What Drives Business Value?
Well, net income, of course, as well as growth prospects. But there are many other drivers of business value and business owners that don’t pay attention to these “value drivers” will suffer when it comes time to sell their business; and that time will come, sooner or later. If you’re considering selling your business, knowing what gives it it’s highest value will increase the likelihood of getting the maximum sale price.
Many business sales fail to reach closing because of various deficiencies in the business that are revealed during the buyer’s due diligence. Unfortunately, this happens fairly regularly and one of the main reasons is one we preach often: getting your business ready to sell.
I’ve blogged about this in the past and we’ve even done a couple of podcasts on this subject but we still get calls from business owners all the time that are ready to sell – have their mind set on selling – but have not prepared. Our initial meetings generally lead to disappointment.
We generally don’t accept an assignment to sell a business if we don’t feel that we have a reasonable chance of being successful. But one of the key factors in having a successful sale is the price being asked – and that price will be higher if the business owner prepared properly.
We’ve long advocated exit planning, a process that maps out how and when the business will be sold (or transferred) and how to realize the highest value for the seller. Ideally, this is a process that is considered at the earliest stages of the business – at start up, even; or when the current owner buys it – but in no event less than three years before the owner begins looking for a buyer.
We get asked all the time why it’s so import to plan your exit so early. Our response is two-fold. First, every business that does not fail will eventually be sold. Second, the longer you work without a plan, the less likely your business will reach its optimal value.
As a rule, owners do not plan early enough to sell their businesses. Most do not realize how much time and planning is required to optimize their business’ value in order to realize their business’ highest sale price. As a result, they try to sell their business before they have maximized the value of that business. This almost always results in a lower sale price or, worse, no sale at all.
Business buyers have become more sophisticated over the past 10 years and now dig deep during their due diligence process. They want to make sure that the business they buy is solid, growing and has a good possibility of continued growth. As a result, sellers need to be better prepared and pro-actively plan in order to realize their business’ maximum value. This planning and preparation involves identifying and addressing a number of possible deficiencies.
Drivers of Value
There are a number of business characteristics that impact a business’ value and they are referred to as “value drivers”. Some are more important to some buyers than to others but they are all considered by buyers during the due diligence period. Here are some of the key business value drivers:
- Sales Trends – Buyers are generally interested in three years worth of financial numbers. We suggest having five years ready. Look at yours. Do they show a steady – not erratic nor explosive – increase in revenue? Most buyers like “steady” and “reasonable”. Surprises to the upside are great but they can portend surprises to the downside.
- Brand Reputation – Does your business enjoy a good reputation? The proliferation of ratings sites on the internet make it easy for a buyer to find out if your business is considered a “five stars” or “one star” operation among its customers.
- Product Line Diversity – Are you reliant on one or two products or services? Throughout history – from Federal Express disrupting UPS to Keurig and Green Mountain eliminating coffee pots in homes and offices around the world – innovation has knocked the struts out from under businesses that for years been solid producers of profit. What happens if some product or service that your business provides becomes overtaken by technology or some new iteration enters the market? If your business relies on one or two products or services, it might have a problem.
- Increasing Profitability – Sales may be up, but is profitability not only keeping pace but also increasing? Are your margins increasing? Are you enjoying greater efficiency?
- Product Innovation – Are you offering new or better products or services periodically? Stagnation in this regard entails the risk of being overtaken by technology or simply “a better way” to accomplish something. (Review “Product Line Diversity”, above.)
There are more value drivers, of course, but the list is long and the details would make for a tedious blog post. If you’re seriously considering selling your business and are really interested in maximizing its value, let me know and I’ll send a three-page list of 10 additional value drivers and an explanation of each completely free.
Get Help When Selling Your Business
There are many characteristics that drive the value of your business and, ideally, they should all be assessed periodically as you proceed down the path of your plan but no less than three years before your planned exit thereby allowing some time to address deficiencies.
How do you do that?
We have long recommended to our clients that they first get their business valued. You’ve got to know what it’s worth and whether that value is approaching what your target is. Next, hire a business adviser to “audit” your business. An experienced advisor will be able to analyze your business’ strengths and weaknesses against the value drivers outlined above and make recommendations that should, over a period of implementation, have a positive impact on the value of your business. Once you know the current value of your business, what characteristics drive additional value and where your shortcomings are, you can begin the process of increasing your business’ value and, ultimately, realize a higher sales price.
This will take time, definitely, but if you’re thinking about selling your company, it is important that you begin the process as soon as possible. You need enough time to correct any issues that impact the value of your business. Poor or no exit planning will significantly impact the value of a business that you spent many years building. Don’t let that happen.
If you have any questions or comments, put them in the Comments box. 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 profitable week!
Joe
The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at jo*@Wo*******************.com