Don’t wake up one morning and decide to sell your business. Wake up and decide to plan for your exit. Because if you have a year or two to plan, you can tangibly increase the value and the selling price of your business. How?
1. High Earnings = High Selling Price. Pretend nothing else matters, because, well, nothing does. At least not enough that if you had one thing to focus on to increase the value of your business, this is it.
2. Depreciate. Earnings (both discretionary earnings for small companies and EBITDA for larger ones) don’t include depreciation expense. For tax reasons business owners tend to expense rather than capitalize and depreciate, but in the year or two before a sale? Depreciate.
3. Reduce Working Capital Needs. A midsize company is sold with enough working capital (current assets minus current liabilities) to continue to operate the business. Think of it as having to sell your car with gas in the tank. Prove you can reduce this amount now (e.g. lower AR, lower inventory, increase payables, etc.) and you can take more cash home in the deal later.
4. Nix the C-Corp. If you think it will be a number of years before you close a deal, see if you can take an S-Corp election. Most buyers will want to do an asset sale (more on this later) and the double tax created by a C-Corp can be extremely painful.
5. Concentration Is a Bad Word. Businesses with high customer concentration or supplier concentration (or knowledge concentration, etc.) attract fewer buyers and this lowers the price. What’s too high? Having a customer with 25 percent or more of your business, or having a supplier with 40 percent of your business is too high. Diversify if at all possible.
6. Make Yourself Unimportant. What business would you rather buy? The one where the owner takes frequent trips and takes every Friday off, or one where the owner has to come in even when he is sick because the place will fall apart without him. A company that relies on the owner gets far less cash up front and often less overall.
7. Pay Some Taxes. Yes, everyone plays the tax avoidance game, but only to a degree. A broker/advisor can only adjust earnings only so much, so it is far better to just pay your taxes for a few years before a sale than the complications that can arise otherwise.
8. Understand What “Adjusted Earnings” Means. Well before a sale is the time to understand what adjusted seller’s discretionary earnings and/or EBITDA means. For example, some expenses will be valid adjustments, so there would be no need to work on reducing that expense, while other areas may need some real focus.
9. A Risky Business Is a Cheap Business. A legal issue dragging on? Environmental problem lurking? Buyers hate risks and risks tangibly lower the price. Identify and attack these areas before a sale.
10. Pick That Low-Hanging Fruit. We hear many business owners say things like, “Pay me X, because you can easily grow this company by doing Y, but I didn’t want to do that because of Z”. For example, “All you have to do is hire a sales manager but I didn’t because I don’t manage people well”. If you have an easy way to boost sales, do it, because you are not going to get X otherwise.