Small business owners often think that their business is worth more than the value placed on it by the market place. I find it interesting that many owners think of selling their business as their number one retirement strategy. However, they don’t treat it as an investment. Owners tend not to think about what they need to do to maximize their return on their investment in the business. And just like most investments, the sooner you start the better the return.
So what are some of the things a small business owner can do to enhance the value of their investment? First, I believe an owner needs to think of how they plan to exit the business. Strategies differ based on the buyer. Who do you want to sell it to? Are you going to pass it or sell it to family members? Are there employees that might want to buy it? Or will you be selling it to someone outside of family or the business? In short, will there be anybody willing to buy the business? If so, what do you need to do to make it more attractive?
There are many different things that you can work on to make the purchase of the business more attractive. The first thing is to make sure that the business can operate without you. This is often achieved by having well documented operational structures, defined organizational leadership, and a great business plan.
What do I mean by operational structures? I mean you should have a good recordkeeping system such as current and historical financial statements that are accurate, detailed customer records, vendor records, and accurate inventory. It is a real plus if your financial statements have been reviewed or audited by a CPA.
You should have documented standard operating procedures (often referred to as SOP’s). This can include a variety of activities, such as how you manufacture your widget to how the receptionist should answer the phone. The important thing is that you have a list of all the activities that are important and necessary to run your business and how they should be executed.
As we all know, one of the most important assets of any company is the people. You should have a list of the company jobs and detailed descriptions. You should have documented human resource records and policies. An employee handbook is a must if you have employees.
Another way to enhance your company is to make sure that you have diversity with both suppliers and customers. It is a big plus to buyers when they know that all your sales or products do not rely on your relationship with one or two key companies. If you have a diversified customer and supplier base, you are less vulnerable if one of those relationships goes bad.
Creating and enhancing intellectual property helps create value for a business. Is your brand protected by trademarks and/or service marks? Do you have any trade secrets and how do you guard them? Do you have any company information that needs to be copyrighted or intellectual property that can be patented? Have you created any innovative systems that can be highlighted?
Don’t forget that the most crucial aspect of selling your business is to have cash flow created by the business. Be-cause no matter what your asking price, chances are the business will need to support the debt load taken on by the buyer. In general, if you ask for a million dollars, make sure your business can support a loan of $750,000 and still cash flow.
So don’t wait until right before you want to sell your business to make it attractive to buyers. Start today to look for ways to increase the value of your business. You will reap the benefits now and in the future.
Lynn Vos is area director of the University of Georgia’s Small Business Development Center. Contact her at 912-651-3200.