5 Ways To Increase the Value and Get a Premium Price for Your Company
Before you think about selling your company, make sure you implement these five key strategies.
The best time to start planning for your exit is before you start your company. The second best time to start planning is now. Every leader I’ve worked with who has been through the process of selling their business wishes they had started much sooner. Even in my own exit, I wish I had done several things months or even years prior.
And while it’s true that planning ahead can save a lot of time and headaches, it’s never too late to start working on things that will increase the value of your business and make the selling process easier and faster for you in the future. Here are five key areas to focus on that will make a real and significant impact on the terms of your sale.
1. Make yourself redundant
Nobody wants to buy a business that can’t run on its own. If you’re critical to multiple aspects of the business that couldn’t run without you, it’s not going to be attractive to a buyer. The best case is that you’ll be stuck with a long and highly restrictive earn-out period where you’ll still be working hard on a business you no longer own.
Start by looking at the key functions of the business and the activities that put cash in the bank. For each part that you play in these critical functions, start putting processes and systems in place to do that work. If need be, hire people that can take over these tasks and get you out of the critical path. Make it easy for a new owner to replace these roles if people leave.
2. Remove key customer risk
If 50% of your revenue comes from one customer and they happen to be your college roommate, you’re in trouble. A new owner is going to be at risk of losing that account after a sale and will likely discount your valuation significantly to offset that risk. Ideally, you want to have no one customer make up more than 10% of your total revenue, and lower is better. If you can’t lower the percentage, make sure you have bulletproof long-term contracts and a pristine relationship with them.
3. Have a differentiated strategy
Strategy is too often overlooked when it comes to valuation. If you’re just like everyone else and only really compete on price, there is no real advantage for a buyer to purchase you over your competitor. If you’re selling a commodity, then your business is a commodity, and your valuation will reflect it.
However, if you have a unique and differentiated position in your market, then you become much more valuable for a new buyer who wants to grow and scale the business. Having key capabilities that are difficult for competitors to copy will mean that people will pay you more for your business. Identify and invest in systems, tools, and technology prior to starting the sales process.
4. Systemize your processes
You might pride yourself on being customer-focused by finding new and innovative solutions for each and every new customer. However, this flexibility will hurt your valuation. A buyer wants to own a money-making machine. That means you need a straightforward way to develop leads, sell your products/services, deliver them consistently with high quality, and collect money quickly to put it in the bank.
Bespoke services and one-off solutions don’t scale, and they can’t be optimized for profits. Define precisely what you do for whom and focus on creating a defined and repeatable product or service. This will simplify everything: what you sell, how you sell, who to sell to, how you deliver, who you need to hire, etc. Don’t let “innovation” be an excuse for not being disciplined.
5. Deliver consistently
Nothing gives a buyer confidence like consistent results over time. If you can show that you’ve defined your strategy, set reasonable targets, executed consistently, and delivered revenue and profits effectively month-over-month, you can almost name your price. On the other hand, missing targets and erratic results will make a buyer think twice and will undoubtedly reduce what they are willing to offer you.
While there are many factors that go into the terms of a business sale, these are some of the key ones. More importantly, these are some of the ones you can control as an operator that will increase your valuation. Every sale is different, but the fundamentals don’t change much. Focus on these to give yourself the best shot at a lucrative exit.
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