One of the most popular questions we receive here at Transworld is "how much is my business worth?" Most often there is no simple answer to that question, and the problem is by the time you really need to know how much your business is worth, there is very little you can do to immediately change the answer. Here's how to rig the system with hot input and information to increase the value!
1) Keep good books and records. It will be the first thing everyone wants to see when buying or valuing your business. With today's computer technologies and programs, you have zero excuse not to have your business records completely automated and accurate to the minute.
2) Grow earnings before you sell. Up trends are very important. A buyer will
value the future earnings based on past results. If the chart is going up, the future earnings must have a growth trend too, and the value will be higher.
Would you buy a business that made $50k, then $100K, then $150K in successive years? (YES) Would you buy the reverse business? (NO) Would you buy a business that was flat? (PERHAPS) Would they be equally valued? NO!
3) Separate fringe benefits from real expenses. I know none of your business owners expense unnecessary items in your businesses. But many legitimate expenses could even be declared by a valuation expert as discretionary. (Did your beach store really need to visit the bathing suit manufacturer in Florence, Italy????) Keep a separate credit card, or accounting notation, or a journal.
4) Have proper management and staff in place. Small businesses are valued on
one owner operator working the business. If your spouse performs a job that must be replaced, the value will be negatively impacted. Your best bet is to phase the family out and have staff that will stay on after a sale. Also, no buyer wants to work 60 plus hours a week. If you do, you had better get some staff before you try to sell. Chief cook and bottle washer business owners will find it very hard to sell. Transfer the knowledge NOW!
5) Have the capacity to grow and make capital expenses. If your business is cramped and the business is limited by the current facility and equipment, your business valuation will reflect that ceiling of r e v e n u e s and profits. Either sell before you need to invest, or buy the equipment and move the business, and sell in a few years.
6) Keep good books and records. (Getting the picture yet?) There are several great accountants and CPA firms in your area. PICK ONE AND USE THEM!
7) Increase the bottom line. Your business is primarily valued based on the profit to you! And yes, they do use multiples, and the multiple increases as the profit increases, i.e. a business making $100K may be worth 2x's ($200K), but a business making $500K may be worth 3x's ($1.5M) .... but remember #2, the trend also affects multiples.
8) Keep everything in good repair... and if you do not use it THROW IT OUT!
The value of equipment and businesses will be higher if everything works and looks nice. Also, buyers will want everything in working order at the day of closing ... even that old piece of equipment that you do not use anymore.
9) Control, manage, and document inventory. PLEASE do not play with inventory as a tax savings strategy. It will catch up with you someday, and you will not like the consequences! (Call me if you want to know the gory details!) Plus, you need to keep your inventory lean and moving! If it’s old, donate it or mark it down. Your balance sheet will shine! And your business ratios will too.
10) Keep good books and records. You got it now right!! FYI. Any bank looking to finance the acquisition of your business will look at least at three years of earnings, to decide how much they can lend. If a buyer cannot get enough money from a bank, you have two choices. Seller financing or sell for less. Good books and records will allow your business to sell fast, for a high valuation, and be financed with third party financing. ALL GOOD FOR YOU.
All business owners should plan for their eventual exit. The problem is, plans sometimes change. If you keep your business in order through these simple steps, you can exit at anytime. Call me if you have any questions or need clarification to any of the information I have provided.
Dan Huber
612-616-2307
dhuber@tworld.com
Transworld Business Advisors of Minnesota