Crystal Faulkner & Chuck Stevens, Partners, MCM CPAs & Advisors
For many business owners with an eye on retirement or partial transition out of the company, their company is their largest asset. Regardless of how an owner intends to transition (and there are many options), they will be better off if they can maximize their company’s value. Driving company value provides far more options during a transition than might otherwise be available. As CPAs certified in Business Exit and Transition planning, the first piece of advice we typically offer to clients looking to transition is to put themselves in the shoes of a prospective buyer. If someone is evaluating their company for purchase, they want to minimize the risks on their end, and one way they do this is by reviewing the value drivers.
Value drivers are attributes that either reduce the risk associated with buying your business or enhance the prospect that your business will grow significantly in the future. Ultimately, these drivers increase value and provide the justification for a premium price, which in turn provides the owner with options when the time is right to retire.
Value drivers vary business to business; however, there are several common areas prospective buyers will evaluate when determining what they believe a business is worth.
Cash flow and financial performance
To a potential buyer, stable and predictable cash flow is critical. In order to bring a premium price for your business, you must establish a pattern of growth over a consistent period of time. In addition, recurring revenues provides a level of predictability not present when every project involves a unique customer or engagement.
It is necessary to have a written business plan and a budget. Buyers will want to know if the growth strategy is realistic. Will it achieve the projected financial results? Are gross margins and pre-tax profits above or below industry averages and are they sustainable? Are the financial statements readily available and understandable? Reliable financial records are vital to any transaction.
Customer and product diversity
What would happen if the company were to lose its highest paying customer or client? It’s important to have a broad customer base where no single client accounts for more than 10 to 15 percent of the total revenue. Having a diverse customer base will help reduce the risk of serious cash flow issues if one or more customers leave; which leads us to the next issue – product and service diversity. Does the company offer a variety? Are the products and services unique and up to date? What differentiates this company from its competitors?
Potential buyers are looking to buy the business, not the owner; which means the company needs a strong management team and key employees who want to stay for the long term. This may seem like a no-brainer if there is currently a great company culture in place, but when leadership changes, often so does the work environment. With this in mind, now is a good time to consider or review employee agreements and incentives. In addition, a future leadership team should be identified (and groomed if necessary). Having a capable and reliable team in place that can provide continuity and assist in the growth of the business under new ownership is of the utmost importance in attracting a buyer.
Standardized and documented systems
The development and documentation of standard business procedures and systems demonstrates to a buyer that the business can be maintained profitably. Take the time to review, document and standardize the processes used to generate revenue, control expenses and increase productivity. In addition, ensure that any business contracts, documents, files, etc. are organized and easily accessible. Implementing and maintaining the operating systems and procedures will help sustain future business growth.
Office environment and equipment
What does the office look like? Is it inviting, comfortable and organized? The office and the areas within it (warehouse, copy/file rooms) should be well maintained to realize maximum value. Seeing disorganized or poorly maintained facilities and equipment might cause a potential buyer to perceive that other aspects of the business may be similarly disorganized. Make a great first impression by having everything in its place when it comes time to sell—just as we do with residential homes.
To successfully increase the overall value of a business, it is essential to plan ahead. Identify and enhance the value drivers well in advance of any anticipated sale and business owners can set themselves up for financial freedom in retirement. The more options and choices available when selling or exiting a business, the more likely a business owner will achieve their personal and professional financial goals.