A seller says, “I want to sell my business.” “How do I make it have more value?”
A buyer asks, “What’s in it for me?”
The answer to both seller’s and buyer’s question are the same. For businesses, value to a buyer is the expectation of future earnings and cash flow. And for a seller, if the company’s expectation of future earnings can be increased, the value of the business goes up.
The seller then will ask, “How can I do it?”
Here are some answers.
Start the valuation process with a solid history of past earnings. In most cases the expectation of future earnings springs from the diving board of past earnings.
Ask yourself, “What allowed my company to create cash in the past?” Technology, people, proprietary rights, location, personal contacts, customer satisfaction, customer service, etc.? If you don’t know, then think it through, talk with your associates, ask your employees. You will find the causes.
Now, to ensure value, make sure the buyer understands that what worked in the past will work in the future.
For example, if your company uses heavy machinery, show the buyer you have kept the equipment competitive through update, replacement and maintenance. A sophisticated buyer knows that and will understand what you have done (or not done) to keep up the quality of the machinery. They will assign value, either up or down, accordingly. It’s not what will happen in the future but their perception of what will happen, that creates value.
For a distributor your success may depend on your sales and customer service people. A buyer will perceive this, and give you high marks for the quality of the people and the support given them.
For one company, technical innovation created past results. The buyer will ask you how what you do to insure innovation’s continuity. Are your people up to date, do they have the tools they need, is the budget adequate?
For retailers, advertising, promotion and merchandising are the keys. They will bring customers to your door and convert them to buyers. The question is, “Will they continue for a new buyer?” Increase the perception of value by showing continuity (and even improvement) in advertising, promotion and merchandising.
Other items heighten the perception of value. Good accounting and reporting does. Do your reports accurately show what’s happening in your business every day? Buyers perceive “good management” if you answer their questions quickly and accurately. Clear and timely financial statements create one perception while the opposite creates another.
Does your information system make your business easier to manage, or is it obsolete and of little use? If you have a delivery service and you competition adds improved software for controlling drivers, can you continue to compete with your old software? Your business will still have value, but not quite as much as before.
Back to the question, “What makes value?”
Answer, “Doing all the things you did in the past to create cash, and showing a prospective buyer that the company will continue to do so.”
Simple.
Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.
Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.
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