Is Your Business a Source of Income, or a Valuable Asset?
How do you define success in your business?
Some owners, including many people in professional services, operate lifestyle businesses that simply produce an income stream. The owner uses some of the income to fund retirement because the business will not continue after the owner retires.
Other owners strive to create a business that will generate revenues and profits after the owner leaves, and these firms are more attractive to potential buyers. If you create a business that a purchaser can take over and manage successfully, you have a more valuable long-term asset.
To create a valuable asset, it's important to consider the shift in mindset and look at it as something to build over time while you consider (and clear up) the factors that make your business attractive to a purchaser.
What Business Purchasers are Looking for
Purchasers look for businesses with a track record of growing sales, positive cash inflows, and strong net profits. These companies typically have a stable, long-term customer base and brand awareness in the marketplace that separates them from their competition, like a defensible moat from Warren Buffett lore.
To gain market share, successful businesses offer valuable products and services to their customers that uniquely position their firm as unique in the market. Even commoditized industries have their shining star businesses that command higher prices and earn repeat customers who are more than happy to refer them to their friends and colleagues. Recurring revenue streams are also valuable because the firm can generate long-term, repeat sales to a customer base, oftentimes receiving cash up-front, without spending marketing dollars.
While financial results are important, valuable businesses offer the purchaser a way to generate sales without the current owner’s involvement. These companies have a recipe that generates results, including an experienced management team and staff, and a set of procedures to operate efficiently.
Some valuable companies own intellectual property and other assets that may increase in value over time.
You can take steps to increase your company value so that your business is more attractive to a buyer, and in many instances, multiple buyers.
Increasing Company Value
Consider what works in your business now, and take action to increase your firm’s value.
If you sell a product or service that clients love, you can grow market share by increasing brand awareness to expand your client base. That may mean adding an online, eCommerce sales channel to your business, or marketing to a different target market. Another approach is to diversify your product and service offerings and to cross-sell new and existing products to your existing clients.
Analyze products that generate repeat business, and try to build more repeat business in a different market niche. A landscaping company with a stable base of customers might add tree trimming services, for example, which increases your average sales per customer. Once you have a process in place to deliver repeatable, excellent service to your customers, you can teach the process to a potential buyer.
To produce the biggest increase in value, create a disruptive product or service that grows profits. Customers are willing to pay a premium for a disruptive product that solves a unique problem and can’t be purchased anywhere else. This is important because disruptive products typically sell for higher prices because they are valuable to your customers, and they allow you to leapfrog your competition.
Finally, you can increase company value by taking a hard look at your entire operation. Analyze your prices, and experiment with increasing prices to generate higher profits. You may find that customers are willing to pay more for some products.
Review your costs, and try to reduce the costs you pay for materials, labor, and other expenses. If certain routines or processes are inefficient, consider making an investment in technology. Better technology can help you process invoices, manage payroll, and post accounting activity in less time, which reduces costs.
As you create a more valuable business, you also need to plan for business succession.
To put together a comprehensive succession plan, think about who will purchase your business, how the company will be operated, and how the sale price is calculated.
Buy/sell agreements can make the sale process much smoother. This is a written document with a potential buyer, such as a business partner or your firm’s senior managers. The agreement includes a sale price calculation method, usually based on a multiple of revenue or earnings.
If you can sell the business using a buy/sell agreement, you’ll have far fewer sales terms to negotiate.
Who will buy your business?
Selling to children or other family members may be an option if these individuals have the business knowledge and the personal drive to take over the company. Some owners establish an employee stock ownership plan (ESOP) to fund a purchase by employees. The assets in the ESOP are used to pay the owner for the business.
If you sell your business to a third party, you need to provide the management team with incentives to remain after a sale. Your managers have the experience to make smart decisions and grow the business, and they provide value to a potential buyer. Investing in incentive-based stock option plans, phantom stock opportunities, stay bonus programs after the sale, and more will all help reduce the risk of a key employee getting wind of a sale and leaving your company.
Successful Transition to New Owner
A successful business sale also requires a smooth transition to the new owner, requiring communication between the prior owner, company management and the purchaser.
The buyer needs information to use the company’s existing systems to generate sales and profits. In many cases, the prior owner stays on during a transition process as an advisor to retain relationships with existing customers and suppliers.
Training the new owner’s management team may require input from the prior owner and company staff. To make the transition effective, both the buyer and the seller need a plan for training, and a timeline to complete the training. The training plan should address the need to maintain company culture and employee continuity.
Create and Sell a Valuable Asset
Selling a valuable company can generate far more money for the owner and the owner’s heirs than a business that simply produces an income. By following these steps, you can build value, plan for a business sale, and create a smooth transition for the new owner.