If you want to maximise the value you realise when you eventually sell your small business, it can really pay to start organising and planning years, rather than months, beforehand.
Small business owners often don't realise as much on exit as they might, and for a number of reasons including:
- over-dependence of the business on the exiting owner;
- inefficient operations that lead to waste and profit leakage; and
- a failure to fully exploit available growth and profit opportunities.
The good news - if a sale is still a few years, rather than months away - is that there are many steps the small business owner can take to improve their chances of a profitable exit. These include:
- Focusing on improving profitability and reducing waste. A series of consistently strong (and improving) financial results will help to demonstrate to potential buyers the profitability and potential of the business. Small business owners are often strongly motivated to minimise tax liabilities by suppressing profits; but this can be counterproductive when it comes to being able to demonstrate the quality of the business to potential buyers. Focus on profitable growth, cutting out unprofitable activities and eliminating waste.
- Reducing the business's reliance on the owner. Many small businesses are reliant - even totally dependent - on the proprietor to operate successfully. This presents a significant problem for a potential buyer. Build a strong management team and progressively transfer knowledge and skills to them. Consider how best to manage business-customer relationships so the goodwill is attached to the business and the brand, rather than the current owner.
- Maintaining accurate business records, including procedural and financial records. Comprehensive and accurate record keeping helps demonstrate to potential suitors the quality and robustness of the business, governance approach and underlying systems, procedures and internal controls.
- Dealing with major problems. Any significant problems within the business need to be confronted and addressed wherever practicable; a potential buyer will seek to mark the price down for unresolved issues so consider if there are problems that need to be addressed now.
- Improving the quality of revenue streams. Buyers dislike uncertainty, particularly when it comes to the future earnings potential of the acquired business. Consider whether income streams can be made more predictable, more regular, more long-term, and less concentrated on a few big customers. Examine your contractual arrangements with customers to see where improvements can be made.
- Protecting the brand and intellectual property. For example, are there registrable trademarks, or processes/ products that can be patented, in order to protect the value in the business?
- Paying down debt. Reducing debt levels can help strengthen the balance sheet and reduce financial risk for a buyer. If the business has surplus cash, paying down debt, especially where the interest cost far exceeds any income earned on the cash, may make a lot of sense.
Depending on the specifics of your business, there might be a variety of other actions to consider too.
If you'd like to discuss how we can help you prepare your business for sale, contact us today.