Question: In a recent column you talked about how the value (sales price) of a small business is determined. This leads me to ask, what are some things I can do to make my business more valuable?
Answer: If your goal is to eventually sell your business, it's best if you started with that idea in mind from day one. If not, you need to shift your thinking pronto. You'll need to show several years of successful performance to support your asking price. Let's talk about this.
To review, the value or asking price of a business is a subjective opinion which is usually based on looking at three approaches: Reviewing the business' assets; analyzing its cash flow; and researching sales of other comparable businesses. Usually the most important factor is determining the "seller's discretionary cash flow." A potential purchaser is very interested in buying a stream of income, above and among other things.
Think of Aesop's fable about the goose that lays golden eggs. What is the goose worth? It depends on how many eggs the goose lays and how long it lays them. Your business is viewed the same way. What cash stream will the business dependably produce, and for how long?
Here are five ways to boost the value of your business.
Be ready with organized, professional financial statements and projections. No savvy buyer is interested in a pig-in-a-poke. The business term for this process is "due diligence," which means that the buyer and likely some outside professionals will be looking intently at your financials, and your operation as a whole. In the year or two pre-sale, work to increase revenues and contain expenses.
Part of the financial scrutiny will involve what accountants call "ratio analysis." Depending on the size of your business, your balance sheet and income statement may get a real going-over. Examples of typical subjects for analysis: profit margins, inventory turnover and your expense ratios. If this topic interests you, Google it or go to the reference desk at the Bellingham Library and ask about "RMA Annual Statement Studies."
A quality sales brochure would be helpful. If you're considering using a business broker to assist your sale, their office will do much of this work. In return you'll owe a commission (maybe 10 percent) if they bring you an acceptable buyer.
Make yourself less essential to the business. Your buyer must be able to visualize him or herself running the business. Your strategy is to build your business with quality employees who know their jobs. A prospective buyer would expect an organizational chart and a set of job descriptions. The business sale process should never be a surprise to anyone.
If you are important to the operation of the business, for example a key part of its branding, then you may have to offer to stay on for an agreed period of time, say as a spokesperson. You can expect some compensation for this; the buyer gets an expense deduction for your fee.
Work on your relationships. A business that is known throughout the community for civic-mindedness will command a premium. Also, realize that a serious buyer will want to talk with your major clients, customers and suppliers about their intent to continue doing business with the company.
Offer attractive terms and conditions. It's pretty uncommon for a buyer to pay cash up front for the asking price. You should be clear that you're open to offers that include your carrying a note for part of the purchase price. Also, consider that if your business has some large assets, like real estate or substantial equipment, you could retain ownership of those and lease them to the buyer.
Another idea is to offer an "earn-out." This is a deal structure where the sale price of the business is adjusted up or down based on the actual performance of the business after the sale. But caution! Be very careful if you're taking the risk and the buyer has little to lose.
Have valuable intellectual property to include. Second only to having a strong net income stream, value is raised greatly by including some unique and legally protected IP. This could include trademarks, copyrights, patents and service marks. The latter can be as simple as made-up words for a special service that you offer, and they may get protection with the symbol "SM". These provide the basis of "goodwill" which means that your business has additional value above and beyond its net earnings. For lots of information on this topic go to uspto.gov.
If selling the business is your goal, start planning right away.
Ask SCORE is prepared for The Bellingham Herald's Sunday Business section by Bob Dahms, a business counselor with the Bellingham chapter of SCORE. Submit questions for this column to Business Editor Dave Gallagher at dave.gallagher@bellinghamherald.com. To learn more about other small-business matters, contact the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization, visit SCORE.org.
