Got an “exit plan” for your business – a way to cash in on its value someday? Most entrepreneurs have such a plan when they start out, and it often involves selling the business to someone else, or to a larger company looking for a foothold into a product, service or marketplace you offer or serve. In a few rare cases, highly successful small firms can end up “going public” with an initial public offering.
But if you hope to eventually sell your business, the time to think about increasing its value is now. Too many owners are shocked to find out the business they’ve been growing and nurturing isn’t worth nearly what they thought.
Here are ways to make your business more valuable to potential buyers:
• Don’t let it be just you. Many small businesses suffer from the all-controlling owner who insists on being part of everything. But prospective buyers can be easily scared off by this. Some of today’s top business-accelerator programs insist that the new businesses they invest in have at least two co-founders, in part for this very reason.
• Avoid excessive customer concentration. Buyers dislike seeing a small number of key customers accounting for the bulk of sales. Work to diversify your customer or client base. You should also know that if you have a highly concentrated customer list when your business sells, you may be asked to include a so-called “erosion clause” in the deal that lowers the price if a top customer leaves.
• Don’t be overly dependent on a single key employee. Often a small business will have a top sales-person who’s vital to the business. If that person were to leave, the business would suffer. The problem can also arise with a technical expert, machine operator or office manager.
• Negotiate the right kind of lease. You might think a month-to-month lease is great because it offers flexibility. But buyers and banks think more about how expensive it is to move a business. In fact, for other than professional-type businesses, banks are reluctant to lend for longer than the term of a lease, including options.
• Keep your technology up to date. Use the expertise you have in your industry to get and keep technology up to speed. Few buyers want a business that’s tech-challenged.
• Avoid “off the books” cash. No reputable broker, accountant or other person who does business will let a buyer pay a price based on unreported cash. Keeping everything on the up-and-up is essential. •