Improving the value of your business
Content provided by a guest contributor.
Most people start a business today with the ultimate goal of selling it one day, at a return commensurate with the substantial investment of time and money incurred over many years.
At the same time,
The current global economic crisis is a good time to take stock of your business with the view of establishing what you want to do with it, where you would like the business to be in 3-4 years time and how you plan to get there.
Like most major investments, there will come a time when you need to sell and that largely entails making the investment attractive to a buyer – a business is no different. Here are some important considerations:
The factors affecting the value of your business
Determining a value for your business is not an easy exercise and is commonly described as the most inexact science around! The exercise of valuing a small private business is a subjective one and largely reflects the opinion of the valuer.
There are various methods used today to value a privately owned business – from earnings multiples, discounted cashflows, net asset value to return on investment. Here are a few factors that could affect the value of a business either positively or negatively:
- Industry in which it operates – is it growing or mature, which recent or potential developments could have an impact?
- Up to date, reliable and verifiable financial information – outdated and disorganised financial records create doubt in a potential buyer’s mind
- Trading projections – ensure that the assumptions used are detailed, make sense and are achievable
- The size & diversity of the client base – having one or two large clients is a major risk, should you lose one and have a large exposure to one industry sector
- Barriers to entering the industry in which the business operates – if they are low, it makes it easy for a new competitor to enter the market
- The number of competitors – too many competitors can place pressure on margins. In addition, products or services that are easy to replicate, could result in the loss of a competitive edge
Think like a buyer
A useful ongoing exercise when considering the attractiveness of your business to a potential buyer, is to think like one. If you were in the market to acquire a business, what would you look for and what would you want to know.
A buyer, depending on his circumstances, will have a many questions about the different facets of a business. But at the end of the day, he is looking for an acceptable return on investment proportionate with the risk. At the same time, if the buyer plans to be involved operationally, he would need to consider the extent of flexible income available for his own purposes and to service any debt raised to acquire the business.
Reliance on the business owner
There are many instances of individuals who have started businesses based on their expertise in a certain field, and after many years, approach retirement age and decide to sell.
Unfortunately, their success was largely as a result of their unique skills and the close relationships built with regular clients over the years. Once he exits the business, a substantial portion of the business’s value goes with him.
For example, take a qualified toolmaker who started his business 20 years ago in the manufacture of components for the motor industry. His ability to secure contracts based on his expertise ensured that the business thrived for many years. Although he had workshop staff to assist him & to carry out some of the work, it was the owner’s relationship with the client that ensured repeat business.
In his book ‘The E Myth Revisited’, Michael Gerber talks about creating an organisational structure for your business and putting in place the systems and controls necessary for the business to function somewhat like a franchise. By doing so, the owner reduces the dependence on himself and creates a business that is far easier to run and more attractive to a potential buyer.
Re-visit your business model and business plan
The way things are done is changing continually and staying abreast of it all requires focus, persistence and determination. Given the constant change, it is worthwhile re-visiting your business model:
- What are you offering your clients?
- How are you connecting with the market?
- How do you derive your revenue streams?
- What are the associated costs of delivering your product/service to your client?
- What are your critical success factors?
All of the above interrelate, so as a business owner, one needs to fully understand how a change in the one impacts on the others. For example, if sales reduced by 25%, how would this affect profitability and cashflow?
At the same time, re-visiting one’s business plan on a regular basis (say every 6 months) ensures one focuses on the various key areas of the business to establish whether the business is still on course as originally planned.
Have an exit goal and timeframe
If your ultimate objective is to sell your business sometime in the future, ensure that you allow sufficient time to plan the process. Goalposts can and do move, but rather decide well in advance of your exit so you are well prepared.
Done properly, preparing and planning for the sale of a business can take anything up to 18 months, depending on the size and complexity of the business. Some of the issues to consider are:
- The timing of the sale considering 1) the general economic environment 2) the outlook of the industry in which the business operates and 3) the future prospects of your business
- Financial matters i.e. clean up debtors, identify non-recurring expenses, consider an audit of the financial statements (if CC)
- Physical assets – ensure your asset register is up to date and premises are presentable
- Contractual / legal matters – ensure all employees have contracts, informal relationships with clients & suppliers are formalised and property leases are current
- Straighten out your records – income tax & Vat returns, ISO updates etc.
- It is a time consuming exercise – although you still need to be involved with the process, give serious consideration to obtaining outside assistance to avoid taking ‘your eye off the ball’ in the lead up to the sale
- Put your best foot forward – creating the right impression with potential buyers right upfront can pay substantial dividends. This entails presenting the business, in it’s entirety, in the best possible way by providing a comprehensive disclosure document (detailed overview of the entire business)
There is a great saying that applies to all business owners ‘Are you working in your business or on your business?’
As business owners, we should be continually working on our businesses to ensure that we improve the way we do things and how we present ourselves to the market. Our goal must be to ensure the long term viability and sustainability of a business so that ultimately, it is a very attractive investment for potential buyers.
Barry Wiseman is a director of the IQUAD Finance Solutions (Pty) Ltd who provide business development services, assist business owners raise funding & secure equity capital. See www.iquad.co.za and www.bwifs.blogspot.com