Influence the value of your business now, so you can sell later

MRSB partner Lloyd Compton, CPA, CA, CBV explains what you can do to make sure your business is ready for sale in 2, 5 or even 10 years and how valuing your business NOW can help you increase the proceeds from its sale down the road.

I believe a business valuation is as important for a business owner as your bookkeeping and financial statements. Just as you watch gross margins and monthly income statements to identify problems that will impact your profit, understanding your business value can help you manage this value and will also influence how much of it you get to keep following a sale. For most owners, there may be specific actions you can take that will increase value. Take the example of selling a house: a little elbow grease will not only make it more attractive to potential buyers, but you also get a nicer house to live in until it sells.

Business valuation is not a math exercise where entering the right combination of numbers and figures will result in the correct answer. Each business has its own strengths and weaknesses relative to other businesses. Each of these strengths and weaknesses affect the inherent risk of your company, compared to other companies or compared to other investment alternatives for a potential buyer. The components of company-specific risk can either be detractors of value or drivers of value. So how do you look at your company now with a view to influencing what it will be worth later on?

Take stock of what you have, and what you have but don't need

Take a good hard look at what your existing assets are and ask whether they directly contribute to the income of the business. You may be able to remove or sell certain assets such as excess land or redundant equipment without affecting the income earning ability of the business. Similarly, do you have any intellectual property or promising technology that you need to secure the rights to?

Now look at your liabilities. You may be able to improve the future cash flows of the business by consolidating debt and locking in lower interest rates, even if there is a penalty for early debt retirement. What about unresolved lawsuits? It may be worth it to settle these or bring them to a head prior to listing. Uncertainty is risk and risk will affect your business value. In a nutshell, tidy up your balance sheet. Like most things in the world, simpler is better.

Get reacquainted with your industry and your competition

You undoubtedly have a very good grasp on your business, your industry and your market. However, we all become complacent over time. You may not view your business, industry outlook or your company's position in the market in the same way you might if you were a prospective buyer. Is the industry a stable one? Is the market declining, mature or growing? How much competition is there and what are your company's strengths and weaknesses versus the competition? What changes are taking place, such as globalization or technology advances, and are you keeping up? How are your relationships with your customers, suppliers and bankers?

As business owners, we tend to focus more on our strengths or our 'value proposition'. But focusing on our weaknesses gives us something to work on, where we can take actions that will positively affect our value down the road, and gives us a better company in the interim. Buyers want businesses with stable earnings but will pay a premium for companies with stable earnings and growth opportunities. For many buyers, the growth opportunity is more important than stability of earnings.

Find new sources of revenue and minimize expenses

For several years leading up to your exit, you should look for ways to steadily increase revenue and reduce unnecessary expenses. Admittedly, this is an incredibly obvious statement. However, paying special attention to recurring sources of revenue will increase your value. Buyers will pay more for annuity revenues than for sales that they will have to work to generate themselves.

No one likes to pay tax. Some owners like to run every possible expense through the business to save corporate income tax. Most common are wages to family members in excess of the true market value of the service that they provide for the business. While this may be a means of employing someone and saving tax, it can be a fly in the ointment when it comes time to value the business or sell. While this can be adjusted for in a valuation exercise, keeping the income statement 'clean' removes any doubt on the part of a buyer and eliminates one major item that needs to be explained, justified and negotiated.

Let your employees shine

If you find that you or one of your co-owners tends to be the beacon to which all business flocks, this is a problem from a value perspective. Allowing one person to 'be' the business can set up an untenable situation for future sale. Consider training other staff to do what you do so that operations will look just as attractive to potential buyers, with or without its current shining star. Go on vacation and see if the business can survive or thrive in your absence. A strategic plan can also be an excellent way of coming together as a team to discuss and set future goals for the business and how individuals within the business can take on added responsibility in implementing change.

Perhaps the main message in all of this is that, by understanding the factors that impact the value of a business, and by looking at your business now as a buyer might, you will be able to make improvements well in advance of negotiations for a sale. As an added bonus, just like a nicer house to live in, you will enjoy a stronger, healthier business until it sells.