Growing the value of a business is a critical concern for any entrepreneur or business owner. Entrepreneurs commonly hear that a company will be worth 3-5x (or some other range of multiples) of the EBITDA or other financial indicators. But what differentiates earning the high end of that range from the low? And how can you move your business from 3x to 5x to 7x?
You differentiate your business — and increase its sale price — by removing as many doubts, questions, and risks as possible for a potential buyer. (The inverse of risk is the multiple a buyer pays.) While many factors can influence a business’s value, we will touch on five key areas that are particularly important for reducing buyer risk and increasing the appeal of a business. Of course, there can always be more, but these are good places to focus first. Here, we will explore these five areas and provide tips for leveraging them to maximize your company’s value.
1. Good Books & Records
One of the most important things you can do to increase the value of your business is to maintain good books and records and operate on an accrual (versus cash) accounting basis to match revenue with expenses. Good books are clean books, which means keeping your personal expenses separate from your business expenses and ensuring that your financial records are up-to-date and accurate. The cleaner your books, the fewer questions potential buyers will have, and the lower their risk concerns will be. In addition, having good books and records can help you identify areas where you can cut costs, streamline operations, and increase profitability, all of which can help boost the value of your business. Cleaning up the books is the simplest, though not always easiest, thing a business owner can address. Changing bad habits is difficult for many, but maximizing shareholder wealth should be your goal.
2. Devalue Yourself
Some of the most challenging companies to sell are those where the owner is the most essential person to the business. You must devalue yourself to avoid the challenges of selling an owner-centric business. Devaluing yourself does not mean you need to be an absentee owner. But it does mean you should have a good management team. (Every person should not need to answer directly to, or require direction from, the owner!) It also means having various people responsible for sales. (Not all sales should go through the owner!) By devaluing yourself, you make your business less dependent on you, which decreases risk and increases the value to a prospective buyer. Devaluing yourself can be the toughest recommendation on this list because it is a “chicken and egg” debate. Since it is costly to grow — and payroll may be the most significant component of that — determining when to hire costly “management” is often a big challenge. This discussion brings us right to number 3.
3. Human Capital
Another critical area of focus is human capital. Finding good people is a common pain point for businesses today, so having a reliable staff team and good employee retention are significant value adds. The old days of business ownership transitions leading to massive layoffs are not the world we live in. Instead, today’s buyers will pay top dollar to acquire a business with a talented and committed team already in place. Additionally, attracting, hiring, and retaining a good workforce is often directly correlated with culture, our fourth focus area.
4. Company Culture
Company culture is an increasingly important factor in the valuation of a business. Buyers today are asking owners about the culture of the business. For example, is it a family-like culture? Collaborative? Competitive? Remember, a buyer will not have the chance to talk to employees during the buying process (because confidentiality is essential), so they will take note when they see the mission statement, vision statement, core values, and other indicators of company culture displayed online and at any company facilities they may visit. Creating an evident company culture that permeates the business can help minimize a buyer’s questions and increase the business’s value. (Side note, you can’t tell a buyer you have a great company culture if they look at your payroll report and see a large turnover percentage from quarterly report to quarterly report…)
5. Brand Recognition
Brand recognition is another important factor in growing the value of your business. Potential buyers find well-known brands appealing, while buying a company that no one has ever heard of can be a red flag. Therefore, having a good marketing department (that has made sure people in your region know who you are) and the corresponding brand recognition is a worthwhile priority that helps increase your business’s value. (You could add intellectual property, patents, etc., to this category, but for simplicity’s sake, we’ve chosen to give brand recognition the focus priority.)
Growing the value of your business requires a multi-faceted approach. Focusing on good books and records, devaluing yourself, prioritizing human capital, company culture, and brand recognition can help to reduce doubts, risks, and questions for potential buyers. By doing so, you can increase the perceived value of your business, move the needle up in the range of multiples, and ultimately achieve a higher sale price when you are ready to sell.
Do you know where your business stands? Our business advisors at Viking M&A are committed to helping you achieve your desired outcome. Contact us today for a confidential, no-cost valuation.