It’s probably one of the most asked questions “How do I increase the value of my business?”
To improve the value of your business and improve the likelihood of achieving a successful sale, most focus on:
- improving profitability,
- reducing costs,
- systemising the business,
- improving policy and procedures,
- updating IT and
- automating processes.
For some business owners the challenge is sales and marketing aspects for building such as:
- an automatic funnel of leads,
- building recurring revenue,
- locking existing clients into long-term contracts.
Others give you plans around selecting the best business broker, advertising the business on the best websites etc. Sometimes HR and people are a key issue and so an Employee Share Plan is implemented.
We do many of those things in our work with clients on maximising the value of their business and they can all improve profit which is one side of the valuation equation. None of them make as much difference as the most important thing you can get right in preparing your business for sale:
The most important aspect is to identify and attract the right buyer!
This is the easiest and fastest way to drive up the multiple (the other side of the business valuation equation) and ensure you maximise the value of your business when you sell. A strategic buyer will always pay more for your business and almost as importantly, they have probably done this before and so will be efficient and professional.
In many cases, but not always, this could be a listed company and that’s even better. Obviously, it varies across industries and sizes of business but let’s use the average of 11.19 (which is the trailing 12-month average as at April 2019). They are often cashed up and have access to funding for acquisitions and therefore they become great buyers. This compares to the long-term average for private companies is 2.5.
Importantly, this aspect of preparing a business was often overlooked. It takes time and effort and a level of expertise. Some business owners (mostly those that have left succession planning to later) don’t have time to implement this strategy properly, but for those who do, we have seen successful sales to strategic buyers including listed companies at much higher multiples of 6, or higher.