Article written by: Joseph Safina | Published by: Forbes Finance Council
Maximizing your business’s value is critical when transitioning, either through sale to a third party or acquisition. Value enhancement is all about increasing profitability, cash flows and efficiency. High-value businesses fetch premium prices during a sale.
If you want to get more money, you have to think of value enhancement. Even if you plan on exiting the business later down the road, enhancing its value is smart thinking.
Value drivers are the various elements that boost a business’s value. They reduce risk, improve cash flows and position your company strategically for acquisition. Below is a rundown of key value drivers.
One key value driver for your business is reliable financial controls. Financial controls safeguard your company’s assets.
Reliable financial controls also support the claim that the business is profitable. Buyers generally conduct financial due diligence, including reviewing past finance documents and checking all controls in place. If unsatisfied, the buyer’s auditors may opt against buying your company.
If past documents are incomplete, unverifiable or incorrect, no one will likely pay top dollar for your business. You need to showcase complete confidence in your past financial activity by implementing stable controls.
Buyers look for companies that are in a better position to access capital. To attract top buyers for your company, set it in a good capital position that attracts financing.
What is your company’s relationship with financial institutions? Does it need shareholder equity or issue stocks to investors? Do you have a great credit standing? With better financing channels, it’s easier to convince buyers.
A significant part of a company’s value lies in its customers. How many repeat customers does your business have? How many long-term contracts does it have?
All these factors play a vital role in the overall value of your business. If a company is too dependent on a handful of major clients, it might lack stability and certainty. The rule of the thumb is to generate your revenue from a broad customer base.
You have to prove to a potential buyer that you have numerous clients and your business is a low risk. You also want to ensure there is repeat business the new owner can rely on.
To improve your company value, you need to have a strategic vision that outlines its long-term plans. How will the company grow after acquisition? Does your company have a long-term forecast?
Growth strategy can be based on several factors:
If you want to get more money from selling your company, provide continuity plans. In my experience, buyers are more likely to pay top dollar for a company that has a realistic growth strategy. Don’t expect a buyer to offer anything significant if there is no clear growth strategy.
When selling your company, think like the buyer. How much money does the business generate? How much money goes out of the business? Are these cash flows reliable?
Think of ways you can improve your business’s cash flow. Implement strategic procedures to increase overall cash flow.
Positive cash flow means the company can run successfully, and buyers can pay a reasonable price for it.
Your company value is also anchored on its ability to hire and retain great staff. Buyers look for companies with a stable workforce, especially in management. They want assurance that dedicated staff with good contracts will stay even after a change of ownership.
You need to ensure the buyer sees value in the people occupying the top jobs. Skilled professionals provide stability and certainty that the business can run comfortably even after your exit. The right workforce helps retain a company’s ethics and culture, among other vital aspects.
Companies with unique products are more valuable and edge out competitors. With a unique product, a company attracts bigger profit margins.
Rather than copying your competitors, try a unique approach. Aim to solve customer problems to set your company apart from the competition. It is easier to find a buyer when selling unique products.
Getting a top price for your company depends on the value drivers you have implemented. These are the key factors buyers will consider before purchasing your company. Failing to implement them can lead to a slow acquisition process or an unprofitable buyout.
ABOUT THE AUTHOR:
Joseph Safina is CEO of Safina Capital, specializing in large-scale funding,
M&A, business development and marketing.