By Clinton Lee
Small business owners are usually the hardest working people around. However, many small business owners let a six-figure sum slip through their fingers without even realizing it. Because the item doesn’t feature in the business’ monthly sales totals, nor the annual end of year accounting, it gets ignored and the business owner loses out.
To illustrate let me give you an example from the real estate world. How often have you heard about somebody who bought a property and sold it several years later for a vast profit? It’s often without even having invested any money into developing or improving the property. The big profit came not from the monthly rent but from the increase in value of the property.
Your big-ticket sale, the one on which you can make the most profit, is the sale of the business itself. And you need to take specific steps to enhance and protect that exit price. A few small changes to how a business is run can add value to the tune of several multiples at which the business is sold.
How You Can Add Value To Your Business
- Presence of recurring revenue streams,
- Absence of customer concentration. and
- No excessive dependence of the business on one or two key individuals.
But there are a thousand other little changes that are more easily implemented, usually cost nothing at all, and yet have an oversize influence when it comes to adding value to the bottom line. It’s in every small business owner’s interest to buy and read, early on in their ownership of the business, a good book or two on “Exit Planning.”
Six Concrete Steps You Can Take
- Keep good records. Whether on accounting, tax, stock, staff or intellectual property, maintain good records, preferably computerized. Do the same with brand, reputation, certifications and other goodwill components. Keep copies of all documents, especially contracts, neatly organized. Prospective buyers will want to go through everything with a fine-tooth comb and no amount of last minute tidying up will be the same as having kept everything neat from the start.
- Exploit opportunities if they exist. While this may seem obvious, it’s often the case that sellers go to market talking about the “potential for immediate doubling of revenue by making a few simple changes.” That doesn’t work. Ever. Buyers figure that if changes really were simple you’d have done them a long time ago. So, if there are low hanging fruit, pluck them yourself and enhance the figures on which your valuation is based.
- Invest in documenting and formalizing company procedures, processes and systems. That really impresses buyers and leaves them less stressed about potential transition problems. It also adds transparency, demonstrates good management and tends to suggest staff are well trained and able to operate independently.
- Ensure contracts you sign along the way allow for your rights under the contract to be transferred. During the course of everyday business, a lack of such provision – when signing new deals with landlords, suppliers, partners and others – often slips through and this impacts on business sell ability and price.
- Pay lots of tax. Especially in the last few years before going to market. As counter intuitive as this may seem for business owners who’ve spent decades organizing their affairs to pay as little tax as possible, ditch the old thinking. Declaring a higher profit and paying a higher tax is painful, but those profits play a key role in calculating value. Declaring an additional $100K in profit for two years may add a few tens of thousands to the tax bill but could result in an extra $300K of value added to the price at which you sell (based on price being a conservative 3x profits).
- Develop a relationship with a good business broker in your sector. You never know when opportunities will arise. It’s sometimes the case that well funded investors, companies in related industries or others are desperate for a business in your sector, your location or with the profile your business has, and are willing to pay way over the odds to make the acquisition. You want to be on the radar when that happens.
Here’s wishing you all the best with keeping an eye on the real bottom line.
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Clinton Lee is a UK M&A adviser who assists business owners with valuing and selling their businesses.