How to Increase the Value of Your Business Before Selling

How to Increase the Value of Your Business Before Selling

What you need to do before selling.

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(Image: iStock/TommL)

Whether you have an existing business or are considering starting a business, Michael Gerber, author of The E Myth, suggests the only reason to build a business is to sell it.

Sadly, many business owners wait too long to prepare the business and they do not have enough time to maximize the sale price of the business; for some, the idea of selling their business never even crosses their minds and others are caught off guard by an unfortunate event.

To avoid getting caught off guard, it is best to start as soon as possible to prepare your business. It is never too early.

Here are a few tips to help you increase the value of your business over the next 24 to 36 months.

 

Clean up Your Books

 

With “good” accountants, you are likely writing off much more than just the required expenses of the business. The value of the business is directly linked to the profitability of the business. If you have minimized your profitability to decrease your tax burden, you will not maximize your selling price. To maximize your selling price, 3-4 years before you want to sell, start optimizing your business to maximize your profit. This alone can greatly increase what your business will be worth to a buyer.

 

Note Abnormalities That Will Be Adjusted For

 

When a professional values your business, they will look to “normalize” your books, called “recasting.” During this process, anything that was not normal will be removed and this will increase the profitability of your business. For example, if you own a restaurant and wanted to replace the hood system, this cost would be removed because it is not “normal” and does not happen every year. Therefore, removing it would increase the profitability of your business.

 

Replace Yourself and Family Members with Staff

 

If you have family members working in the business, start to replace each one with non-related staff. When a buyer looks at your business, the business has less value and is riskier if there will be a mass exodus at the time of the purchase. Slowly, replace each family member with a staff member that would stay with the business after the purchase.

 

Secure Key Employees

 

You will also want to create an employee retention program to secure employees that are critical to operations. A new owner will feel more comfortable knowing the critical employees are incentivized to stay with the business after the purchase and this will make the business less risky and more valuable.

 

Design Your Business on Systems

 

Every major task in your business should be documented and systematized. Although your current staff knows exactly what to do, for the buyer, having systems in place assures him or her that the business will run without you. Start by documenting the critical functions and then over time document all functions of the business. This task is time-consuming but will make a huge difference in the sales price of your business.

 

Have a Growth Plan

 

Now is the time to ramp up your marketing, sharpen your sales team and make sure you have a solid plan for growth. Buyers pay more for growing flourishing businesses than ones that are stagnant. Now is the time to make your business look the best it’s ever looked.

By using these tips, you can drastically increase the value of your business and increase your sales price as well as sell the business faster.

This article was written by William Lipovsky and originally appeared on Due.com


William Lipovsky owns the personal finance website First Quarter Finance. His most embarrassing moment was telling a Microsoft executive, “I’ll just Google it.”