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16 Things that Increase The Value of a Business and Get You More Money When You Sell
these are the pieces that build long term value, and make your life simple as an owner.
1 - Time in business
A business established in 1866 and still trading today is inherently more valuable.
They’ve not only stood the test of time, but they’re an established brand.
On a tighter timeline that’s also true, but in different ways.
A 10-year-old business is significantly more valuable than a 2-year-old business – there’s a high chance it has long term repeat clients or customers.
It has probably weathered one or two economic downturns, has hired and trained staff, and has and established online presence.
2 - Good Historical Performance
If a 10-year chart shows revenue increasing on a steady upward curve, a buyer is going to be inclined to believe and expect that growth to continue.
Second-best is a chart that goes sideways, with the business neither gaining nor losing revenue and profit over time.
A real destroyer of value is a business that’s tanking – not only is it worth less, but the population of buyers of distressed businesses is far less than the mainstream.
3 - Hard asset value
Assets will reflect on your balance sheet, and any buyer can expect to pay for those assets in the same way they would on the open market.
However – beware the trap.
Yes, assets are reflected in the sale price of your business, but, they can rob from the SDE multiple, because the buyer conflates the two in his mind, and expects you to do the same.
Sometimes having less assets might be a win – especially in the lower end of the market, with businesses worth less than $1m.
4 - Absentee owner
An owner who doesn’t need to go to the office/shop/whatever everyday is the ultimate proof that they’ve achieved a real business, rather than a job.
They have capable and competent staff, they’ve assigned responsibilities to those staff, and things are working as they should.
Any buyer will see this is a sign of a strong business – especially if it’s multiplied by stable or growing revenues and profit.
5 - Retirement as reason for exit
There’s always a question of “why are they selling”.
You can’t avoid that question. It’s a natural question.
And it doesn’t matter what the answer is – there will always be doubt. “Is he telling me truth? Is that REALLY why he’s selling? Does he know something I don’t?”.
Those questions will always exist – unless the owner is retiring.
A retiring owner gives great comfort to a buyer for two reasons – firstly, the buyer can be sure the exit is for a pure reason, and secondly, they buyer can be certain that the former owner will not become a competitor at the end of any agreed non-compete period.
Both these reasons work together to increase the value of a business.
6 - Employee tenure
A business with long term staff is inherently more valuable – it shows that things are working well, the staff are happy, and when they’re happy, they take care of clients and customers better.
A ‘revolving staff door’ is bad for business.
And it’s both a cause, and a symptom.
It’s the cause of customer dissatisfaction, poor service, and often low morale – and it’s a symptom of a failing leader.
If the owner has been unable to attract and retain key staff, they’ve failed to do that which is most essential – build a business!
The Turks have a saying – “the fish rots from the head first”, and that very much applies to business.
7 - Customer base
A two-million-dollar business built on two clients is worth… not very much at all.
However, a one-million-dollar business built on 76 clients is worth many, many times more.
Buyers of businesses (and lenders!) want to see a client base that is built on stable ground. Ideally across many industries – for example, a trucking business that serves only soy bean farmers is 100% reliant on the soy bean market, and would achieve a valuation at the very low end of the scale, even if they had many soy bean farmers as clients.
However, if the same trucking business had a client base of 6 soy bean farmers, 8 food distributors, 2 brick factories, 5 clothing retailers, and 6 sea-food companies, the business would be worth two or three times more than in the first example, because it has not only a diversified client base, but their industries are well diversified too – if the soy bean farmers have a bad year, the brick factories might be busier, etc.
8 - Competitive advantages
Most businesses don’t have any inherent competitive advantage.
They’ll say all the right stuff, like “our service sets us apart”, but really, there’s nothing there.
Real competitive advantage is something that you have and others don’t.
Maybe you’re the only distributor in your region for a product that demonstrably outperforms its nearest rivals by 600%. That’s a real competitive advantage worth paying for.
Or you might sell cardboard packaging, and also operate a cardboard and paper recycling business – the efficiency you gain from exposure on both sides is a trade advantage.
Any real competitive advantage contributes greatly to the value of a business.
9 - Proprietary products
Following on from the previous point, proprietary products are the ultimate competitive advantage – at least, to the extent that they’re useful to the market.
If your business has designed, developed and patented the only product in the world that solves a particular product, your trading position is strong, and that will greatly boost your valuation.
Often, if a business has a patent or other intellectual property included, that intellectual property will be valued separately to the operating business by specialist valuers who take into account the commercialization value of the IP.
10 - Obvious growth
This one means ‘obvious’ growth.
Not just normal and expected growth.
Obvious growth is growth that doesn’t require conditions to change, and can be taken advantage of right away.
An example of obvious and immediate growth opportunity is a HVAC service company that receives 60 service calls a week, but only has a service crew capable of 20 calls a week, and is turning down the other 40.
The obvious growth comes from doubling or tripling the workforce, and saying ‘yes’ to the additional calls instead of referring them elsewhere.
11 - Clean books and records
A business is valued, in large part, based on its historical performance.
If there’s no accurate record of that historical performance, the value also evaporates.
Any business owner who expects to sell – or otherwise achieve a good valuation – must be serious about record keeping.
A bookkeeping service should be a minimum starting point, and on the other end of the scale for businesses with revenues into the several-million-dollar, annual audits can provide assurance for any future acquirers that historical records are accurate.
12 - Asset register
Most businesses need to purchase capital items to operate.
An example is a trucking company that purchases not only their trucks, but other equipment needed to operate – perhaps a forklift, an expensive stair-climbing wheel trolley, office computers, etc.
If a business owner intends to be paid for all of those things when it comes time to selling the business, they’ll need to have a correctly and accurately compiled asset register that lists the item, the purchase price, and the present value based on your accounting standards for depreciation (which will vary by location and industry).
13 - Favorable lease terms
A lease agreement that allows a business to do what it wants to do is going to be more valuable than a lease that is strict.
To continue with our trucking business example – if they leased a warehouse or depot under an agreement for an initial 3 years, then have the right to renew two more times for 3 years each (commonly called a 3x3x3 lease), with no rent increase, that will immediately be more valuable than a 7x5x5 with a 4.6% increase at each renewal.
Lease accounting and lease review is in itself a specialist area – but the simple rule of thumb is that you don’t want long term obligations, you definitely don’t want long term obligations that increase automatically, but you want to be able to continue doing business.
14 - Location
Following on from the previous point about favourable lease terms – the thing that underpins any lease is a piece of real estate, and the location of that real estate might matter a lot, depending on the type of business.
Our trucking company might want to have a depot near the intersections of interstate highways – whereas a clothing retailer will do much better in a location near other clothing retailers than they would if they were a standalone clothing store next to 6 fast-food outlets.
Historical performance of a business will tell you whether the location is a winner, and a good location will add to the value of the business.
15 - Industry trends
If the industry is booming, the business will probably continue to be ok too.
Healthcare is growing rapidly, so it’s not an unreasonable idea to say that a home-care agency has good industry conditions.
However - borrowing a little from the above example of a diversified customer base - it needs to be noted that ‘industry trends’ don’t just relate to your industry, but to the industry of your clients.
If you’re a trucking company serving only soy bean farmers, your business will trend with the soy bean industry, not with the trucking industry.
This is why it’s doubly important to have a diversified client base.
16 - Seller financing
A seller who is willing to offer financing, in whole or in part, to a buyer is going to get a better valuation than a seller who demands an all-cash, walk in/walk out deal.
In real estate deals, vendor financing is called a vendor takeback, or VTB, and that term has leaked over into business sales too.
Nothing says “this is a solid business that I’m selling” like being willing to have your big payday conditional on the continued performance of the business.
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