How to Increase Your Small Business Value from Day 1

One of Don Draper’s most memorable lines in “Mad Men” is, “The day you sign a client is the day you start losing him.”

Smart business owners apply a similar thought to planning, founding and managing their companies: The day you start your business is the day you start preparing to sell it.

If you don’t have an exit strategy in mind when you start and build your business, you can paint yourself into a corner and be left with no good way to get value out of what you have worked so hard to build. And if you’re depending on selling the business to fund your retirement, the problem is magnified because you won’t get any “do-overs.”

There are two critical elements of preparing to sell your business:

  • Identifying your buyer.
  • Organizing or preparing your business for maximum value.

Although the second point above should be acted on first (you should always be building your business for maximum value), let’s look at point No. 1 first because it does have some impact on your preparation.

Identify Your Buyer

There are three general categories of buyers you should consider:

  • Family Member
  • Key Employee
  • Outside Buyer

As I alluded to above, you want to present each of these buyers with a business value that has been maximized. However, with the first two on the list, you need to do additional prep work.

If you’re going to work out a deal with a family member or one of your current employees, you need to be sure that they have been sufficiently trained to take over the reins. You would probably want to go into a transition period to make the sale and change in leadership go smoothly for everyone involved.

If you sell to an outside buyer, there’s a good chance that some kind of training or transition period will be part of the sales agreement.

How to Build Your Business With the Sale in Mind

You need to keep an eye on the finish line from day one. However, that doesn’t mean there are strict rules that apply to every phase of your business development. It means that you need to be ready to make the correct course adjustments depending on the stage of your development. Let’s look at one of the first ways to groom your business for sale to illustrate this.

1. Maximize cash flow and profitability.

With the exception of some tech start-ups whose value is based on potential payoff in the future, most businesses are appealing to buyers when both the top and bottom lines look healthy.

This means that as you get closer to the time when you want to sell, you don’t want to be taking a risk on a costly new venture. It’s fine to gamble a little when you’re not close to your exit date, but it will bite you if you’re not able to turn it into a profitable venture by the time buyers start looking over your operation.

2. Diversify income streams.

If you’re a service business with one or two major sources of revenue or a manufacturer with few products, this can lower the value of your business because it scares potential buyers. They will naturally wonder what happens if they lose one of these key accounts or sales drops on your popular item(s). Further, in service companies, potential buyers will fear that key accounts are invested in you personally and will jump ship when new ownership takes over.

3. Have some forward-looking products and services.

If your business is built around a legacy product or service, what happens when demand drops for it? A buyer wants a business with a future, so have products and services that promise increased sales in future years. Granted, there is a tension between this idea and “maximize your profits.” Perhaps you prepare well-researched plans for where you want to go in the future instead of actually launching the new products or services. If do start pilot programs, manage them efficiently so they pay for themselves and contribute to profits.

4. Spread responsibility among key employees.

If your business is dependent on one or two people, you either need to:

  1. Have backups in place.
  2. Spread their responsibilities to others.
  3. Assure their continued employment.
  4. Train new owners to do their work.

5. Start planning your exit strategy early. 

I want to reinforce the importance of beginning your sales or exit planning early. Not only does it give you a chance to put things in order, it gives you time to recover from mistakes and/or a bad market. Say you’re looking to sell in five years, but three years later your business is experiencing great growth in profits. You know there’s a business cycle and that growth will flatten at some point. It might be smart to sell while the selling is good. On the flip side of that, you might want to weather a downturn and not sell.

If you’ve given yourself plenty of time to prepare, you can make some 11th-hour adjustments. If you wait to the end to start preparing, you lose that flexibility.

I’ve tried to give you an overview of the most important issues you’ll be wrangling with to prepare your business for sale. However, there are experts who specialize in this, as well as companies that sell businesses like yours. Talk to some professionals in your area who understand your business dynamics and the local market.

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