Boost Your Business Value in 2020? 5 Powerful & Proven Strategies.
If you’ve got plans to sell your business in the near future, then one of your priorities in 2020 should be to build its value. While some business owners seem to just take the “keep increasing profits and hope a buyer comes along” approach, that is definitely not the best one. This might be one of the reasons that studies show 70-80% of businesses that are actually marketed for sale never actually sell. Fortunately, there are specific, concrete strategies you can implement today to significantly increase the business value of your company so that you stand a much better chance of being in the 20-30% of owners who are able to sell your business tomorrow.
This article lists five of the top, proven strategies that companies of all sizes use to improve their business value and chances of acquisition. In fact, if your company is in the lower-middle market size category, defined as having annual revenues of $5 million to $50 million then you should definitely pay attention to these strategies because your company is increasingly catching the attention of institutional M&A buyers like private equity groups. While this is a definite plus in terms of having more potential buyers than ever before, these are also highly sophisticated and discriminating investors and buyers who won’t give your business a second look unless these five business value boosting strategies are in play.
Strategy #1: Maintain your books to show your business value
If you’ve caught the attention of a buyer, one of the first stages of the buying process is the due-diligence process when the buyer puts your business under a microscope to decide whether or not to actually buy. To use an analogy from the real estate world, the due-diligence process is like a home inspection, but in reality it can be more akin to a tax audit. The due-diligence process is intense and will involve the sharing of very detailed and confidential information with a potential seller (usually under the protection of a well-drafted non-disclosure agreement or “NDA”). More importantly, the due-diligence process will make or break your business sale transaction. If the buyer is worried about anything found during this process, your chances of a successful transaction are virtually nil.
By far, the most important data you will be sharing with a prospective buyer in the due-diligence process is going to be your financial records. Buyers will want to get an in-depth understanding of the financial health of your business, and the only way to do this is by reviewing your books. Keeping your books in good working order won’t just make it easier to provide them to a prospective buyer when the time comes, they are also an essential indicator that you, as an owner, should be using for your own internal strategic planning and forecasting.
At a very minimum, you should be using accounting software to maintain your books and provide you with ready access to the following reports:
- Balance Sheet
- Profit/Loss Statement
- Cashflow Statement
- Accounts Receivable Aging Report
- Accounts Payable Report
If you aren’t inclined to maintain your own books, it’s definitely fine to hire a bookkeeper to do it. However, don’t make the mistake of thinking that this is just a “hands-off” task once you’ve outsourced it. Ill-intentioned bookkeepers embezzle money from business owners all the time and the more hands-off you are with your books, the less likely you are to ever discover the embezzlement. To prevent embezzling and to be able to properly manage your business, you absolutely have to regularly review financial reports even if someone else maintains them! Besides, from a business value perspective, few things are as big a warning sign to potential buyers as a business owner who isn’t in tune with the finances of their own business.
The added benefit of maintaining good books for your business? It equips you, as the owner, to be a better strategist which will always result in a better run, more profitable, business.
Strategy #2: Grow – the right way
Growing businesses are attractive to buyers so if you want to boost your business value, growth is key. Ideally, if your business revenue is growing by 20% or more each year, you will attract the right attention from potential buyers. The trick is how to do this, especially if you don’t happen to be in a high growth industry where everyone is achieving this type of revenue growth.
Making your company the kind of growth story that attracts buyer attention will require you to capitalize on your competitive advantage and use that to achieve high growth instead of just focusing on one-time factors like cost-cutting or acquiring other companies. What’s your competitive advantage? What keeps your customers coming back to you and not to your competitors? Is it your unique brand? Protectable IP (such as your unique patented product or your secret formula)? Exclusive contracts or other arrangements? Or do you have resources that your competitors can’t match like the perfect network, exclusive vendors, or large manufacturing capacity?
Figure out what your company’s unique strength is and use it to lead your growth: protect it legally, incorporate it into your brand, and capitalize on it when marketing to your customers. For example: if you own an insurance brokerage and your most valuable asset is your long-standing working relationship with a particular insurance company, then steps to make sure this relationship continues to be a pillar of your growth might include negotiating an exclusivity contract with that insurance company, protecting yourself with non-solicitation agreements with key staff (making sure to comply with any legal restrictions on this in your state), and including top benefits from this insurance company (like low premiums, financial strong company, good claims management) in your marketing and branding.
Strategy #3: Focus on the right type of revenue
Revenue is revenue right? Actually no, not in the eyes of potential buyers. Certain types of revenue are worth much more than others. In particular, subscription-type revenue, also called Annual Recurring Revenue (ARR) or Monthly Recurring Revenue (MRR) is much more valuable to buyers than one-time purchase revenue. For example, in the security system industry, where revenue comes from both installations (one-time purchase revenue) and monitoring (MRR), companies are valued almost exclusively on their MRR. Smart owners who focus on growing their base of monitoring customers build solid valuations; whereas, those who are happy just with installations get left in the dust. Even in other industries, where valuations are focused on earnings before depreciation, taxes, and amortization (EBITDA) MRR is looked upon favorably and have both a positive impact on the valuation (by increasing the valuation multiple, for example) and increase the likelihood of purchase offers in the first place.
Does your business model have an MRR side to it? If so, then focus your efforts on growing that side. If not, then there’s no better time to build one. The Automatic Customer: Growing a Subscription Business in Any Industry is a must-read if you need help building or fine-tuning your own MRR base.
Figuring out how to build a base of recurring revenue into your business model will do wonders for your business value.
Strategy #4: Diversify your customer base to boost business value
What’s better for your business value: a few large customers or lots of smaller ones? The answer may surprise you but makes sense intuitively. If your business is mainly concentrated on just a few large customers (like the law firm that basically survives off one or two large contracts, or the insurance firm that is more or less a “captive” firm of a large corporate client) it might be comfortable for you as the owner. After all, you can rely on steady income and don’t have to spend the time running around landing smaller clients and deals.
However, from a potential buyer’s perspective, having just a few, large, customers is a turn-off. Why? They see this as being more risky – especially when they need to assume your contracts. Let’s use the example of an accounting firm that does 90% of its business with a large corporate client. For a buyer looking to value this accounting firm for a potential purchase, lack of customer diversification is a big risk. If the buyer loses the contract for whatever reason: the contract expires, the client doesn’t like the buyer, the client decides to take another approach to insurance, or whatever the reason, then the accounting firm just lost 90% of its value and the buyer is left with something worthless. In this case, at best a prospective buyer will insist on protective measures like contingencies (such as basing the purchase price on a guarantee that the contract stays in place for four years with a serious reduction through a “claw back” if it doesn’t last that long) or an earn-out (where you, as the owner, are required to stay on and part of the purchase price is based on the you meeting deliverables over a period of time that, in this case, might be based on servicing and maintaining the contract for example). At worst, they will seriously discount your business value, or decide altogether not to buy.
Strategy #5: Build out your management team
One huge factor that a potential buyer will use in valuing your business is how well your business will function without you. Quite simply, if your business looks like it can run just fine without you, then it will be more valuable and a buyer is more likely to just cash you out. On the other hand, if it looks like you are an integral and essential part of your business, then a potential buyer will find your business less valuable altogether, and may even insist on an earn-out.
One of the best ways to demonstrate that your business can function well without you is to have a strong management team. After all, if your employees are always looking directly to you and you only for direction and decisions, then obviously your business can’t function without you. Therefore, if you want to increase your business value in 2020, you owe it to yourself to build a strong management team or, if you already have one, make it better. By “better” I mean make sure that it has what I consider the essential traits of an effective and empowered management team: a) the right make-up (loyal, experienced, skilled managers who communicate and manage well), b) authority to make key decisions, c) systems by which to make those decisions in a way that you would approve of, d) recognition for their role and authority by everyone (employees, vendors, and customers alike), and e) the ability to think strategically so that they can see how their decisions affect the overall direction and mission of your business.
No time to waste
Just like you shouldn’t be planning for your retirement when you’re ready to cross the finish line, there is no time to waste in planning to sell your business. Improving the sellability of your business can be complicated (for instance, continuing the retirement analogy, it isn’t as easy as just making monthly contributions to your 401k) but it definitely isn’t impossible. Follow these strategies in 2020 and you will be pleased with the results. Not only will your business be a more attractive, more valuable sell, but you will likely make more profit in the meantime as well. A double win!
Are you looking to sell your business in the near future? Have you used any of the strategies in this article to grow the value of your business? I want to hear from you.