How to increase the value of your business before selling

When you first set up your business, you probably weren’t thinking about selling it. Instead, it provided you with the freedom to be your own boss, to enable you to benefit from the rewards of your hard work and allowed you to spend your working day doing something you are passionate about. However, like most things, your work life will come to an end, and by planning for this, you can maximise the value you receive for all your hard work. When speaking to business owners thinking of selling, I often point out to them, they may only get one chance to sell their business and therefore maximise the value they have worked hard to create.

Below are a few ways in which you can prepare your business for sale and to help maximise the value.

Increased sales

The most obvious but increasing sales will mean more revenue. Consider ways in which you can diversify your portfolio and make your products appealing to a wider audience. Likewise, look at your existing customer base and are there ways of selling more to them by identifying new needs. This is a method of increasing your gross recurring fees “grf” which can be more attractive to a potential buyer than “one-off” sales. Likewise, if you offer services to your clients, agree a contract with your customers, agreeing a rate for a set period. Customer contracts represent a significant intrinsic value for a buyer as it provides assurance that customers will remain after the sale of the business.

Increased margins

However, increasing sales by itself is not enough if you must discount the price to increase the volume. Nobody wants to do more work for no or less money. So, review your margins to ensure all your costs are covered and look to streamline processes where possible to cut costs, or if required, increase your selling price to protect your margin.

Review costs

Linked to the above, use this review to validate all costs, especially fixed costs and cut these where possible. If you have regular suppliers, look to negotiate a new contract with them to provide some certainty going forward. Compare prices for different suppliers and change or renegotiate where necessary.

Unnecessary costs

As a rule of thumb, an acquirer will usually request the previous three years accounts. Make sure these three years accounts prior to the sale are as good as possible by removing all unnecessary costs. If a buyer decides to value your business on a multiple of profits basis, increased profitability will lead to an increased valuation.

Get your books in order

Accurate and reliable information is key to the smooth sale of any business. A potential acquirer will carry out detailed due diligence before investing in any acquisition. Therefore, spend time reviewing all financial statements to ensure there are no skeletons to appear and make sure all reasonable financial information that could be requested is available.

Build a management team

Small business sales often fail if the acquirer realises the vendor is key to the business and all the knowledge, customer contacts etc. is with them. Train a management team to cover all responsibilities and show the potential new owner you are not required in the business by not being there all the time and prove you regularly take time off.

Record key processes

Linked to the above, ensure key processes are documented for anyone to follow once the deal is completed. This can also reduce the handover period required.

Improve your systems

The better your systems the more productive your business will be. They also ensure your business functions effectively, efficiently and in compliance with all rules and regulations. Don’t put off investment in making the business better by using the correct technology. For example, if you haven’t already, made the change to cloud accounting, do so, as a business that has already been through the transition will be valued higher than one that hasn’t and leaves this for the new owners to tackle.

Forecasts/budgets

A business which prepares forecasts/budgets can command a higher valuation if it shows growth in sales and profitability. This suggests a business knows where it’s going and how it will get there. However, the business will also have to state all assumptions made and demonstrate its ability to achieve targets set in the past if the forecasts are to be believed.

Staff

Like the accounting records above, ensure all staff records are up to date. All employees should have a signed contract of employment, and ensure records are kept of joining dates, salaries, working hours and holiday entitlement.

Competitive advantage

Highlight what makes your business/products different. Any unique selling points “USP” should be detailed in the sales brochure and any opportunities which are not being exploited at present should be detailed.

All of the above can make your business more attractive to potential buyers and therefore increase the value someone is willing to pay. It is certainly worth planning for a sale as soon as you can to implement any of the above that may be appropriate and as stated earlier, to maximise the reward for all your hard work. If you’d like to discuss this topic in more detail, please contact Farnell Clarke and we may be able to help you increase the value you receive for your business.