11 Steps to Significantly Increase the Value of Your Business

Probably the most common question I’m asked by business owners is “What’s my

business worth?” That question usually requires a lot more information specific to that

business. But the factors to consider in valuing a business are the same across most

industries. Therefore, most items I focus on in this article will apply to your business and

taking some time to focus on them will give you a more valuable company.

Of course, increasing the value of an asset usually only maters if you plan to sell it.

While that’s also partially true in this case, taking some of the steps outlined below will

give you more a profitable business while limiting your business risk even if you never

plan to sell. But some of these changes will take time to be reflected in your company’s

financial statements and other operations. So, if you’re doing this to prepare for a sale,

the earlier you start the better.

1. Clean up the Books

When a Buyer purchases an existing business, they aren’t really purchasing the assets or

the stock. They’re buying the revenue stream that business is likely to produce over the

next several years. The best way to project that revenue stream is to review the

company’s financial statements and tax returns for the last few (typically 3) years.

Maximize Profits

The problem for many privately held companies is that their financial statements and tax returns often underrepresent their profitability. That’s because these companies typically go out of their way to NOT show a profit or to show as little as possible. After all, profits get taxed.

Reducing profits is done in many ways such as adjusting inventory numbers, running

personal expenses through the business, or worst of all, simply not reporting some

income. If you’re considering a sale of your company, go through your current financial

statements with a fine-tooth comb.

The best time to start this process is a couple of years prior to the sale, but at the very

least make sure the current year’s financials reflect all business revenue and only those

expenses that the new owner will be required to incur to operate the business. During

this period, it’s best to maximize short term profits and accept the tax consequences;

you’ll be better off in the long run.

Also, during this period, expenses with only long-term profit potential should be

minimized. For example, this would not be a time to invest in a new computer system or

extensive research and development. Excess inventory and fixed assets may be sold to

improve earnings. To the extent possible, limit expenses to office supplies and other disposables necessary to operate the business in the short term.

Remember that Buyers are attracted to companies “on the rise”. Those that can show that revenues and profitability have been increasing the past few years will be more valuable. The good news is that simply cleaning up the financials to include correct revenue and expense amounts can help accomplish this goal.

Pro Forma Financials

Because past year tax returns and financial statements may include things like family-related expenses and assets that would be eliminated under a new owner, you might want to spend the extra accounting time to create at least two years of pro forma financial statements adjusting out the family perks.

Also, document the reasons for the adjustments. Adjusting out the salary expense of a “phantom employee” such as a semi-retired family member is usually plausible. Adjusting out the expenses for the owner’s business car or cell phone might, depending on the business, be questionable since a new owner could consider these a necessary expense of the business.

Add Backs

Add Backs are basically adjustments made to the financials to show the “real” operating profit of a business. It’s very common for owners of privately held businesses to present potential Buyers with a list of expenses that the Buyer would not have to pay going forward, thereby making the business more profitable and increasing the purchase price. Some of these items, such as inventory adjustments and personal expenses, were discussed earlier.

Although add backs are a standard and accepted practice, the problem with some add backs is that while you may convince a Buyer that they are legitimate and reasonable adjustments, it will be much harder to convince the lender who is providing the financing for the purchase. Because nearly all business purchases are financed to some degree, it’s important to remember the golden rule in banking: Those that Have the Gold Make the Rules! Be especially careful with things like paying personal expenses out of the business and any "off the books" income. The #1 reason deals fail is because of financing. You must understand how to deal with bankers and the SBA. So, it’s best not to rely entirely on add backs and just stop running these excess expenses through the business at least a full year before the sale.

Separate the Land and Building from the Business

The real estate in a small business is often its most valuable asset. But this asset can also misrepresent the financial position of the business itself. If the land and building are owned inside the entity, it’s often best to create a separate LLC to hold the real estate, or at a minimum, create a pro forma set of financial statements as though the premises were rented at an arm’s length, fair market rate.

Many small companies lease their premises from their owners. Whether the premises are owned by the company or separately by you, plan to have an independent real estate appraisal made of the land and building as part of the overall evaluation of your company. Do this even if you intend to lease the building to a new owner to develop market leasing rates. Separating the land from the business operations also allows you the flexibility of selling the business with or without the real estate.

Wipe Out Contingent Liabilities

Buyers, especially larger ones like private equity firms, are very concerned with contingent liabilities. This includes claims and potential claims from customers, suppliers, employees, competitors, etc. No one wants to “buy a lawsuit”. For example, suppose your company is involved in a claim where you are being sued for $1,000,000, but you expect to settle the case for a small fraction of that amount. It’s probably better to negotiate the settlement now. It’s much easier for the new Buyer to evaluate a $25,000 set liability than a potential $1,000,000 liability that may or may get reduced.

2. Start Conditioning Customers and Employees

Many business owners take pride in being the heart and soul of their business and that’s not necessarily a good thing, especially when it’s time to sell. Ask yourself if your customers consider themselves to be doing business with you or with your company? When you’re considering an exit strategy, it’s important to condition your customers to do business with “the company.” You can do this by making sure your customers have exposure to, and trust in, others within your organization prior to closing. That will give the Buyer some confidence that these customers will remain a part of the business and won’t look elsewhere once you’re gone.

Likewise, you’re going to want to start training others within your company to take over the tasks you currently handle. Most Buyers don’t have a seasoned management team ready to move into the purchased company. They’re going to be relying on the existing personnel to continue to run the company. Regardless of contractual obligations, about two-thirds of all owners are gone from their businesses within one year after the sale. So, before the deal is done, the Buyer needs to feel comfortable with the person you choose as your successor as well as the other key players in the company.

To make sure that the right management team will be there at the time of sale and will remain in place, you’ll want to implement employment agreements, non-compete agreements and incentive plans to maintain your key players through the acquisition and transition process. Ideally, by the time you are negotiating with a Buyer you want to be able to show that the company wouldn’t skip a beat if you were to take a 3-month vacation.

Remember that you don’t have to necessarily tell your employees and customers that a future sale is why you are making these changes and in most cases it’s better to keep any potential sale strictly confidential until a deal has been struck and a written agreement is put in place. Cross training your staff and keeping key employees in place is a good business practice regardless of a sale.

3. Make Your Business Show Well

When getting ready to sell your business don’t ignore the little things. You wouldn’t show your car to a prospective Buyer without washing it or your home without mowing the lawn and making the beds. The same kind of aesthetics also appeal to a prospective business Buyer. A coat of paint, a general house-cleaning and some minor repairs and maintenance to fix cracked windows, etc. are important.

These little things can often make a big difference. If the building looks run down, with dirty carpets and peeling paint it creates a feeling of neglect and apathy. That’s not the impression you want to create for a Buyer. You want to create an environment that shows that the little things get taken care of and that your employees are diligent and happy in their jobs.

The initial impression you make when a Buyer enters your facility can have a strong psychological impact. Much like with a new home purchase, they must be able to see themselves in that environment and feel like they would be happy there. They also want to feel like they can come in and tackle the “big” things on day one rather than having to fix a lot of little things.

This same type of clean up and maintenance attention should be given to your books and records. We discuss your financial records in another section. Here I am talking about things like, is the employee list current? Do you still have obsolete inventory or equipment on the books? Is your corporate minute book up to date? Do you have a current list of suppliers and pricing? These things should be organized and up to date. If they aren’t, they tend to distract a prospective Buyer from the real issue of determining the value and seeing the potential of the company.

4. Demonstrate Customer, Supplier, and Product Diversity

No, I’m not talking about gender or race here, but rather the over-reliance on a small number of large customers or suppliers. How many of your customers account for more than 5% of your revenue? A potential Buyer would prefer that answer to be none. That way, if you lose your largest customer, it won’t cripple the business. If you do have an over reliance on large customers the answer clearly isn’t to reduce your sales to them, but rather aggressively try to bring in additional customers so that the large customers represent less than 5% of the increased revenue total on an individual basis.

With respect to suppliers, it’s less critical that you buy your company’s supplies from multiple sources. The real issue is whether there are multiple suppliers that you could easily purchase from. That eliminates the risk that a problem with one supplier would negatively affect your business.

Much like the customer and supplier issue, companies that have only one product or service come with more risk than a company that has numerous products and services that it can offer its customers. Remember that for Buyers (and far more so for their lender) it’s all about assessing and reducing risk. The more flexibility and options a business has, the lower the risk is to the Buyer.

5. Boost your Recurring Revenue

A Buyer wants predictable ongoing revenues from the business. But not all revenue dollars are the same. The best way to ensure that revenues keep coming in is having customers contractually committed to buy your product or service. Another valuable model would be a subscription that auto-renews unless the customer cancels.

Obviously not all businesses offer products and services that lend themselves to this model. But remember, you don’t have to have some iron clad, long-term, contract with specific buying requirements. Basically, any factors you can show that make your customers more likely to continue to buy the same products or services from you on a regular basis will be beneficial.

There are many ways to show this. For example, if you provide a service that the customer must have done every year no matter what (such as tax return preparation). Another model is where you sell a product that needs additional parts or accessories on an ongoing basis (razor and razor blade model). Maintenance plans or extended warranties on the products and services you sell is another way to show guaranteed future revenue to a Buyer.

6. Examine your Competitive Landscape

If you are considering selling your business, take a good look at your competitive landscape. Do you have a recognizable brand or any type of proprietary technology that sets you apart? What type of strategic Buyer would find this brand or technology particularly appealing even if it’s not currently generating significant revenue? Have you made sure that your rights are fully protected through work for hire agreements and relevant intellectual property rights such as trademarks, copyrights, and patents?

What are the barriers for market entry for your competitors? Will they have to obtain some sort of license or certification that is difficult or time consuming to obtain? What type of expertise is needed in your business or industry and what’s the availability of those that have it? Are there any zoning issues that would prevent potential new competitors from gaining a foothold? Any other advantage you might have such as exclusive rights to an area or to someone else’s products or services is also a plus.

Remember what a Buyer is looking for here is a competitive advantage, something that can’t be easily reproduced or obtained by a new competitor. The stronger your competitive advantage is, the less likely the Buyer is to simply start his own company to compete against you and the more valuable your company will become.

7. Increase Your Brand Exposure

This section sort of goes hand in hand with the discussion about your competitive landscape and creating a competitive advantage. You want to show a potential Buyer that they’re getting more than just equipment and people. Having a recognizable brand, whether it’s for a product or the company itself, is something that can significantly impact a company’s value. This doesn’t mean you have to become the next Home Depot

or Walmart. Brand recognition within your own industry or geographical area is often enough to make a difference.

Encourage your staff to publish articles in their areas of expertise and speak at industry events. Contact local media people and ask them to use you as the voice of authority for industry issues. Engage your customer base on social media and consider additional advertising initiatives. This type of exposure can favorably influence a prospective Buyer.

You will also want to do a “search audit” on your company. This is much easier than the scary “audit” word makes it sound and is done by simply typing the company name into Google. You can bet that is one of the first things a Buyer is going to do once the name of your company is revealed to them. Make sure all your information is up to date and that you have any old, incorrect, or unflattering information removed to the extent you can.

8. Create a Written Growth Plan

When preparing materials for a potential Buyer, describe in writing, the opportunities available to your company in a short (2-5 pages) report. This plan should address the following questions: What additional markets can we pursue? What additional products and services can we deliver to our existing customers? What segments of our current market offer the most growth potential? What areas of our business offer the greatest margins? How can we further expand in the high margin areas? Can we license our intellectual property? What strategic alliances can we establish to move the business forward? What are the hard costs associated with implementing the growth plan? What cost saving measures can be executed in the future?

Any research materials you can produce to support your growth plan should be included in your report. When it comes to unlocking the market value of your privately held business, the final selling price is not limited strictly to the bottom line. The Buyer will of course come with their own ideas for what they can do with the business, but anything you can do to give them ideas to consider, or to get them excited about the future prospects for the business will be a big help.

9. Draft an Operations Manual

In addition to buying a recurring revenue stream, a potential Buyer is acquiring your business model and business “know how”. That includes things like your customer and supplier relationships, your company structure, a description of the management roles within your company, etc. Some of the more critical information like customer and supplier lists will usually be provided as schedules to the purchase agreement.

However, there is far more that the new owner needs to know. I’m talking about a lot of the day-to-day operations and administrative information. Things like employee hours, how to operate certain machinery, company bank account information, what types of insurance you carry and with what brokers, when do the current policies expire, etc. That’s where the operations manual comes in. The most valuable businesses allow the new owner to step right in and hit the ground running with very little involvement from the prior owner. In addition to having personnel who have all the business and administrative know-how, an operations manual is also a great asset for a new owner. It doesn’t have to be anything particularly fancy and doesn’t have to be organized in any certain way. It just needs to contain the important information that someone would want to know if they were suddenly put in charge. You can find plenty of free templates available online.

10. Demonstrate Customer Satisfaction

Any prospective Buyer is going to want to see that your company has a good reputation and a happy and loyal customer base. How often do your customers refer you to others? What percentage of your customers are repeat customers? What does your BBB profile look like? How about the likes, follows, and comments on your company’s social media pages? Look at your various profiles across social media, the BBB and referral websites. What do you see there? Is there any information you would like to change?

Perhaps the most important item today is your Google My Business page. Depending on how well you’ve updated it, it will have information on your business including location, hours, and most importantly, reviews. You’ll want to reach out to satisfied customers and send them a link to provide you with 5-star reviews. Depending on your business type, other sites such as Yelp and Home Advisor may be important as well.

I’ve owned or advised just about every type of business over the years, and I can tell you with certainty that no matter how happy a customer is, it will still be difficult to get them to leave an online review. You’ll have to continue to follow up and the longer you wait after the service is provided the less likely it is that they will do it. There’s an old business maxim that a satisfied customer tells no one and an unsatisfied customer tells everyone. This is certainly true with review sites! If you want a good online reputation, you’ll have to work for it. It usually won’t come from simply running a great business.

11. Consider the Right Help

Even in the best markets, selling a business is a very difficult prospect. Approximately 80% of businesses listed by the owner don’t sell. Unrealistic value expectations, downward financial trends, funding issues, and due diligence presentation can all affect the value and salability of your business. Working with a qualified business intermediary will increase your chance of a successful exit.

Owners tend to look at their own companies through “rose-colored glasses. Finding an advisor who can be objective, honest, and who has experience in deal making is critical. A business intermediary acts as the quarterback for your sales team and coordinates the entire process from the initial analysis, to pricing your business, listing it for sale, marketing it, finding and qualifying a Buyer, organizing due diligence, assisting with the financing process, and managing other advisors such as lawyers and accountants to get the deal closed.

Having a knowledgeable third party handle this role can be especially important if you plan to stay on and work for the Buyer. During the negotiations, you and the Buyer are

adversaries. After the deal is done, you are then working together on the same team. Your advisor can advocate on your behalf during negotiations, essentially playing the “bad cop” and thereby protecting your relationship with the Buyer.

Selling a business is an intensely personal decision. In most cases it’s about much more than just money. So, the one thing you should never accept from a Buyer or an advisor is pressure to sell your business; only you can make that decision.

Conclusion

Perhaps the one thing that frustrates owners most about selling their businesses is the amount of time that lapses between the decision to sell and the final closing. Good preparation can not only increase the salability and value of your business, it can also help to shorten the time to close.

Although not all the items discussed above will be relevant or available to every company, I can assure you that attention to these items will be well worth your time and the earlier you start prior to a sale, the better off you’ll be.

My business is all about creating relationships so I’d be happy to spend a half hour with you on the phone, free of charge, to discuss any questions you might have about selling a business or ways to make your specific business more valuable. Feel free to reach out anytime.

Jeff Brown, J.D.

Mergers & Acquisitions Specialist

Business Acquisitions, Ltd.

8400 E. Prentice Ave., Suite 1300

Greenwood Village, CO 80111

Office: 303-758-4600

Cell: 720-989-4121

Email: jbrown@baltd.com

www.baltd.com www.linkedin.com/in/jeffbrownbusinessbroker