Simon Hunt, Regional Partner of Business Partnership for Oxford and The Chilterns, outlines the importance of building the value of your business before a sale and the different factors that will increase business value to a buyer.
When the time comes to sell a business, most owners would probably say that it’s their goal to sell or transfer their business in order to fund their retirement or finance the next stage of their career.
Determining the market value of a business is one of the hardest to put a price on, so owners should take the time to understand what their business is really worth and put themselves in the buyer’s shoes to find out what they want.
Selling a business will probably be the largest financial transaction many owners will carry out so it’s even more important that they get the best price for it. Sometimes, all you need to do to see your business rise in value is to wait for the right market to sell it in, but there are many more proactive ways to increase the value of your business prior to putting it on the market.
Understanding your company’s value becomes increasingly important and it depends on a variety of factors, such as past profitability and asset value. In financial terms, the value of any business is the current worth of its future cash flows for the prospective buyer. There are also intangible factors to consider, and often provide the most value, such as customer goodwill and intellectual property.
You only have one opportunity to sell your company so it’s vital that you make your business as appealing as possible to buyers and they feel they can receive a return on their investment. Here are some factors that will help increase the value of your business:
Reviewing and renewing contracts
Before talking to potential buyers, you will need to be clear on the contracts you have in place, whether it the lease on the building, customer or supplier contracts. It might also be worth renewing any key contracts as this might make the business more valuable and check that customer contracts allow for change of ownership – otherwise they may need to be rewritten or a clause added to ensure they’ll carry on after you sell. Securing loyal customers will have a big impact on the company’s value.
Having reliable suppliers will ensure continuity for the business, so it is equally important to make sure their contracts are up to date and maybe consider diversifying your supply chains. Having more options can make the business better at coping with the unexpected, which will enhance its value in the eyes of potential buyers.
A company’s competitive advantage is the reason customers buy from them instead of their competitors. It is vital that businesses know their competitive advantage and then they protect and promote it. High quality, innovative products or services, coupled with exceptional customer service can help differentiate a business from its competition.
Every business should have a unique selling point, also known as USP, and this is extremely important to portray in all marketing efforts, whether that includes customer testimonials on the website, creating short videos for social media channels or doing PR and blogs to raise awareness. Speaking to your current client base would also provide interesting insight as to why they chose your business over another and then this information can be used to attract new customers. Remember, the more revenue a business makes, the more a business is worth.
Having a skilled and experienced team may be the factor that makes a business the most valuable and be more attractive to a wider range of buyers, especially those with less experience in the sector. By retaining these employees, it will make the transition much easier and the business will continue to generate profits from day one. It can also help your employees to accept and benefit from the sale.
Consistent financial performance
A company that unfailingly generates higher profits and cash inflows will influence buyers as they will like a business that can be lucrative in any type of environment. For example, if a company grew both sales and profits during the Covid pandemic, while other firms in the same industry struggled, it will be more valuable than the competition and more appealing to buyers.
Recurring revenue increases business value
Businesses with established recurring revenue streams are more appealing to buyers, and in some cases, significantly increase the value and sale price of the business. Buyers can be confident with recurring revenues that there will be guaranteed cash flow for the business and more stability when it comes to forecasting revenues and creating budgets. There will also be reduced risk and more opportunities for growth, particularly if the buyer believes they can grow recurring revenue in the future.
“You may have only one attempt at getting what you need from your business sale so don’t take any chances If your business is not worth enough now. Building the value of a business before a sale will be hugely beneficial and it can pay off in the form of a higher sale price. Building value may simply include making changes, or simply uncovering existing value that you can promote to buyers. By increasing the value of your business before you sell will ensure you have increasing revenue and profits, as well as a strong management team, quality products and services and strong processes and procedures.”