If you hope to sell your business someday, the time to think about increasing its value is now. Too many business owners are shocked to find out the business they’ve been running isn’t worth nearly as much as they thought, says John Martinka, VP of Partner On-Call Network, a Kirkland, WA-based firm that helps small businesses prepare themselves for sale.
Here are 10 ways to make your business more valuable to potential buyers:
1. Don’t let it be just you. “Too many businesses suffer from the all-controlling owner who not only knows how to do everything but also insists on being part of everything,” notes Martinka. Don’t become a bottleneck. Prospective buyers can be scared off if the shoes they have to fill appear too big.
2. Avoid excessive customer concentration. Buyers dislike seeing a small number of key customers accounting for the bulk of sales. Work to diversify your customer base. You should also know that if you have a highly concentrated customer list when your business sells, you may be asked to include a so-called “erosion clause” in the deal that lowers the price if a top customer leaves.
3. Keep financial statements and tax returns in line. It’s vital to have good accounting systems and financial safeguards in place, and keep accurate records and statements. Try to avoid adjustments or add-backs.
4. Don’t be too dependent on a key employee. “A small company I know of recently had severe problems when their top salesperson left and took most of their accounts,” says Martinka. The problem can also arise with a technical expert, machine operator or indispensable office manager.
5. Negotiate the right kind of lease. You might think a month-to-month lease is great because it offers flexibility. But buyers and banks think more about how expensive it is to move a business. In fact, for other than professional type businesses, banks are reluctant to lend for longer than the term of a lease, including options. No lease can mean no sale.
6. Keep your tech up to date. Use the expertise you have in your industry to get technology up-to-speed, show increased efficiencies (and profits) and sell for a higher price.
7. Avoid any “off the books” cash. “There isn’t a CPA around who will let a business buyer pay a price based on unreported cash,” says Martinka.
8. Grow your revenues. This one’s rather obvious, but true. A business doing $1 in sales won’t sell for the same multiple of profits as a similar business doing $10 million. There are simply more risk factors associated with a smaller business. A minor hiccup to a larger firm can be a major disruption to a smaller one.
9. Keep business and personal matters separate. Many small business owners have received lower prices or haven’t been able to sell a business at all because they’ve co-mingled their personal and business finances. Sure, it’s sometimes easier to pay for things out of your own pocket, or have your business cover expenses that are really personal in nature in order to get the tax write-off. But, the bottom line, says Martinka, is that banks and buyers want to see profits. “Show a lot of profit, pay some tax and it will come back to you in multiples when it comes time to sell,” he says.
10. Make it a business, not a 24/7 commitment. Maybe you’re willing to work all the time, but most buyers aren’t. They may not have the same passion for your product or service; instead they have business skills to leverage what you’ve done. Hire employees and learn to delegate.
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About the Author: Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.