As a business owner contemplating an exit, you need to be strategic but opportunistic.
While your levers of long–term business value are your people, physical assets, intellectual property and relationships with customers and suppliers, these take time to improve – time you may not have. So, what can you do to quickly increase the value of your business nest–egg?
Looking at your business like a buyer is the first step to realising value. Here are three key things to do:
- Know what you are selling Just as you might detail your car before advertising it for sale, take time to prepare your business before presenting it to buyers. Look at your business like a potential acquirer. This will reveal things that need to be fixed.It is also useful to set a baseline for any deal by getting an independent valuation (and maybe getting a few improvement tips on the way through). Many business owners have an inflated idea of value from inappropriate comparisons with much larger companies that an independent view can dispel.
- Assets and liabilities Many smaller companies do not have sufficient protection for their intangible assets like licences, trade names, patents or designs. Identifying and protecting these assets not only increases their value but prevents an unscrupulous potential purchaser from taking advantage of you in the due diligence process.
- Normalise financials Buyers will look at your business’s finances differently than you do. Elements you’ll need to deal with are one–off events, owner–related transactions and accounting anomalies.Also, since many small and medium–sized businesses do not need to fully comply with accounting standards, issues can emerge that threaten negotiations. This is especially the case when a smaller business sells to a larger business and both discover they do not speak the same financial language. You must solve any accounting issues before entering into a transaction.
CAPTURE VALUE FROM QUICK WINS
What can you do quickly to knock the business into shape? Three areas to consider are:
- Fine tune the balance sheet If you have any assets that are not used in the business you should sell them before entering a sale. Many people leave private assets in their business that can muddy a potential deal.
- Settle disputes and reduce uncertaintyDisputes can involve employees, tax, legal matters or commercial arrangements with customers or suppliers. All such matters should be settled before you enter a sale.
- Prune investment and spend judiciously Owners looking to sell should not make long–term investments in their business that may result in negative short–term results. People often forget this basic principle. You should focus your discretionary spending on investments that pay off sooner rather than later. Longer term projects with investments far into the future will not be valued now.
VALUE OF THE DEAL
You can drive value throughout the deal process by again looking at three key points:
- Increase the number of bidders Many small business owners will choose to negotiate an exclusive deal with one party because it is easier and less traumatic. However, this approach is detrimental to generating the best price. Like a property auction, a larger field of bidders will usually help generate a higher return.
- Timing is everything Owners that want to sell their business should keep abreast of macroeconomic factors such as the state of the economy and what is happening in their market. For example, with the All Ordinaries Index at record levels and the business media buoyant with news of mergers and acquisitions, it is a good time to consider a sale.
- Understand business synergies You need to think about the synergies a buyer might realise from your business and try to generate some of them before you sell.Buyers will pay more for a profitable business with a solid growth history. They want to know that the business is in order and your existing revenues can be maintained by sustaining what you have established. Highlighting your competitive advantage and other such intangible assets helps to present a value that financial statements alone cannot express.
The process to helping you get as much value for your business in the run up to an exit is no different from selling any other asset.
The trick is in taking viewing a very personal thing, your business, through the dispassionate eyes of a purchaser and then making the hard decisions that mean your business will be more attractive to potential buyers.
Clever Companies do not stand still. They are dynamic and constantly challenge the status quo. Our Private Client Service team is committed to helping these private businesses make the most of their opportunities. To learn more about the topic covered in this article please visit our website or call us. Gregory Will: 02 8266 3344