How Can I Get As Much Money as Possible for My Business?
To answer this question, you need to think like a buyer. What do all buyers want? Outlined below are the key factors:
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Strong predicable cash flow. After all, they will be making an investment, so they need to:
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have confidence in the cash flow
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have an expectation that cash flow will be steady (and ideally growing)
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Healthy Profits.
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An allowance in the Profit and Loss statement (and cash flow statement) for a reasonable salary for the owner (and any relatives).
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For example, the P&L might show a profit of $200,000. But if the owner and his spouse both work full time in the business and draw no salary, the real profit could be less than $50,000. In some cases, for tax purposes, the owners will draw unusually high salaries or incur higher “discretionary” expenses which could understate the profit available to the new owner.
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For these reasons, it is important that the P&L be restated to eliminate any abnormalities.
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Strong Sales.
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Positive trends
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Excellent records
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Balance. Reasonable working hours for the owner (and any relatives). If the owner has to work 80 hours a week and has no time for vacation, the valuation will be negatively impacted.
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Established methods and procedures that staff follow easily, such that the business can run without the owner’s constant involvement.
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Ideally these will be documented so that anyone can follow
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A strong team that the owner can count on when he is not there. Evidence of a good team would include:
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good morale
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low turnover
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high productivity
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a good mix of age groups (so not everyone is retiring at once)
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fair, market-based compensation
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no reliance on any key employees
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A unique product or service offering where price is not a major consideration in purchase decisions.
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Strong supplier relationships.
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competitive products
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reasonable and competitive terms
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they support your sales efforts
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with little danger that supply could be withheld
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A good distribution of customers
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Little reliance of a small number of customers
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Customers that return often
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Customers that pay bills quickly
You should score your business on all of the above factors. If you want to get excellent value for your business then you need to score “excellent” on all these factors.
If you score average (say 3 on a scale of 1-5) or below, then you really owe it to yourself to put a business development plan in place to improve each of the areas – it can have a HUGE impact. Let’s use a very simple example to illustrate the mathematical impact. In this example let’s assume you score below average and generate $100,000 cash flow (after reasonable allowance for owner salary) you might apply a multiple of 3 times cash flow (as an example only) to yield a value of $300,000 (3 X $100,000). If you improve your cash flow by 50% (to $150,000) without changing other aspects of your business, you could expect your valuation to increase to $450,000 (3 x $150,000). A 50% increase may seem like a lot, however, by making a series of small sustainable adjustments over the period of 12 months a 50% increase and profit and cash flow can be quite attainable for many businesses (to find out how, contact us at coaches@actionbusinessdevelopment.com or 905-943-4265 or 416-483-9251).
But that’s not all! If you improve your score to above average on all the other factors your cash flow valuation multiple could also be expected to increase. You see, you will then have a far more attractive company, which more people will be interested in – and they’ll be prepared to pay more for it. For example, if your valuation multiple increased from 3 to 5, then your business would be now worth $750,000 (5 X $150,000). So, in the simple example, you have gone from a valuation of $300,000 to $750,000 over the course of 1 year. That’s an increase of $450,000 (150%)!
So if exiting your business might be in the cards in the near future, you might want to set out to tune your business over the next 12 months. It just might be the most profitable 12 months of your life.
To find out how your business rates, take our Free Online Business Health Check.
To find out how to make your next 12 months the most profitable period in your business life, contact us at coaches@actionbusinessdevelopment.com or 905-943-4265 or 416-483-9251. Or register for our Free Workshop - 6 Steps to a Better Business.
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