If someone walked in and offered to buy your business today, what number would you want on the cheque?

Most business owners I know aren’t too sure of the value of their company, so would be inclined to settle for what seemed a reasonable offer.

But selling your business is not your only option to get away from the chore of the day-to-day.

As an exit strategy you could instead become the chairman, hand over the business as a legacy to your children/family or even sell your business to the staff through a management buyout (MBO).

But a key success factor for all of these or to maximise the selling price, you need to plan and work on your business well in advance.

So before you set out on a plan to exit, first and foremost, all shareholders need to agree the end game, create a plan and start working together to maximise the value within a set timescale.

Bear in mind, often the minimum period it takes to sell a business is about 12 months and ideally you want to give yourself three to five years to ensure you maximise the value and/or hand over a sustainable business to your successor/s.

So from today your overriding objective should be to build value in your business to allow you to have the freedom of choice to do any of the above Exit options. 

What are the fundamental steps to build value in your business?

1. Track and improve financial performance

Buyers will value your business based on a multiple of the future net profit (after costs) and not a multiple of the top line turnover.

Therefore ensure you have up-to-date management information to hand. Use an online accountancy system and utilise visual scorecards with agreed measures and Key Performance Indicators (KPIs).

This will help you understand what to focus on to improve cost management and increase margins, but also shows any potential buyers that there are good working practices in place and that you know what makes your business tick.

2. Continue to focus on growing and developing sales revenues

Buyers will be much more interested if they can see continued development opportunities for the business and a strategy or plan is clearly mapped out and in place to ensure that your business is on a positive growth curve

3. Ensure your business isn’t reliant on any one person, supplier or customer

Your biggest customer should not be more that 20 per cent of your total sales turnover.

Always have at least two potential suppliers for products or services and be acutely aware of any one staff member whom the business is totally reliant on, including yourself (See point eight).

You need to ensure you have plans in place to mitigate any future risks to continual uninterrupted trading

4. Tighten up your cash flow management and improve your stock turn

The more money you have tied up in Work in Progress (WIP), debtors or stock, the less the value the cheque paid to you personally when you come to sell.

Note, the new buyer will have to finance the business working capital and hence the lower they will pay you for the business.

So focus on reducing debtor days and follow up and chase your customers for payment and where you can also extend creditor terms with your suppliers.

Also check stock levels and your stock turn over ratios and reduce the amount of inventory you hold.

Some advice here is to systemise processes using technology (ERP systems) and standardise operating procedures (SOP).

It will not just become easier to manage the day to day but will free up yours and your staffs time to focus on developing your business further and increasing its value.

5. Build a portfolio of reoccurring income

If you offer a service, or could offer a service such as maintenance, annual audits, membership or subscriptions, then focus on building these reoccurring income streams (portfolios).

Establish auto renewal contracts with direct debit payments which will aid not just positive cash flow management but will drastically enhance the value of your business.

Remember buyers pay for a multiple of future profitability, therefore the more business that is guaranteed in the future the higher the multiple is likely to be.

6. Focus on your businesses differentiation from your competitors rather than competing on price

Consider updating your brand and marketing presence online, such as your website.

Emphasise why your customers keep coming back to you, review customer testimonials and determine if it is due to service levels, high quality products and/or services, or the ability to react and respond quickly.

Whatever the reason for repeat business you want more customers recommending your business.

So capture your Unique Selling Propositions (USP) and share these at any opportunity to promote your business.

Tip here is bringing in a specialist to outsource your marketing to a freelancer or agency, which is well worth the investment.

7. Ensure you measure customer satisfaction

Obtain testimonials and have proof of recent customer satisfaction levels.

If you can prove your business has a high reputation and a strong brand in your sector, the business will become more attractive and the value will increase.

8. Step out of the owners' trap and manage yourself out of the business

If you’re the one that has the interface with the customer, deals with all the complaints, creates the products, or deliverers the service, the value of your business will be heavily discounted by the buyer.

It will be very difficult for you to transfer the customer relationships and therefore ownership to someone else.

This may be your hardest challenge. So start thinking now and create a plan to manage yourself out of the business.

It starts with delegation then either consider developing an existing member of staff or recruiting your successor and then spend your time nurturing, coaching and developing this person to allow you to step away from the day to day on a gradual basis.

There is no standard calculation for valuing a business.

A rough guide is somewhere between three and five times your annual net profit, (before tax and interest) and you must be able to provide proof of a steady number of years trading.

So ensure you work on the above areas to create a more desirable business such as; having an attractive loyal customer base, a strong and recognised brand, guaranteed future income streams and that you can show forecasted market share growth.

But ultimately you also need to show your prospective buyer that you’re not key to the businesses future performance, so manage yourself out and then you are more likely to achieve an even higher multiple value. 

At the end of the day you and or your family may not want to sell your business but wouldn’t it be a great feeling to have that freedom of choice after putting in all those long hours and many years of hard graft?

“What you get by achieving your goals is not as important as what you become by achieving your goals.” - Zig Ziglar.

If you’re interested in knowing a bit more –

At Business Doctors we offer free access to the Value Builder online tool click here , along with a free no obligation meeting to go through the key factors which will increase the value of your business.

Our next business breakfast seminar Working Smarter not Harder 8am, Thursday September 13, Crown & Mitre Hotel, Carlisle. Booking link

Alternatively, we will be running some Freedom seminars and workshops during September and October across Cumbria. Please keep an eye on our events website page.

Summer reading/audio obtain a copy of Built to Sell by John Wirrillow

For a one-to-one business health check c lick here .

Or contact Peter Fleming 07966 686112 or email peterfleming@businessdoctors.co.uk 

Business Doctors  website