It is disappointing should you find out that the valuation for your small business is lower than you were expecting, especially if you were planning your retirement based on something higher.
Regardless of the estimated value, a business is a requirement if you want to sell your business. So, if you received a lower business valuation than expected, you may need to plan value enhancement strategies.
Below is a rundown of some steps you can take to improve the valuation of your business or position for a positive exit.
Increase your revenue
Sounds obvious but maybe it is time to examine what you are doing to drive new business?
Depending on the nature of your business, you may need to revamp your current marketing plan. Experiment with new strategies that can drive traffic to your selling platforms or promote your products and services to increase awareness of your business and hopefully drive sales.
If you already have a social media presence, it may be a great time to revisit your digital strategy. Social media algorithms change and vary across every platform. Staying on top of these changes can help you design ways to get yourself in front of your target audience.
Other ways to consider can be lengthening operating hours or eliminating discretionary spending. Working with a business coach or marketing contractor that can push your business to increase its value may be the best way to go.
Focus on profitability and cash flow
A prospective buyer will examine your profit and loss statements and focus on how much cash the business can generate. In fact, increasing profitability with the same amount of revenue can boost the valuation of your business and make it more appealing to prospective buyers!
So how do you increase your profit? Start by finding ways to be more efficient by reducing discretionary spending. Do you pay for car leases, club memberships or other expenses through your business? While that has a number of benefits, these discretionary expenses may reduce your profitability and in turn, lower the valuation of your business.
Depending on the type of business, some sources of revenue may be more profitable. Increasing a more profitable revenue source by 5% may have a greater impact than increasing a less profitable source of revenue by 10% for example.
Focus on assets (tangible and intangible)
Assets are value items, such as furniture and equipment, which your business owns or leases to operate. They can also be intangible, creating value in your business, such as customer base, intellectual property, trademarks, or patents.
To make the most of these assets, whether tangible or intangible, is to have a detailed record of them and add accurate value.
Maintaining accurate asset records in your balance sheet can:
- Showcase profitability of the business
- Generate precise profit and loss reporting
- Assure prospective buyers
- Create a positive attitude towards the business
Whether selling or closing your business, valuing assets is vital in determining its worth.
Depending on the number of years your business is operating, you might have accumulated assets that are way past their excellent working condition. Note that the value of tangible assets depreciates over time due to the normal wear and tear. On the other hand, it is best to seek professional advice when valuing intangible assets.
Improve the business’ financial record-keeping
Keeping your financial records up-to-date and accurate is a value-enhancement strategy that shows your business has reliable financial management.
Reliable financial management means efficient operations. Typically, buyers do due diligence. This includes reviewing financial records for the current and past 2-3 years. If past documents are incorrect or questionable can delay the time it takes to complete a transaction or in some cases a prospective buyer may opt-out of the negotiation.
Consider selling to employees.
You might want to consider this option. It may not be the most financially profitable choice, but it has its benefits. Since your employees know a great deal about the business, it will not take long to adjust. Nearly 65% of small businesses sales are seller financed meaning the buyer will pay the purchase price over a period of time using proceeds from the business. Existing employees that know the business may very well be positioned to grow the business and ensure you get full payment.
Highlight human capital
You can boost your business value by employing and retaining highly skilled employees. Buyers are looking for companies with stable employees, especially executive-level personnel. It will also be important for them to know that talented, dedicated employees will stay with the company regardless of ownership changes.
Liquidate or sell the assets
If you cannot sell the business for the amount you had hoped, you might consider selling the business’ assets instead. In some cases, a buyer may wish to acquire a number of assets through an Asset Purchase Agreement. In this sort of transaction, it may be necessary to obtain a Net Asset Value (NAV) which is calculated by taking the total assets minus the total liabilities.
This allows both parties to see the portions that add value to the business (assets) and those that decrease the value (liabilities).
Here’s is a simple illustration using this method:
Assets: $200,000 – Liabilities: $50,000 = $150,000 (Your Business’ Estimated Value)
As mentioned earlier, tangible assets may need repairs or clean-ups because of regular use.
Businesses that need little to no work to become operational will appeal to buyers.
The best bit of advice is to know the value of your business before you plan to exit so you have time to make changes that can present the business in the best light. The more time the better, one to three years prior to selling is ideal. You need time to experiment and see what works and have the results show up in your financial records.
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