The value of a business is largely determined by profitability and presentation. Although you may not be planning to sell for several years, you can – and should – start getting your business ready for sale now.
Profitability
Naturally the financial performance of your business will be a major factor in determining its value. You and your accountant can work together to assess your business’ current value then identify opportunities to improve profitability and put strategies into place. Our article “How To Improve Business Profitability By Reducing Expenses” explains some of the actions business owners can take to make savings and improve their profitability over time.
Presentation
Because you want to present your business in the best possible condition, now is the time to assess the quality of your premises, plant and equipment, systems and documentation. Gradually undertake any necessary repairs, maintenance, replacements and aesthetic improvements to ensure your business physically presents as well as possible.
Reviewing your systems and documentation will help you to identify any improvement opportunities. For example, an inventory management, CRM or payroll system could add value to your business by increasing efficiencies and by making it easier to transition to a new owner. Similarly, taking the time to document your processes can also help you to identify ways to be more efficient while putting your business’ best foot forward.
Future Maintainable Earnings
Don’t think of your business as a static entity at any given valuation date, but rather as representing future earnings for potential buyers. A business presenting with the ability to deliver maintainable profits to a new owner will help to maximise its sales value. There are many aspects of your business which contribute to it being a healthy going concern:
- Customers. Spreading the risk by having a large customer base is preferable to having a small number of large customers. However, if the nature of your business means that your sales are mostly generated by a few large customers then we recommend putting customer contracts into place to provide some security to a new owner.
- Suppliers. Review your supplier contracts and if necessary renegotiate. Improving your supplier terms of trade can improve your current profitability as well as assisting new owners.
- Staff. Now is the time to ensure your business doesn’t rely too heavily on any one staff member – yourself included. Putting strategies in place to reduce or minimise key person reliance will improve its attractiveness and value. Our article “Making Your Business Worth More Without You” suggests ways you can minimise the risks of key person reliance.
We recommend running your business as if always preparing it for sale. The reality is you might want a lead-in period of two to three years to put you in the best position to maximise its value.
UHY Haines Norton Director Kerry Tizard works with business buyers and sellers across all industries. To find out more about how we can help, please contact Kerry on (09) 839-0300 or email kerryt@uhyhn.co.nz.