Thinking about Selling Your Business? Part Three: Maximizing Business Value
After you’ve estimated the value of your business, settled on a reasonable price range, and put the sale process in motion, there are proactive steps you can take to make sure that the sale is as successful as possible.
From an objective point of view success means simply closing the sale. But from a subjective point of view—your point of view—this means ensuring that the transaction happens at the higher end of that price range. No doubt you will be happy if the sale closes in a reasonable period of time, but you will be much happier indeed if that sale closes for, let’s say, $500,000 rather than $415,000.
This may sound labor-intensive and time-consuming, but we aren’t calling for a drastic increase the number of clients or overall sales. Here we are going to talk about three simple steps that can tip the scales in your favor.
Maximizing the value of your business requires that you know some key points:
- The two—and only two!—types of business buyers,
- Which buyers will pay the most for your business and why, and
- How to tailor your business so it meets the needs of those buyers.
We will cover these three items below.
Two Types of Buyers
There are two types of business buyers, and each type approaches your business with different ends in mind.
The first type, investment buyers, purchase businesses based on cash flow. They buy a company for its income stream and for an opportunity to increase that income by growing and improving the business.
The value of a business to an investment buyer is a function of how much cash flow the business produces and the likelihood that the cash flow will continue in the future.
Strategic buyers, on the other hand, purchase businesses based on something more than just cash flow. They buy a company to get access to a component of the company that can be used to improve the buyer’s existing business. The cash flow it produces is secondary. These components can include an existing customer base, special technology, or employee skills, or even access to preestablished business systems.
The key for you as a business seller is that the strategic buyer will pay more for your business than an investment buyer.
Consider a company that sells printers, let’s call it Sabre, that wants to sell its products into a new market. It could try to sell directly to that market. But its sales would be limited by the experience and credibility of its sales team in that market and by its understanding of the market’s needs and terminology.
If, on the other hand, Sabre decided to buy a paper company called Dunder Mifflin, which already served the new market, it would acquire Dunder Mifflin’s customer base and products or services, as well as an experienced sales force with a reputation and staff experienced with the new market.
Dunder Mifflin is worth a premium to Sabre because, in addition to the cash flow coming from Dunder Mifflin’s established operations, Sabre can grow its original business by piggy-backing on Dunder Mifflin’s existing distribution network and by selling more of its printers through the new sales channels. It may also be able to improve Dunder Mifflin’s profits by cutting costs from duplicated back office operations.
Sabre can make a case that Dunder Mifflin is worth more to it because of the return from the added sales of Sabre products to Dunder Mifflin customers and can, therefore, pay a premium over a straight cash-flow-ROI analysis.
Creating a Strategic Buyer for Your Business
Creating a strategic buyer market for your business requires forethought and planning. And, unfortunately, most small businesses are purchased by investment buyers precisely because the owner hasn’t planned the exit in advance, considered who could be a strategic buyer, or tailored the business for those strategic buyers.
As I have said many times before, you will leave your business at some point. It is as inevitable as the sun rising tomorrow (at least for another 5 billion years!). If you don’t sufficiently plan for that exit, you will be throwing money away.
First, it’s important to consider what companies would likely be strategic buyers for your business. Does your business operate in a particular niche (market, geographic area, etc.) that another industry could exploit with complementary services or products? Does your business offer a product or service that a buyer could offer to its existing customers to increase the lifetime value of those customers? Has a competitor tried to sell into your niche but failed?
All of these scenarios offer possible strategic buyers for your business.
Dress Your Business to the Nines
Once you’ve identified possible strategic buyers, you must put in place the structure that will maximize the value of your business to those buyers.
Cultivate a Customer Base
Build a good-quality customer base in a well-defined niche. Narrow down your company’s value proposition for your customer and take care to cultivate repeat customers who appreciate the value that your business provides to them.
Make sure to compete for these customers on service or technological expertise only, NEVER compete on price! Customers who only patronize your business for the cheapest product are the least loyal and the most expensive to acquire.
Cultivate a Winning Business Culture
Next, watch your profitability constantly. Analyze every decision based on profitability. If you invest in the business, make sure you know when you’ll receive cash flow from that investment. Be sure profit will grow.
Hire the best employees and pay and incentivize them to view the business as owners, even if they’re not. Your key employees are part of your business’ value proposition, and you should have ‘golden handcuffs’ keeping them in place.
Then, systematize the operation of your business (Related: Reduce Small Business Stress) As many aspects as possible of your day to day operations need to be codified and written out. Systems will allow consistency across your business. If the business requires you or a certain employee to run it, it will be much less valuable to all buyers.
Of course, there are particular things to do for your company, depending on its size, market position, and product or service.
The best way to increase the wealth you will realize from the sale of your business is to consult with an experienced business advisor. But even taking a few of these steps will put you above most other businesses owners.
How Can We Help You?
Here at Alexander Abramson, we focus exclusively on business-related legal matters. Our staff focuses on creating a wonderful client-experience by actively listening and maintaining open lines of communication, consistently meeting deadlines, and being upfront about our pricing and services. Don’t trust the legal needs of your business to an attorney that can’t or won’t offer you the best service possible.
Ed Alexander is also a Florida licensed business broker and a shareholder of Fitzgibbon Alexander, Inc., a Central Florida consulting, business valuation, and business brokerage firm.
We would love to speak with you directly about how we can help you sell your business.
Call us 407-649-7777 to set up an initial consultation.