Whether you have an existing business or are considering starting a business, Michael Gerber in the book, The eMyth, suggests the only reason to build a business is to sell it.
Sadly, many business owners wait too long to prepare the business and they do not have enough time to maximize the sale price of the business; some never plan to sell and others simply get caught off guard by an unexpected illness or unfortunate event.
To help you not get caught off guard, it is best to start as soon as possible to prepare your business. It is never too early.
Here are a few tips to help you increase the value of your business over the next 24 to 36 months.
1. Clean up your books. With “good” accountants, you are likely writing off much more than just the required expenses of the business. The value of the business is directly linked to the profitability of the business. If you have minimized your profitability to decrease your tax burden, you will not maximize your selling price. To maximize your selling price, 3-4 years before you want to sell, start optimizing your business to maximize your profit. This alone can greatly increase the what your business will be worth to a buyer.
2. Note abnormalities that will be adjusted for. When a professional values your business, they will look to “normalize” your books, called “recasting.” During this process anything that was not normal will be removed and this will increase the profitability of your business. For example, if you owned a restaurant and had to replace the hood system. This cost would be removed because it is not “normal” and does not happen every year. Therefore, removing it would increase the profitability of your business.
3. Replace yourself and family members with staff. If you have family members working in the business, start to replace each one with non-related staff. When a buyer looks at your business, the business has less value and is riskier if there will be a mass exodus at the time of the purchase. Slowly, replace each family member with a staff member that would stay with the business after the purchase.
4. Secure key employees. You will also want to create an employee retention program to secure employees that are critical to operations. A new owner will feel more comfortable knowing the critical employees are incentivized to stay with the business after the purchase and this will make the business less risky and more valuable.
5. Design your business on systems. Every major task in your business should be documented and systematized. Although your current staff knows exactly what to do, for the buyer, having systems in place assures him or her that the business will run without you. Start by documenting the critical functions and then over time document all functions of the business. This task is time-consuming, but will make a huge difference in the sales price of your business.
6. Have a growth plan. Now is the time to ramp up your marketing, sharpen your sales team and make sure you have a solid plan for growth. Buyers pay more for growing flourishing businesses than ones that are stagnant. Now is the time to make your business look the best it’s ever looked.