by: Tim Dooley
One of the most popular questions I receive is How much is my business worth? There is no simple answer to that question.
The problem is bigger. By the time you really need to know how much is your business is worth, there is very little you can do to immediately change anything.
There are things you can begin doing right now to increase the future value of your business. When someone else begins placing a value on your business, they apply formulas, capitalization rates, methodology and other techniques and inputs.
Start now to get ready for that future possibility. Here are ten ways to increase the future value of your business.
➤ Keep good books and records.They will be the first thing everyone wants to see when buying or valuing your business. With today’s computer technologies and programs there is zero excuse not to have your business records completely automated and accurate to the minute.
➤ Grow earnings before you sell. Up trends are very important. A buyer will value the future earnings based on past results. If the chart is going up, the future earnings must have a growth trend too, and the value will be higher.
Would you buy a business that made $50k, then $100K, then $150K in successive years? Yes. Would you buy the reverse business? No. Would you buy a business that was flat? Perhaps. Would they be equally valued? No.
➤ Separate fringe benefits from real expenses. I know that business owners expense unnecessary items in their businesses. However, many legitimate expenses could be declared, by a valuation expert, as discretionary. (Did your beach store really need to visit the bathing suit manufacturer in Florence, Italy?) Keep a separate credit card, or accounting notation, or journal for discretionary spending.
➤ Have proper management and staff in place. Small businesses are valued on a one-owner-operator working the business. If a spouse performs a job that must be replaced, the value will be negatively impacted. Position your business for sale by phasing out family members, replacing them with staff people who will stay on after a sale. Also, no buyer wants to work 60-plus hours a week. If you do, you had better get some staff before you try to sell. Chief cook and bottle washer business owners will find it very hard to sell. Transfer the knowledge–now!
➤ Have the capacity to grow and make capital expenses. If your business is cramped and the business is limited by the current facility and equipment, your business valuation will reflect that ceiling of revenues and profits. Either sell before you need to invest, or buy the equipment, move the business, and sell at a later time.
➤ Keep good books and records. Getting the picture yet? There are several great accountants and CPA firms in your area. Pick one to work with.
➤ Increase the bottom line. Your business is primarily valued based on the bottom line profit. And yes, we do use multiples. The multiple increases as the profit increases. To be clear, a business making $100K may be worth twice that, or $200K. But a business making $500K may be worth three times that, or $1.5M. And remember that trends can also affect multiples.
➤ Keep everything in good repair. The value of equipment and the business will be higher if everything works and looks nice. If you do not use it, throw it out. Also, buyers will want everything in working order at the day of closing…even that old piece of equipment that you do not use anymore.
➤ Control, manage, and document inventory. Never play with inventory as a tax savings strategy. It will catch up with you someday, and you will not like the consequences. Plus, you need to keep your inventory lean and moving. If it’s old, donate it or mark it down. Your balance sheet will shine. So will your business ratios.
➤ Keep good books and records. Now you’ve got the picture. Any bank looking to finance the acquisition of your business will want to review at least three years of earnings to decide how much they can lend. If a buyer cannot get enough money from a bank, you have two choices. Seller financing, or sell for less. Good books and records will allow your business to sell fast, for a high valuation, and financed with third party financing. All good for you.
All business owners should plan for their eventual exit. The problem is, plans sometimes change. If you keep your business in order through these simple steps, you can exit at anytime.
Tim Dooley is President of Transworld Business Advisors of Fort Smith/Central Arkansas. He and his team provide business brokerage, franchise consulting, and franchise development services in AR and OK. Call him if you need clarification or have questions at 479-228-8340 or 479-459-1745 (cell); Email: firstname.lastname@example.org; www.tworld.com/fortsmithar.