1 January 2024: Selling a Business: Increase its Value
The beginning of every year is often a time when people consider where they are in their life and where they want to go – how they should plan for the coming year. In the case of many business owners, it’s often a time when they cast a critical eye at their business and their life plan and recognize that it might be time to prepare for their inevitable exit.
Our tagline – “Every Business That Doesn’t Fail Will Be Sold…Every One!” – applies universally and at the end of one year or beginning of the next is often when business owners consider that theirs will eventually – inevitably – be one of them. It’s when this realization dawns that we often get the call and the question: “Can you help me prepare my business for a sale?”
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Properly preparing a business for the inescapable fact that it will be sold takes planning and focus. We’ve written on a number of occasions about preparing a business for sale, most notably in this post and don’t intend to rehash that here. But if the owner wants to realize the highest possible value of his or her business, there are several steps that should be taken beyond simply organizing the financials, contracts, leases, etc. in order to make it as easy as possible for a buyer to buy.
Separate and apart from the work of organizing all aspects of the business and the additional preparation of making sure that the owner is ready to transition out, focusing on what can be improved in the coming months that will have a material impact on value is at least as important.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. Instead of enrolling in the complete course, could you enroll only in the module(s) you wanted? We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
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Most of this is pretty easy but often not considered by either the owner or the broker. But ignoring value maximization is foolish. It often results in leaving money – sometimes BIG money – on the table that, with a little bit of focus, could improve the seller’s post-closing life.
What’s It Worth?
Perhaps it’s no surprise to the worthy readers of this here weekly gazette that the first and, without doubt, most important step to increase the value of a business is to know what we’re increasing it from. That, of course, means that we have to know what it’s currently worth.
It always surprises us when our potential clients tell us they have no idea what their business is worth. They know what their home is worth, what their car is worth, what their investment portfolio is worth but they rarely have any idea what their business – almost always their biggest asset – is worth.
They don’t say it that way, of course, but often claim a value based on some formula they heard at the club or in a magazine article. But in nearly a quarter century in the business brokering trenches, we’ve NEVER heard an owner state a number that was ultimately proven to be accurate.
Why? Because they very rarely understand how to calculate the first number that must be known before any valuation work can begin.
We have pontificated on this topic many times over the years (here and here for starters) and won’t waste the space or time repeating what’s already been stated but suffice it to say that before you can take the steps necessary to increase the business’ value, you must know its current value.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Step one in the process of increasing the business’ value is just that; know what the business is currently worth. If you’ve not done so recently, get a professional to value it.
So, once you know what the business is worth, you – the owner – may feel it’s not enough to allow you to live the life you’ve envisioned for yourself and your family post closing. This is generally the case when we value a business.
Business owners often have an exaggerated opinion of the value of their business and we’re very often the bearers of bad news. But knowing what the value is will help you decide whether to sell it or continue to grow if for another few years.
Increasing Value
But let’s assume that the business’ value is an acceptable number and the owner is ready and willing to bring it to market. The question we ask is, “Can that value be increased over the next 12 months or so?” The answer is almost always “Yes!”
Aside from knowing what the business is currently worth, identifying actionable improvements that can increase its value and building and executing a plan to achieve that increase are the next steps.
The two primary and most easily understood ways to increase value are simple: increase revenue and decrease expenses. Except in the rarest of cases, both can be accomplished simultaneously and without investing a new widget.
Revenue can be increased by properly leveraging the relationship the business or its owner has with current clients or customers. For example, does the business supply one or two Walmarts? Find out how the business can get into two or three more. Even before the first extra Walmart dollar is received, the value of the business will be increased.
Got a service business? Adding business brokering to a real estate brokerage results in a competitive advantage, a new revenue source and higher value – even if only one or two businesses are sold during that next 12 months. Buyer are looking at the future in both examples and the value of the business will be significantly increased based on expected revenue.
Decreasing Expenses
Somebody – the owner, a business intermediary, financial consultant, accountant – with a keen eye for business operations and financial results, should be tasked with examining the operating statements on a line-by-line basis – and cut without remorse.
Does the company need that storage facility it has been paying for? Can the insurance expense be reduced by getting rid of several redundant or inoperable trucks? Is the payroll padded with dead weight such as a ne’er-do-well in-law? Would the landlord consider a more favorable rental rate, reduce CAM charges or even abate the rent for six, nine or more months if the owner would extend the current lease for a longer term?
Like many individuals, businesses sign up for stuff on a subscription basis and never re-evaluate the product or service they subscribed to. Subscriptions can often be reduced if not eliminated.
Does the company have more insurance than it needs? Some lenders require a borrower to acquire insurance before the lender will finalize a financing instrument. For example, a business might need working capital or capital expenditures and use debt financing to secure that capital by selling debt instruments – issuing notes – to individuals and/or institutional investors. Such lenders may require the company to purchase insurance policies in favor of the lender(s). Has the debt been paid off or substantially paid down? If so, the expense of the insurance might be able to be reduce or even eliminated.
The Bottom Line
With enough time, we could come up with a dozen or more additional expense categories that might provide substantial expense reductions – and thus increased value. Add to that effort any increases in revenue – actual or projected – and you’ve got the makings of a significant increase in revenue.
These steps are not necessarily immediate but they can be easily accomplished in that aforementioned 12 months leading up to the sale.
There are other ways of increasing value but these two general approaches are the basic ones; the most easily identified and implements. They’re where to start.
If you’re a business owner thinking that 2025 or ’26 might be the year to transition out of your business – or if you’re a professional business broker representing, or hoping to represent such a client – these next 12 months are the runway where the inevitable transfer of the business can pick up speed and come to market at a substantially higher value then it would have if you simply said “sell it” without giving enough though to maximizing value.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com