Adding Value to a Business for the Purpose of Selling

If you're looking to sell a business, it's critical to look at the value of the business. But a typical business really has two values. The "academic" value is the one determined by a professional business valuation which can be completed though ROI. The other is the "true market" value. The academic value is arrived at with a formula based on the firms' hard assets, cash flow, industry averages and multiples. The fair market  or true market value also takes those items into consideration, but then considers what buyers are really willing to pay.

For many small and mid-sized businesses hard assets like equipment, vehicles, land, buildings, and inventory may be limited. For some small businesses there may be no hard assets at all. Instead, their value is based on intangibles like employees, business processes, customer lists, location and business relationships. As an example we recently closed on the sale of a company for 1.6 million dollars with hard assets of less than $70,000!

To maximize the fair market value of your business, it's vital that you capitalize on those intangible assets. 

• Develop key employees. Buyers generally aren't interested in paying a premium if the business relies on you for its success. Remember to delegate responsibility to key employees and involve your key staff members in the decision making process. Demonstrating that your company's success is reliant on your capable, well-trained employees - not just you - will pay off at the time of sale.

• Document what you do.  Be sure that job descriptions, operation processes, and strategic plans are documented. Documented records and plans give a buyer greater comfort that he or she will be able to emulate your successful growth and will help your buyer obtain financing. Also, be sure to keep business records like sales and expense reports, internal profit and loss statements/balance sheet, and tax returns clean, well-organized and accurate.

• Build relationships. Name recognition, customer awareness and your reputation are all part of your business value. Even if your company doesn't have many hard assets, your relationships are key. Consider diversifying both supplier and customer accounts. Consider written contracts or service agreements when possible.

• Improve cash flows. A potential buyer wants to see the "true cash flow." And, of course, in the business world cash is king. Be sure you are driving all income to the bottom line. 

• Review your assets. Sell off or dispose of unproductive assets or unsalable inventory. Remove or buy off any assets that are primarily for your personal use. 

• Find and build your niche. You don't have to be everything to everyone. Buyers will pay a premium for a niche that has barriers to competitive entry. 

Keep these important intangible assets in mind if you're looking to sell your business. They convey a value that financial statements alone do not. If you are looking to sell, make a plan. Start working on the intangibles well in advance of putting your business on the market. For many business owners, they reach a point where they burn out and psychologically retire early, before a sale is made. It's important to work to keep your focus right until the sale is complete. 

Finally, when the time to put your business on the market arrives, consider lining up key specialists who will help you make the most of the sale - an attorney, an accountant, and a business intermediary to name a few. Remember, you only have one chance to sell your business, so you want to do it right