You’ve heard the line, “When the time is right, will you be ready?” As a business owner, maximizing the sales price of your company may be the most important process that you undertake. It will probably represent the bulk of your retirement nest egg and provide you with the means for a secure retirement. This article addresses key areas that effect business value and what you should focus on to position the company for sale.
An accrual based balance sheet and income statement will be at the top of the list of any serious buyer. The balance sheet is a snapshot of your financial position at a point in time. The trends in your balance sheet offer important clues about your business. It could indicate collection problems with accounts receivable, slow moving or obsolete inventory items, or a shortage of working capital. Adverse trends can indicate to buyers that there is weak or ineffective management, resulting in higher risk and lower value. Identify the key ratios that are relevant in your industry. Typically, working capital, inventory turnover, and debt to equity ratios are significant balance sheet ratios for most businesses. Work at improving your ratios so that they meet or exceed industry standards.
The income statement is a fundamental value driver. Since revenues drive the income statement, make sure that your company’s revenue recognition policies are in accordance with generally accepted accounting principles (GAAP). There are complex rules regarding revenue recognition for firms engaged in construction activities, software sales and support, and contracts with contingent consideration. The income statement will reveal trends on revenues, gross profit percentage, and other operating costs. For a potential buyer, companies with strong or stable growth in revenues are more attractive than businesses that are stagnant or declining. Equally important is the gross margin. Be prepared to explain any significant trends that might be the result of a different product mix or class of customers. When selling your business, one of the components of value is future growth. For a potential buyer, future growth is more believable if the company has a track record of consistent growth in sales and earnings.
One of the most valuable assets of your company isn’t even visible on your financial statements, your employees. A well trained workforce, committed to the company and its vision, can be a valuable asset. A well-run company invests in its people, providing them with adequate training, a compensation package that rewards their efforts, and open communication about the company’s direction and their future.
Your customers are also part of the value equation. Are your customers repeat buyers with a history of prompt payment or are they at risk of walking to the competition? A loyal customer base provides comfort to the potential buyer that reduces risk and increases value. All things being equal, a customer base that is relatively homogeneous in sales volume is less risky than a customer base in which one or two customers represent a large percentage of sales. The loss of a single high volume customer can cripple growth and hence, would be considered a higher risk factor.
Often a business owner is so involved in the operations that his absence creates a dangerous void. Successful companies don’t rely on one individual. Owner dominance only increases risk and reduces value. Successful companies have systems and procedures in place and a trained workforce that can handle the normal and unusual situations. Training subordinates and delegating responsibility should be an ongoing process to ensure continuity which increases value.
A strong management team is never satisfied with the status quo. Current operations are scrutinized and evaluated on a regular basis. Budgets and cash flow forecasts are prepared and evaluated against actual results. Proper internal controls are in place and monitored for effectiveness. Improvements to products and services are studied and evaluated.
Processes and Improvements
In the technology age, information is vital. A company’s IT system, tracking information such as inventory levels and product costs, customer sales history, and financial performance, is a critical factor in managing your business. Often the investment in new technology pays for itself in a relatively short period of time.
Capital expenditures for your facility and equipment are necessary to maintain efficiencies in your operations and stay competitive. Any business that doesn’t have a plan for replacing outdated equipment will find itself penalized by potential buyers. Keeping your infrastructure up to date also places your company in a position to handle future growth.
Risk is abundant in any business venture. Managing risk is on-going process. Too often, risk management is often performed by small business owners after the fact. A pro-active approach to identifying external and internal risks to your operations keeps you one step ahead of your competition. The risk assessment process identifies areas where the risk of the dollar value of loss and the probability of loss is above your defined threshold. Some risks are transferred to third parties, for example, by the purchase of insurance policies. Other risks can be addressed by strengthening internal controls, instituting formal policies and procedures, and creating a contingency plan.
Maximizing the value of the sale of your business is an ongoing process that doesn’t happen overnight. A structured approach focuses on the attributes that potential buyers can identify and quantify. Your actions now can pay big dividends when the time is right.
Is you business ready? If the answer is “Yes”, congratulations! If not, call me, I can help.
John M. Byrne, CPA/ABV
Key Exit Advisors, LLC