Have you ever had a valuation done on your business? Most business owners would say yes.
But, ask them if they think they could actually close a deal for that amount and many owners become a lot less confident.
Assessing the potential value of your business is not the same as overcoming the challenges that get in the way of making a deal. Many companies end up selling for amounts lower than their valuation because they couldn’t demonstrate their quality to potential buyers.
That begs the question, what can you do to make your business market-ready before putting it up for sale? How can you make decisions today that will lead to an increase in your sale price down the line?
What Defines a Quality Business?
Many business owners only think about how to maximize their business value today. For that reason, they make decisions based on the historical performance of their company and then take proceeds from the earnings.
But, when a buyer is looking at your business, they are thinking about how they can put the least amount of their capital at risk and still maximize their potential return. So when they’re evaluating your business, they are looking at fundamental things like the quality of your reporting systems and management team.
They also consider the visibility of your earnings base and the way you manage your working capital to maximize your returns. If you don’t work on shaping this perspective, you can be unpleasantly surprised by what buyers think your business is worth.
Risk and Value Gaps
Business owners are accustomed to managing high levels of risk. But, potential buyers may not have the same stomach for chance. Since you are so used to risk, it can make it difficult for you to evaluate how risky your business really is.
A buyer, on the other hand, will be warier. They will want to see a strong possibility of a high return. Since they have a different viewpoint than you, they may be less willing to invest in your company if it’s perceived as risky.
If you’re running into this problem, there are three ways to solve it:
- Top-line Growth
- Cutting Costs
But, these strategies too can increase your business risk in the eyes of a potential buyer. If you try to grow your top-line too quickly, you can begin to suffer with longer order turn around times and ruin your company’s reputation.
And, if you make the wrong aquisition, you may end up overwhelmed with improving that section of your business and lose focus of the bigger picture.
Other approaches to reducing the risk-value gap include:
- Finding cheaper suppliers
- Cutting the weaker employees
- Eliminating expenses
But, these strategies can cause problems as well. You may sacrifice the quality of your goods or the amount of customer service you are able to provide.
How to Build Value the Right Way
Building value into a business is a long-term process. You need to focus on creating a low-risk environment. It has to be a part of your company culture.
As the owner of your company, you will have to drive the process. But, it’s also dependent on your employees following suit to coordinate to fill the gaps that cause your company to seem risky.
If you’re considering selling your business in the next few years, get in contact with experts today that can help you shape your policies to create a solid and sustainable business model that appeals to buyers. For more advice, contact me today.