If you hope to sell your business someday, the time to think about increasing its value is now. Too many business owners are shocked to find out the business they’ve been running isn’t worth nearly as much as they thought, says John Martinka, vice president of Partner On-Call Network, a Kirkland, Wash.-based firm that helps small businesses prepare themselves for sale.
Here are ways to make your business more valuable to potential buyers:
• Don’t let it be just you. “Too many businesses suffer from the all-controlling owner who not only knows how to do everything but also insists on being part of everything,” noted Martinka. Don’t become a bottleneck. Prospective buyers can be scared off if the shoes they have to fill appear too big.
• Avoid excessive customer concentration. Buyers dislike seeing a small number of key customers accounting for the bulk of sales. Work to diversify your customer 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.
• Keep financial statements and tax returns in line. It’s vital to have good accounting systems and financial safeguards in place, and keep accurate records and statements. Try to avoid adjustments or add-backs.
• Don’t be too dependent on a key employee. “A small company I know of recently had severe problems when their top salesperson left and took most of their accounts,” said Martinka. The problem can also arise with a technical expert, machine operator or indispensable 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. No lease can mean no sale.
• Keep your tech up to date. Use the expertise you have in your industry to get technology up-to-speed, show increased efficiencies (and profits) and sell for a higher price.
• Avoid any “off the books” cash. “There isn’t a CPA around who will let a business buyer pay a price based on unreported cash,” said Martinka.
• Grow your revenue. This one’s rather obvious, but true. A business doing $1 in sales won’t sell for the same multiple of profits as a similar business doing $10 million. There are simply more risk factors associated with a smaller business. A minor hiccup to a larger firm can be a major disruption to a smaller one. •
Daniel Kehrer can be reached at
editor@business.com.
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