Keys to Increasing Your Business’s Value

If you own a business you are no doubt aware that the ability to sell your business is a vital aspect to securing your retirement.  As a Certified Valuation Analyst I have the opportunity to do a number of business valuations.  In this work I have identified a few key elements that will ensure you are able to sell your business for the highest price possible.

Depth of Management

One of the main reasons that professional service firms like doctors, dentists, accountants and attorneys are not able to see their business forthe same premium as other businesses is due to a lack of management depth.  In other words, the success of the business is attributable to the efforts of one person and the relationships they have.  Should that person be removed from the business there is a risk that the profitability of the business would suffer.  Professional businesses have a hard time avoing this issue due to the specific credentials they need to own the business, but I’ve seen this mistake made with all manners of other business.

The key to avoiding this problem is to ensure that you have people in place who can run your business if you were to be removed.  If the business is not completely reliant upon you a potential buyer will be willing to pay a higher price for the business as they will have the management in place to help ease the stresses of a transition in ownership.  Furthermore, the potential buyer will have people in place who truly understand the nuances of the business.

Avoid a Concentration of Customers

If all of your eggs are in one basket the value of your business will be diminished because the actions of one customer could significantly impair the profitability of the business.  In a perfect world, no one customer should make up any more than 10% of your revenues.  If you are able to accomplish this sales mix there is little risk that the defection of one customer would damage the operation of the business.  In other words there is less risk to a potential buyer.

Professionally Prepared Financial Statements

Internally generated statements are nice to have, but a potential buyer will put more credence into a financial statement prepared by a CPA.  At minimum it is a good idea to have compiled financial statements, but if you have a larger business I would suggest getting reviewed statements once you decide that you may be three years or so away from selling the business.  This will show a potential buyer that you have taken your financial statements seriously and they will have some assurance that a third party has vouched for the accuracy of your statements.

Avoid Funny Business on the Financial Statements

No one likes paying taxes, but I’ve come across some situations where the owner of the business is running just about every personal expense they can think of through their financial statements.  Not only does this put you in the cross hairs of the IRS, but it diminishes the value of your business as a potential buyer will never completely understand all of the add backs you want to make in order to present a fair version of your financial statements.

Conclusion

The largest variable in determining the value of any business is the risk associated with the investment.  If you can show that you have a strong company with good people, a diverse customer base and financial integrity you will be able to sell your business at its maximum value.