you increase the bottom line will potentially add $4 to your selling price. Savvy owners trim all unnecessary expenses. I was selling a company recently and noticed that the last 2 times I visited the facility the owners each had new automobiles costing $60,000 plus. I knew that the business paid for the vehicles so I asked about them. The old vehicles were still good, but the owners have always bought new vehicles. These types of things cost a business owner in the long run. Look for ways to trim the fat of a business, not increase expenses unnecessarily.
- Think Twice About Buying New Equipment. If you are considering selling your business I would think twice about spending money on anything that would not add value to your business. Selling old equipment and adding new equipment often adds debt that would need to be paid at closing, but doesn’t necessarily add value to the business. For example, with a house, if you refinish an existing bathroom it doesn’t add to the value of your home, it just makes it look better. If you were to finish a basement, then you add square footage, which would add to the value of your home. The same goes for your business. Adding $2 Million of equipment won’t add $2 Million to the value of your business. I would fix up the old equipment first and only add that which is absolutely necessary before taking your business to market.
- Boost Efforts to Collect on Stale Receivables. Old, stale, receivables are seen as a sign of a business owner not paying attention to his business. I would make every effort to get those uncollected accounts over 120 days off the books or collect on them. This is part of what I call financial “clean up”. The same should be done with Accounts Payable that are extended beyond 60 days. Make every effort to pay them off.
- Analyze Customer Concentration. Review your customer base and calculate how much of your revenue is generated from your top 5 customers. If the top 5 customers generate over 80% of your revenue you have a high customer concentration. This is viewed as less-than desirable to a buyer and weakens the selling price of your business. If you have a high customer concentration, make every effort to find new customers.
- Fire Yourself. Your business should run better in your absence than in your presence. If you spend 50-60 hours a week at your business you need to hire someone to replace you. I’m not saying that you can’t sell a business that you manage, but I am saying that it is more attractive to a Buyer when the owner is absentee or semi-absentee with good management in place. The reason for this is the new owner will need to find your replacement after the sale which can be a daunting task.
Rick Krebs–Mergers and Acquisitions, Professional Business Broker
Rick brings a unique blend of sales, entrepreneurial, and financial experience to Business Sales Group. He began his career as a CPA, working in Nevada and Utah where valuable financial experience was gained. He uses those skills every day. He graduated with a Master’s of Science Degree and Bachelor’s Degree from Utah State University. As a business owner he started Liberty Mortgage, a mortgage bank licensed in 23 states nationwide. He eventually sold the successful company to an investor from California. He has been in the M&A space helping people sell their businesses since July, 2010. During his first year as a business broker with BRC, he listed and sold more businesses than the entire office combined.
As a sale-side and buy-side advisor for Mergers and Acquisitions transactions Rick’s advisory, accounting, and management skills are invaluable when advising sellers as they maneuver the intricate details of the deal through closing. Rick is also a CNA (Certified Negotiation Expert) which helps him negotiate the most favorable terms for clients in a transaction.