Scott O’Brien, WorthPointe Partner and financial planner, is passionate about serving business owners and helping them coordinate their financial lives. As a result, he often networks and connects with others who support business owners.
Scott recently connected with John Fincher, Certified Business Intermediary and Board Certified Broker with Corporate Investment in Austin, TX, who put together the following checklist to help businesses increase their value. John was kind enough to share his advice with the WorthPointe community, and we hope you find it as valuable as we do.
20 Ways to Increase the Value of a Business
Even though all companies vary in many aspects, there are common value attractors and detractors. Use this list to see where you might add value to your company prior to a sale.
- Diversified customer base. When a single customer has more than 20% of your business, the buyers will discount the value. The higher that large customer percentage, the steeper the discount will be.
- Creating a scalable business. Buyers always ask, “How can I grow this business?” A business that can be expanded to multiple markets can usually project future sales based on realistic expansion models that also consider the capital expenses necessary for growth. Discounted cash flow valuations can be used in determining maximum value.
- Great management bench strength that has players ready to step up to the next level. Buyers want to know that employees other than the owner are capable of running the operations of the business.
- A product or service that is well differentiated in the market. A business has more value when it doesn’t have to be the low cost producer and is therefore able to have higher margins than competitors.
- Long tenured employees. These employees add value because of their training and knowledge base and the fact that you have long-standing employees says the business has a good company culture.
- Clean facility. Just like dressing up a house for sale, a clean, well-organized facility will increase the value of the company.
- Good training and procedures written down and well organized. This leads to higher skilled employees and also provides a roadmap for the buyer, two things that add value by enhancing comfort about the company’s future.
- Good reputation. Buyers will seek opinions on the reputation of an acquisition target. Just prior to closing, they will most likely have a conversation with a few key accounts to ensure they’re satisfied with the company’s products or services and will continue doing business with the new owner.
- Financial trend is up, up, up. Companies that are trending up in the last three to five years have more value than companies with flat or erratic, unpredictable sales.
- Family issues from family members working in the business are cleaned up before the sale. Sometimes nepotism can cause the wrong people to be put into positions for which they are not suited, whereas another employee or a new hire could do the job much better and would add value to the company. If family members are going to leave after the sale, it would be better to replace them and have the new people well-trained and operating at the position well before the sale.
- Full compliance and recordkeeping with all governmental agencies regarding licenses, taxation, special requirements and reporting. For example, buyers will usually perform an audit of sales tax payments to ensure all taxes have been paid properly and will request a No Sales Tax Due Certificate from the State Comptroller. Liabilities found in buyer audits can not only reduce the value of the business, but can make it unsellable.
- Too many personal expenses being run through the company or even worse — unreported cash. As a friend of mine once said as we were looking at an acquisition, “If he cheats that much on the IRS, what do you think he will do to us in this acquisition?” We passed!
- Good recordkeeping and clean books. Buyers must be able to prove the numbers during due diligence and the better the books, the more value to the buyer. Audited financials can really improve the value for mid-market companies and make the transaction much smoother.
- Principals well respected in their industry. Buyers feel more confident when they see the company’s principals are active participants and well respected in their industry, which might include serving in leadership roles in the industry associations.
- The ability to weather a recession. Businesses seen as recession-proof always have more value than those that experience severe cyclical downturns.
- Market size and penetration rate. Buyers assign more value to companies with more upside potential.
- Management team that has good client relationships. If only the owner has and maintains the client relationships, this is a red flag to buyers.
- Strong balance sheet. Just as a bank likes strong financial ratios on the balance sheet, buyers also assign value by taking into account the condition of the balance sheet.
- Assets in good working condition. Buyers want to buy good assets. If a company’s assets are old and worn-out, buyers will discount their value.
- Well-constructed advertising and marketing plan that funnels the sales pipeline to a competent sales team and ensures future company growth. Buyers want the business to be sustainable and able to grow based on not only maintaining existing accounts, but growing new ones as well.
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