How to Maximize the Value of your Business
Whether you are a business owner, are planning to sell your business or looking to acquire a business it is important to know how to maximize the value of your business.
For business owners, you need to know how to maximize the value of your business because it is simply good business. You are in business to help enhance your LQ, and an important part of an LQ business is generating an excellent return on your investment.
If you are a business owner planning to sell your business, you can often times dramatically increase the amount of money you will receive in selling your business by implementing these 12 steps to maximize the value of your business.
We often times provide a business valuation or “Brokers’ Opinion of Value” to a business owner with the advice that they should NOT sell now, but rather should implement these 12 steps to maximize the value of their business.
For business buyers, it is important to know how you can dramatically grow the value of the business you acquire. Knowing how to maximize the value of the business you plan to acquire can dramatically lower your acquisition risk and dramatically increase your potential acquisition reward.
The 12 steps we recommend to maximize the value of a business are:
1) Have a business plan which you are actively using to manage your business
• Recommend www.bplans.com which has 400+ actual business plans you can review plus can download Business Plan Pro software for $99.
• Recommend spending 30 minutes per day reviewing your business plan and thinking about how you can improve your business.
2) Improve your SDE
• SDE or Seller’s Discretionary Earnings is the key number in preparing a valuation for small and medium sized businesses
• SDE includes many business expenses which benefit the owner personally such as travel, meals, auto, use of credit cards etc.
• To determine SDE you recast the Profit and Loss statement (SDE FAQ/SDE Estimator available by contacting griffrost@vrhi.com.
3) Clean up your financial records
• If real estate is location, location, location business value is financials, financials, financials
• Make sure your financial statements are well organized and up to date
• Make sure your tax returns match your financial statements.
• A business buyer is likely to use SBA lender financing which values a business based on their last three years tax records.
4) If location dependent, lock in good long term lease
• Make sure you have a written long term lease which allows you to assign the lease to a buyer without the landlord being able to increase the rent or take a % of the business sale.
• If you have an agricultural business on leasehold make sure the lease is long enough (15+ years) to justify a capital investment by a business buyer.
• The #1 deal killer in business sale transactions are landlords requiring dramatically increased rents when asked to assign a lease.
• Know that you may have to remain a guarantor on a lease or need to sublease.
5) Have written agreements for major customers.
• If you have customers who account for a significant portion of your revenues make sure you have written agreements or contracts in place.
• You may be comfortable with a handshake agreement but a buyer for your business will definitely prefer written agreements.
6) Invest in your employees and management team
• Labor is one of the major costs in any business
• Make sure your employees are as productive as possible by giving them the proper tools, training and a superior work environment.
• Even a small increase in employee productivity will have major positive impact on your bottom line.
7) Strengthen your systems
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Franchise business can charge a premium compared to a non-franchise business because they have superior systems
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Good administration, operations, marketing systems “Institutionalize Best Practices”
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Manualizing your business will add significant value in the eyes of a business buyer.
8) Build Barriers to Entry
• Make it difficult for competitors to successfully enter your market
• Secure exclusives on products, markets and with your partners
9) Maintain your facilities and upgrade your equipment
• A business that is priced properly, has the right terms and “shows well” will sell.
• Make sure that you regularly upgrade your equipment to maximize employee productivity
• Make sure you keep your facilities looking “ship shape” so that they “show well”
10) Make the Business less dependent on You!
• Buyer’s will pay a premium for businesses where the owner is absentee
• To create an LQ Business and an LQ Life (LQ=Life Quality) set-up your business so your employees can run the business without you.
11) Go Green!
•“Conscious Consumers” will pay a premium price for products from a “green business”
• Going “Green” is not only good for the environment it saves businesses money
12) Use the Internet Effectively
• Every business today needs to be utilizing the internet effectively
• A business which is effectively utilizing the internet to reach customers and increase employee productivity will be valued significantly higher
To learn more about how to Maximize the Value of your Business please reach out to the Island of Hawaii experts, e-mail: griffrost@vrhi.com