This article is another in our series on Exit Planning in the Green Industry. Last month, we focused on understanding the value and marketability of your business. This article focuses on steps you can take to enhance the value and marketability of your business over time.
Assuming you are not in a situation of having to take your business to market immediately, there are concrete steps that you as a business owner can take to improve the value and marketability of your business when you do plan to sell it.
Focusing on Earnings and Cash Flows
The most important (but not the only) factor in determining the value of your business is the cash flow that it generates. Cash flow may be defined in various ways, including EBITDA (earnings before interest, taxes, depreciation and amortization), free cash flows (sometimes defined as EBITDA less maintenance capital expenditures) and seller’s discretionary earnings (EBITDA plus seller compensation and benefits). Steps taken to build the predictable sustained cash flow of the business over time will result in higher valuation and marketability.
Focusing on the Fundamentals
In building the cash flow from the business, it is a good idea to focus on the fundamentals of the business. A good place to start is to make a list of the strengths and weaknesses of the business, trying to see them through the eyes of a potential buyer. You can then develop an action plan to take advantage of the strengths and to minimize the impact of the weaknesses. Among the topics that may appear on that list are such items as:
- Service lines – Do the Company’s service lines make sense, and will they appeal to buyers? Are there services which should be added and others which should be eliminated?
- Pricing strategies – Does your pricing strategy support your overall business strategy? Do you have a pricing strategy?
- Target markets and customers – What are your target markets and who are your target customers? Do they make sense in the short-term and the long-term?
- Physical locations – Are the business’s physical locations desirable? Should the business relocate or add additional locations? What can be done to make the business’s existing locations most desirable?
- Employees – What can you do to improve employee quality and retention? When prospective buyers take a look at your business, they will want to know who the key employees are, how long they have been with the business and how likely it will be that these key employees will stay with the business after a sale is completed. They will also be interested in knowing how the business will be protected if some of these employees decide to leave and compete with the business.
Making Your Business Less Dependent on You
One key step is to consider how to make the success of the business less dependent on you as the owner. This can often be accomplished by a combination of implementing good systems and having high quality key employees you can empower to act in your absence. Accomplishing this will make it easier for prospective buyers to understand how the business can successfully transition from your ownership to theirs. It may also allow you to take a vacation.
Implementing Quality Administrative Systems and Procedures
One step in making the business run more smoothly and efficiently is to implement quality administrative systems and procedures. This may include such steps as developing a usable policy and procedures manual or implementing up-to-date computer systems.
Maintaining Good Financial Records
Maintaining good financial records is a significant key to the marketability of the business. Good records are both accurate and timely. They document the performance of the business over time. It is extremely difficult to sell a business, especially at a premium price if high quality financial records are not available or are not prepared on a timely basis.
Maintaining a Distinction Between Your Business and Personal Affairs
One step in preparing a business for sale is to identify financial items (both income and expense, but usually mostly expenses) that will not apply to the new owners of the business. This may involve items of expense that are discretionary to the owners of the business and would not be required of a new owner. These items, commonly called “add-backs” are a part of nearly all business sale transactions. However, the larger these items become as part of the business, the greater the scrutiny they will receive, and the harder it becomes to unlock the full value of the business.
Retaining Quality Advisors
Retaining quality legal, financial and other advisors as you build your business will help ensure that you structure your business in such a way that, when the time comes, it is possible to structure as favorable a transaction as possible. Your advisors will also already be available, and you will not be scrambling for advice and counsel late in the game.
These are just a few of the steps that you can take to improve the value and marketability of your business over time. The exit planning process should include an evaluation of your specific situation and a concrete set of steps you can take to improve the value and marketability of your business.
Next month, we will focus on preserving the value of your business.