What is your business worth? While exiting from a business, valuation is a major concern for entrepreneurs. Defining a fair value for a company is not easy however the sale price you establish will be an important focal point of your transition plan. Selling a business can be a major challenge for an entrepreneur. In addition to the complexity of the process and sentiments involved, owners need to ensure that they maximize the value of their business which they have built with so much effort and time. Making last minute cosmetic changes to a company before listing it, mostly result in disappointment. It is always advisable to owners to take their time in planning and preparing for a transition.
When it is time to sell a business, most of the owners have a price in their mind that they must receive in order to achieve their exit goals and fund the nest stage of their life or career. But majority of the times just before listing their companies, owners discover that their businesses worth less than what they anticipated. Therefore, entrepreneurs need to work on increasing the value of their business before pulling a trigger on listing their company. In general the thumb rule is that the longer you have to prepare, the more control you can have over the value of your company. Keeping that in mind, here are some ways to enhance the appeal of your business and make it more valuable.
- Improved Profits: Any buyer would be willing to pay more for companies that can generate a profit quickly. Showing buyers that your company is profitable is definitely a good step but if you can assure them that the profits are still increasing, that will surely have a positive effect on the price they are willing to pay. Evaluate and find new ways to cut costs or increase efficiencies that will give the profits extra boost leading up to a sale.
- Polished Processes and Routines: Sometimes buyers have a view that most valuable asset of the business is seller himself. It is seller’s responsibility to convince buyers that they can operate the business successfully even after the exit of seller. One of the ways to do this is to build up irrefutable processes and routines that enable the company to function smoothly even without the involvement of the seller. Also ensure that these processes are properly documented so that the new owner can use it as a guide to run the business successfully.
- Recurring Revenue Agreements: Sales are the main driver of any successful business. It is advisable that in the years leading upto his exit, the seller should work on consistently increasing sales and revenue especially focusing on recurring revenue sources that could generate income for the new owner from the very start. Building a recurring revenue source and shoring up any pending customer or vendor contracts will assure buyer that they will have a consistent flow of revenue while they get accustomed to the new business.
- Ensure Key Employees are on Board: The last thing any buyer would want is employee turnover. Having proficient employees makes business more stable and progressive. Maintaining a high quality workforce will help you increase your company’s worth especially if those employees plan on staying back with the company even after your exit. Put in long term incentive plan for employees like equity ownership that vests overtime or bonus plan based on profits that will encourage employees to stay even after the sale of business.
- Unique Product or Services: It is important to have a differentiated product or service. During the time of sale, companies with specialized products or services can help seller to gain upper hand but they will have to show that their company has a dominant position in the market. To do this, make sure to develop and promote any patents, IP or other unique feature of your product that provides you an advantage over your competitors. Focus on creating a diversified customer base that, ideally, generates recurring revenues.
- Clean Business Structure: Most of the time a buyer’s first impression of your business is the physical structure. Before listing your business, it’s better to make sure the facility is looking its best. If there is need for renovation or better furniture, make sure it is completed before any buyer visits the unit.
Lastly, make sure to strengthen all the loose ends before you list your business. Finalized leases, contracts and agreements will positively affect the value of your business helping you to receive the right price that you need to move on to the next phase of your life. However, regardless to whether one actually go through with a sale or not, these steps will help any entrepreneur to build a stronger, more efficient and valuable company.
Impact of COVID-19 on Valuation of a Business:
COVID-19 has had a devastating effect on the economy, financial markets and real estate values. Entrepreneurs wonder how much the value of their company has changed with this crisis.
You need to use your judgement and estimates while valuing your business. The direct and indirect impacts of the pandemic will likely place heightened emphasis on estimates and judgments for most 2020 valuation dates. For any business (especially small organizations), estimating the effect of COVID-19 on value will depend upon consideration of all available information at the date of valuation. Some of the points to consider would include:
- Which sector and industry does the entity operate in, and what are its specific lines of business?
- Where geographically are the entity’s operations concentrated?
- Will the business be able to deliver its products and services in the face of disruption in operations? If yes, how?
- How long the business expects the operational disruption will last?
- How diversified is the customer base? Which customers may be in distress?
- How diversified is its vendor pool? Which vendors may be in distress?
- Does the business need to manage their cash balances differently or modify its policies around working capital?
- Whether the entity should defer their capital expenditure to conserve cash or potentially accelerate?
- What actions must the business take to maintain compliance with debt covenants?
- Has the business received government assistance pursuant to various economic relief programs?
- What was the standing of the business in the market prior to the COVID-19 crisis?
The business needs to assess the impact of pandemic on near-term and longer-term prospective financial position. The impact may not yet be known or quantifiable and even if it is quantifiable, those estimated are likely to change in real-time. There are various methods to compute the valuation of a business but we must choose the one which best suits the objective of the value especially when you are preparing your business for sale. You can read about common valuation methods in detail
here
