Question: While I love owning a business, I know I need to start preparing for retirement and planning to sell my business over the next few years. To make sure my business is ready for success in the future, what recommendations do you have for creating value before I retire?
A: It’s wonderful that you are preparing for the future and want your exit strategy to be as successful as possible. Creating value in your business will give you many more options for the transition of ownership than you might otherwise have been able to. As a professional EOS Implementer, I work with companies preparing for a transition to ownership by helping senior management and leadership teams understand what drives value in the eyes of buyers and focus on the most important tasks to increase the overall value of the company. A first step for many in your position would be to put yourself in the shoes of a prospective buyer and identify the “value drivers”.
Value drivers are attributes that reduce the risk associated with buying your business or improve the prospect of significant growth for your business in the future. Focusing on these factors can increase the value of your organization and justify a higher price tag, which creates options for you when the time is right for you to retire.
Value factors vary from business to business, however, there are several common areas that potential buyers will assess to determine what they think your business is worth:
- Human capital. Potential buyers are looking to buy your business, not you; which means your business needs a strong management team and key employees who want to stick around for the long haul. It might seem like a no-brainer if you have a great company culture, but when leadership changes, so can your team’s intentions. With that in mind, now is the time to consider or revisit employee agreements and incentives. In addition, you need to identify (and prepare if necessary) your management team. It is important to have a competent and reliable team that can ensure continuity and help the business grow under a new owner.
- Cash flow and financial performance. Stable and predictable cash flow is essential for a potential buyer. In order to bring a high price for your business, you need to establish a pattern of growth over a constant period of time. In addition, you must have a written business plan and a budget. Buyers will want to know: is your growth strategy realistic? Will it achieve the expected financial results? Are gross margins and pre-tax profits higher or lower than industry averages and are they sustainable? Are your financial statements easily available and understandable? Reliable financial records are a necessity.
- Diversity of customers and products. What would happen if you lost your highest paid client or client? It is important to have a large customer base where no single customer represents more than 10-15% of your total revenue. Having a diverse customer base will help reduce the risk of serious cash flow problems if one or more of your customers leave or no longer require your services; which brings us to the next problem – the diversity of products and / or services. Does your business offer a variety of products and / or services? Are your products and services unique? What sets your business apart from the competition? These are questions you should be able to express to a potential buyer.
- Standardized and documented systems. Developing and documenting standard business systems and procedures demonstrates to a buyer that your business can be maintained profitably. Take the time to review, document, and standardize the processes you use to generate revenue, control expenses, and increase productivity. Additionally, make sure that all business contracts, documents, files, etc. are organized and easily accessible. Implementing and maintaining operating systems and procedures will help support the future growth of your business.
- Office environment and equipment. Is your office welcoming, comfortable and organized? Your office, facilities, and areas inside (warehouse, copy / archive rooms) must be in good working order to achieve maximum value. Seeing disorganized or poorly maintained facilities and equipment can lead a potential buyer to believe that other aspects of the business may be disorganized as well, such as employee records, financial records, compliance records, etc. . Make a great first impression by having everything in its place when it’s time to sell, just like you would if you were selling your home.
To be successful in increasing the overall value of your business, it is essential for you to plan ahead. Identify and hone the value drivers well in advance of any planned sale, and in doing so, you can be well prepared for financial freedom in your retirement. Work with your advisors to develop a plan that will work well for you and your business.
Crystal Faulkner is a Cincinnati Market Leader with MCM CPA & Advisors, a CPA and Consulting firm providing expert advice and beyond the bottom line thinking for today’s public and private companies. , large and small, not-for-profit, government entities and individuals. Tom Cooney works for Wealth Dimensions, an investment advisory firm. For more information call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that features high performing people, businesses, organizations and issues from across our region.