Embarking on the journey to exit your business requires foresight and meticulous planning to ensure not just a smooth transition but also the maximization of your business value.
Typically, this planning should begin 5 to 7 years prior to the desired sale.
And while that timeline can seem so far out of sight for business owners in the thick of it each day, there is a lot to be done when it comes to selling your business the right way.
In this article we’ll delve into the four avenues that will allow you to maximize your business’ value prior to your exit. From making yourself inconsequential, finding and retaining key employees, to demonstrating a strong cash flow and mitigating risks to the buyer, you can strategically prepare to make the most of your biggest asset.
How Can You Maximize Your Business’ Value Prior To Leaving Your Business?
You’ve poured a lot into your business and you owe it to yourself to work towards maximizing its value before you exit. There are four approaches ideal for business owners to accomplish in order to make this process as seamless and rewarding as possible.
#1 Make Yourself Inconsequential
This one is perhaps the most powerful but least obvious. Making yourself inconsequential, by definition, means becoming not important or significant. As a business owner, we know that’s the hardest thing to do because you are, in fact, the most consequential in your small to medium business. Even though it feels counterintuitive, the more you able to be out of your business the more you can:
- Increase the value
- Increase the saleability
And those two factors make this process as smooth and rewarding as possible for you.
When you make yourself inconsequential, you are creating a turnkey machine that anyone can own and run. Your buyer isn’t relying on your specialized skills or experience for the continuity or success of the business.
For some business owners, this realization is exciting. Fostering this environment where you CAN be out of the day to day operations allows you to do more of what you want to do while creating a more profitable business.
So, regardless of whether you’re ready to sell, or not, making yourself inconsequential is win-win.
#2 Find And Retain Key Employees
If you’re going to make yourself inconsequential and be out of the day to day, you need to decide who can run your business. Who are your key employees?
Without key employees that can run the business, a buyer is wondering, “how am I going to replace YOU?” It’s much more appealing and valuable when there are clearly defined key employees who are confident and comfortable with stepping in to run your business.
Without these people, you becoming inconsequential is not valuable.
A great tool for the continuity of your business when it comes to your key employees is a retention strategy. This retention strategy would include a period of time, anywhere from 2 to 3 years ideally, where the key employee(s) is encouraged to stay during the transition from owner to owner. This strategy further positions your business as being more valuable to the buyer.
#3 Demonstrate Cash Flow
Being able to demonstrate cash flow is essential in the sale of your business as a business is always valued by its cash flow. This makes your cash flow potentially a huge value driver. But, when you own your business, your goal is typically to show LESS income on paper to reduce taxes. That goal changes when you’re trying to sell your business. When it comes to selling your business, you want to show maximum income.
With this push-pull of demonstrating cash flow in your business, often a “fresh coat of paint,” is needed. This might look like:
- Cleaning up your books: working with an experienced financial professional to properly and adequately account for cash flow, and
- Accounting for expenses differently: shifting what your business would normally pay for the a personal expense, like your vehicle, example
Your business valuation will typically look back 2 to 3 years. For this reason, working to demonstrate your cash flow to maximize the sale for a MINIMUM of the past 3 years is essential to capture your buyer. But, we’re willing to bet most buyers will be interested in seeing this demonstrated cash flow dating further back.
Demonstrating your cash flow helps mitigate risk to your buyer.
#4 Mitigate Risks To The Buyer
Speaking of risks. There is always a risk to the buyer that the business may not run as well as it did when you ran it. With that being said, anything you can do to mitigate risks to your buyer must be done.
One area this is especially true is your customer base. Think of a company like Amazon. Amazon has billions of customers, potentially including you, with a huge diversification in that customer base. This highly reduces their risk. They aren’t relying on what type of person or one kind of industry to build their business value.
Most buyers will be concerned about your customer base when there is a high concentration of less than 20 clients.
When there is a lack of diversity in your client base, there may also be stronger ties when it comes to the business owner-customer relationship. This means it’s possible that when the new owner steps in, these customers step out. This is a huge risk to your buyer, understandably. For this reason, it’s also crucial that you have your key employees taking over more of the day to day, like meeting with your customers.
Beginning to find new lines of business is a hard thing to do. This can be even tougher based on the industry you serve.
Prepare Your Business For It’s Ultimate Sale
The preparation that goes into selling your business can feel like a daunting task.
And IT IS.
But you shouldn’t begin this journey alone. When you have one chance at selling your business for its maximum value, positioning yourself for a successful and lucrative sale ensures that you AND the new owner can reap all the possible benefits.
However, even if now isn’t the right time to sell your business, it’s always the right time to start maximizing your business’ value.
To learn how you will begin stepping out of the day to day of your business, talk with an experienced professional at Consolidated Planning on identifying your short term and long term business goals.
2023-166408 Exp. 12/2025
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
