Welcome to the Business over Breakfast podcast and to celebrate international podcasting day Bree and…
Business Exits: How to Increase the Value of Your Business
There are a couple of easy choices that can be made almost immediately when considering exiting your business. If you are in a situation where the sale of your business is not forced upon you, this is a great place to be. You have the time to set your business up for sale, and you can focus on two areas where you can easily increase the value of your business.
You can focus on growing the earnings of the business and secondly on growing the number by which these earnings will be multiplied by, to calculate the value of your business.
Focus on increasing the earnings
What are earnings?
In some businesses, the earnings figure can be revenue or sales, but most of the time the ‘earnings’ figure is based on pre-tax profit. This figure could be last years or a weighted average of the last three to five years. This will depend on your industry, the potential buyer and may vary.
A typical acquirer will price a business based on its past performance and value it on its potential future earnings. For a well-established business to show a steady increase in earnings (or pre-tax profits) is considered a positive sign to a potential purchaser. The goal is to continue to show these earnings moving forward.
What you can do if your earnings have been good.
If your earnings have been good, then map out your business model and clearly identify how your business makes money.
- How you get work in the door
- How you do the work and get it out the door
- How you make money or keep the cash on the way through
The purchaser will want to know this too. Knowing this and putting a flow chart around it will help you and your team concentrate on what works. Your flowchart will also help keep your business ticking along nicely, particularly if you are also working through the process of selling your business, which can be very time-consuming and distracting.
What you can do if your earnings have not been good
If your recent earnings have not been as favourable as they could be, then it may be worthwhile to challenge your current business model.
Earnings come from the sales you make, less the cost of the goods you have paid to make that sale, less your overheads (such as wages, rent, advertising, etc.) Dissect your business and uncover where the bottlenecks are. Just focusing on getting more clients can be a recipe for disaster if you are not making enough profit out of the clients and product you already have.
As a savvy business owner, you will also realise that increasing your business profits is good for both you and the buyer. You get to make more money along the way, and when the new owner steps in and follows your system, they will have a nice predictable, profitable business. What is good for you is also good for the buyer.
Focus on increasing the multiple
What is the multiple?
The multiple is the other side of the equation. This is the figure that your pre-tax profit is multiplied by to get your valuation price.
Increasing your multiple is your other choice. A business which makes no money outside of the wages you pay yourself, one which is purely dependent on the owner and where there are no systems in place would struggle to be worth 1 x earnings. An established business with tangible and intangible proprietary assets, generating good earnings, which is fully systemised and runs without you would be worth many times its profit.
An easy way to increase the multiple
One of the easiest ways to increase your multiple is to build assets in your business. For example, if you have a system which can effectively attract new customers and to keep your existing customers coming back a potential buyer will find this valuable.
- If your customers come to you via word of mouth or for your exceptional customer service, could you specifically write down what you do and how you do it?
- Do you have a marketing plan in place which considers the different seasons and which products you promote around these seasons?
- Do you know what marketing works and what marketing does not work and why?
- Do you have a sales process? If you do, great. If you don’t think you do, think again, because you may just run it on automatic.
The tip is to get all this information out of your head and down on paper. These are just a couple of ideas that you can work on. The potential buyer will see value in this and be willing to invest more in your business if you have this information well documented.
The decision to either increase your earnings or increase your multiple (or both) is dependent on where you are now and the skills and commitment that you and your team around you have. With the right team and strategic focus, you can dramatically increase the value of your business.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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