If you are like me, and many thousands of other business owners, then you are planning to sell your business in the next 5-ish years, and your comfortable retirement counts on getting a fair price. Unfortunately, if you are like most of that group of owners, you probably don’t know how much your business is actually worth right now and exactly what you should do to get the best value for it when the time comes.
The good news is that if you have 3-5 years before you plan to sell, there is still time to drive a significant increase in the value of your business. The key is understanding the value drivers for your industry, and then coming up with strategies to improve yours. There are multiple ways to determine what to work on that fall into three categories: The Obvious, Industry Benchmarks, and Key Ratios.
The first category, The Obvious, are all the things you KNOW you should be doing but you aren’t, or you used to and you stopped. Things like increase Sales and reduce Cost of Goods and Overhead, in other words, be more profitable. The other obvious things are to reduce Debt and improve Cashflow. Now what might not be so obvious is how to accomplish some of these things, so you might want to get some help for that, like a business coach.
The second category, Industry Benchmarks, consists of obtaining information about best practices in your industry. There are many sources of information out there, some free, some reasonably priced. Your CPA and industry associations are good sources of reports on your industry, to learn some financial and other benchmarks for well performing businesses in your industry. These range from Gross and Net Margin targets to a breakdown of overhead categories as a percentage of sales.
Depending on the industry, there can be dozens of benchmarks to sort through, and here lies the problem with benchmarking. When you look at all of the benchmarks for an industry, there are times that any one business cannot meet each of the benchmarks because some are mutually exclusive of each other. For example, you can’t achieve benchmark 1 and benchmark 2, because they are opposing metrics and depending on how you run your business, only one of them actually applies. Again, you might need some help from a professional to determine which benchmarks apply most directly to your business.
The third category, Key Ratios, is a set of financial ratios that bankers and buyers look at to determine the financial soundness and credit-worthiness of a business. This is important if your buyer is likely to need outside financing to purchase your business. The ratios used are different depending on your industry, so you need to learn the correct ratios for your business. Good sources of this will be your bankers, a business broker, business valuation consultant or coach.
The Scary Part
I have talked to many unhappy business owners over the years that waited too long to understand what makes a company valuable. Some of these simply had to close their doors and sell off equipment as scrap because they had no time and/or energy left to build value back into the business. Business brokers have to turn away far more businesses than they would like because so many of them simply aren’t worth anything or even enough for the owner to receive any cash after the broker fees.
If you would like some help figuring out where you are on your path to selling your business as a retirement asset, let’s sit down and talk about the strengths and opportunities in your business. Or if you are more of a do-it-yourselfer, you can take our free Business Assessment to get a view of where you are on the path to maximum value.
Author: Mark McNulty, Business Coach in Louisville, KY