How to build and measure value in your business before selling
The key to creating a valuable business is to engineer ways to add financial value throughout the lifetime of your business. This not only adds security for key stakeholders in the company, but also increases the appeal to investors and prospective buyers. When selling your business, you will want to generate a return that matches market value to facilitate your next business venture, fund retirement or help finance the next chapter in your life.
Planning your business exit early can provide time to actively increase company value by simplifying, streamlining and restructuring your business to perform efficiently. This can make way for a self-sufficient company with low expenditure and high returns. Your core goal will be to increase profitability and growth potential before putting your business up for sale to secure your best chances of hooking a suitable buyer.
By appointing a professional business broker or business transfer agent, you can use their industry experience and knowledge to put yourself in the shoes of prospective buyers and understand what factors add value. We provide a roadmap on how to increase company value before selling your business and how company value can be measured.
Roadmap to increase the sale price of your business
As part of the daily running of your business, you may cast your eyes on company cash flow to ensure you have enough funds to pay bills when they fall due and the company balance sheet to check that company debts do not outweigh the value of company assets.
Cash flow and balance sheet test - A cash flow test and balance sheet test can provide a top-level view of company finances, and how much value is in the business.
Hire an accountant - To provide a comprehensive view of how the business can operate cost-efficiently and therefore increase both short-term and long-term value, speak to your accountant who will regularly conduct a health check and tax review.
A business with up-to-date financial reports and an organised financial reporting strategy in place can make way for responsible operating as there’s likely to be more transparency, and less cover for discrepancies to hide behind.
Company valuation – A company valuation is a procedure used to calculate how much a business is worth, commonly performed by a business broker, business transfer agent, or professional business valuer, as part of the business selling process to establish market value and price a business.
There are many methods available by which a company can be valued, such as an EBITDA valuation, in addition to dedicated metrics to measure growth and compare company value against industry benchmarks.
When assessing the value of a business, company profitability will indicate the financial value of a business. Reliable and regular income streams show guaranteed income for the new business owner following the sale of your business.
Recurring revenue can be secured in many ways, such as contractual agreements, auto-renew services, and preferred supplier relationships. This refines the accuracy of projected income and reduces the risk profile of your business.
Mitigating the risk posed to your business and investing in contingency planning can help build a resilient infrastructure in the event of economic uncertainty, as experienced during the coronavirus pandemic. By regular conducting a risk review, you can remove barriers in the way of generating income and build a more agile and adaptable business.
For example, diversifying your client book by serving a variety of small, medium and large businesses, rather than concentrating on a few high-value contracts can reduce your dependency on selected customers. In the unfortunate event that one these businesses enter company liquidation or administration; your business could collapse due to the shortfall in income.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Investment in business
To increase the value of your business, you need to take a proactive approach to facilitate growth through regular investment. Company growth can typically be achieved in two ways, acquisitional or organic. Acquisitional growth addresses artificial growth through strategic mergers and acquisitions and organic growth occurs through the natural development of your business.
This can be achieved over the short-term by establishing your brand, building a positive reputation and growing your team by recruiting tactically. Investment in your business can be directed internally, for example, by adopting lead tracking software, and externally, such as building a new website.
By also investing in a long-term strategy, you can make informed financial decisions and plan in accordance with your five-year or ten-year plan to grow the market value of your business, increase market share and reduce debt. The planned sale of your business may also be incorporated into this plan.
Investing in new talent can help establish a socially, environmentally and commercially relevant business, powered by modern individuals with industry experience and a variety of desirable skills. By building a hands-on team with a fusion of specialisms, you can ensure your business reaches the forefront of technological innovation and serves fresh appeal to prospective customers.
Building a staff hierarchy to overlook key components of the business, such as HR, marketing and business development can create a clear structure dedicated to driving company growth and adding value.
Investing time to increase value in your business before putting it up for sale can help raise short-term and long-term potential ad result in a higher sale price. By raising the commercial value of your business to its maximum, the new owner can confidently take ownership and agree to a maximum price.
At Selling My Business, we have over 60 years of experience in helping business owners prepare for the business sale journey, increase company value and find suitable parties to buy a business. We have a network of local business brokers across the UK and an in-house team of professional business valuers. We offer a free business valuation and charge no upfront fee, contact a member of our team for more information.