Are you thinking about selling your business? Whether you’re considering selling in a few months or a few years, selling a business for the best price takes prep work. Start planning now for a future sale.
Luba Kagan, the business development and strategic partnerships manager at CoStar Group, shares seven steps you can take now to boost the value of your small business before you decide to sell it.
1. Increase your profitability
Potential investors will need proof your business is currently profitable. If you can show them these profits will continue to trend upward, you can sell for a higher price. Look for places where you can reduce costs and create efficiencies.
2. Create streams of recurring revenue
Find ways to increase sales and revenue, especially recurring revenue, that will generate income for the new owner—right from the “get-go.” This may include shoring up any pending customer or vendor contracts, giving the new business owner peace of mind they will have consistent revenue flow as they get accustomed to running their new business.
3. Establish processes
Instituting and documenting regimented processes, which enable the company to function effectively without your involvement, will make buyers feel at ease. Potential investors need to be convinced that long after you’ve made your exit, the business will continue to thrive and run smoothly.
4. Cultivate a high-quality workforce
New owners don’t want to deal with employee turnover, especially when they’re new to the business. Experienced workers bring balance and stability and help to generate profit. You can increase your company’s worth by actively cultivating a high-quality workforce.
5. Stand out and differentiate your products or services
Businesses with differentiated products and services are uniquely positioned to dominate a part of the market. They have an advantage over their competitors and, therefore, can command a higher price. You can do this by developing and promoting any intellectual property, patents, or other unique feature of your products or services.
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6. Identify and highlight tangible and intangible assets
It is essential to list and price all physical assets of your business, including furnishings, fixtures, equipment, and inventory. But also consider the value of your intangible assets—things like contracts and agreements, customer relationships, brand recognition, and more. Every non-material asset that contributes to your company’s profit line has the potential to boost its price.
7. Mitigate your risks
Put yourself in the buyer’s shoes. Do whatever is possible to enhance your company’s value. Are your financial records accurate and up-to-date? Is your facility looking its best? Are there any loose ends that you need to tie up before you list your business? Buyers prefer businesses that come with low risks and high rewards.
Taking these key steps will not only enhance your company’s value, it will also grow its sales, improve its profit margins, and help it stand out from its competitors. When it comes time to sell, your business will be more attractive to buyers and command a higher price.
Is it a good or bad time to sell?
While things may have picked up a bit, in the second quarter, small business transactions dropped 39%, according to BizBuySell’s Insight Report—the largest year-over-year decline since the Great Recession, when transactions dropped 50% in the second quarter of 2009.
According to the Report, “The second quarter of 2020 began with government-mandated shutdowns postponing deals as owners focused on maintaining operations while buyers waited for the dust to settle. Lack of clarity over which businesses were ‘essential’ versus which were required to close and for how long made for an especially challenging market.”
During the first week of July, BizBuySell surveyed thousands of small business owners and buyers to learn how the coronavirus pandemic had impacted their business or buying decisions. According to the survey, 20% of business owners closed their doors as a result of COVID-19 and another 32% suspended partial operations.
Fearing the worst, many buyers paused their search. Others who wanted to move forward couldn’t because lenders froze loan approvals. BizBuySell reports, “This dynamic combined with dried-up cash flow for impacted businesses complicated short-term exit plans and resulted in some owners pulling their businesses off the market.”
Jay Offerdahl, president of Charlotte, North Carolina-based Viking Mergers & Acquisitions, describes the situation as a “giant pause,” with fear of the unknown paralyzing all parties. “Buyers and lenders didn’t want to close, while sellers would panic at any hesitancy and immediately want to find another buyer,” says Offerdahl.
But by July, 71% of the surveyed owners who had been forced to close had resumed operations. BizBuySell says, “Entrepreneurs are pivoting, adapting, and seeking opportunity amidst the disruption brought on by the pandemic, and as a result, acquisitions are steadily bouncing back from April lows.”
After a 51% year-over-year decrease in April transactions, consecutive 12-point gains in May and June shrank the deficit to 39% and 27% respectively. Over the same period, the number of buyers searching and inquiring about businesses on BizBuySell recovered then eclipsed pre-pandemic levels.
“The panic changed toward the end of May. At that point, we understood what we were dealing with, and the appropriate way to view financials in light of it,” says Offerdahl. “Demand recovered, listings started to return, and deals were happening again.”
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