I don’t know about you but I hope to retire some day. I’m not in a hurry as I love what I do but I thought I’d share some of the factors that helped me to obtain 32% MORE than average on the sale of my second business. (My first business was a small partnership with a friend that we wound up amicably when I returned to the UK)
Yes, buyers will look at the profitability but there’s more beyond that so here’s a checklist for you to work on. The difference between and average and a premium valuation often depends on preparation.
1.Stable revenue and profit trends – stability is often better than erratic growth. The new owners want to know how much profit they will be able to generate. Clean, well-organised accounts – these give an impression that the whole business is well run. EBITDA is more than a buzzword, it’s an adjusted profit measurement that allows buyers to compare like with like when looking at different businesses
2.Minimise risk for the new owner – reduce risk leads to higher multiples. Assured future revenue through contracts, retainers, subscriptions, and repeat customers will guarantee the new owner their first income. This assured revenue also gives confidence over future cashflow
3.Diverse customer base. A big ‘name’ may sound impressive but they may be at higher margins and/or the business may be overly dependent on them. Risk concentration is a concern for prospective buyers. Diversified income streams (customers and products) increase stability and confidence
4.Strong brand and market position. Brand recognition and reputation will continue to attract customers to your business in the future. If you have a niche it may be easier to stand out as a specialist. Identify any competitive advantages that you have in terms of USP and intellectual property. A trusted brand will often receive a premium offer.
5.Documented systems and processes – these will help the business to run smoothly without you making the transition easier for the new owner will also increase the value of your business
6.Reduced dependence on the owner. If the business is dependent on you to continue running then it may well collapse without you and so will be valueless to the new owner. Start your retirement now. Ensure that others in your team have knowledge of operations and sales as well as customer and other business relationships. It is important to delegate to your team.
7.Experienced and reliable team – they will keep the business running day to day when you have exited. Retention of employees post-sale is often desirable for the new owner so ensure that the buyer is aligned with your key team. This will reduce operational risk for the buyer (as well as looking after the team who have served you well)
8.Potential – Buyers will pay for potential growth and scalability. Ensure that you have up to date, scalable systems in place (this is where many retiring accountants fail to prepare leaving the new buyer with too much work to do). Identify untapped markets, new products, and expansion opportunities
9.Clean compliance position. Ensure that all contracts, licences, insurance, etc are in order and settle any outstanding disputes or liabilities
10.Clear exit preparation and timing – spend 1-5 years preparing* in advance of the sale by improving financial metrics and reducing risk.
Increasing the value of your business is not just about increasing profit but also reducing risk and proving that profits are sustainable. Put yourself in the position of the buyer. Small improvements can often significantly increase sale price.
*Warning – when Della has coached business owners to prepare their business for sale two thirds of them have liked the new business so much that they have deferred their retirement!