Why Should Someone Pay More for Your Business?
By Jonny Parkinson, Managing Partner, Marktlink
It makes perfect sense to want to get the best possible price when selling your business.
But maximising sales value isn’t simply about attracting the right buyer. It requires careful preparation. In fact, it demands a specific mindset.
For a business owner, this mindset is about holding two potentially opposing views of your company simultaneously.
Firstly, you need to put time and effort into building value in your business to prepare it for sale. Secondly, you must step back from it and begin to see it purely as an asset that doesn’t depend on your ownership to operate successfully.
Selling a business successfully means preparing carefully and well in advance, so that you can sell when you want to, not when you need to.
Your seller’s mindset supports a process that should culminate in finding a buyer who will pay more for your business.
Be mindful of your multiple
It stands to reason, the more profitable you can make your business, the higher you can drive its sale price.
How do you arrive at this price? The normal methodology is by calculating a multiple of your company’s earnings. However, this multiple will vary from business to business and differ depending on the sector in which you operate.
Various qualitative and quantitative factors come into play here, under two main categories, growth and resilience.
A calculation of a multiple based on growth looks at your historic growth levels alongside growth forecasts. It also examines current market conditions and how these affect your business’s scalability. There are M&A opportunities to assess – could your company become a platform and does it have a pipeline?
Then there’s the question of cash flow conversion. How do your profits convert into cash for future investment?
When it comes to resilience influencing the multiple, you must consider the quality of earnings, your customer relationships and the makeup and performance of your team.
The crucial point is that your multiple isn’t fixed. When you look at your company’s growth and resilience, you should think about how you can influence and optimise them. Small adjustments can make big differences.
Boost your profits
Profitability inevitably drives business value.
What measures can you take to boost your profits? Improving operational efficiency, streamlining your processes and effective cost control can all help to improve your margins – remember that profit margin is a better signifier of value to a buyer than revenue.
And don’t underestimate the attractiveness of recurring revenue. This has higher margins because it requires less effort to achieve. Businesses with recurring revenue generally sell at higher multiples. Customer contracts and retainers are vital indicators to support recurring revenue in the eyes of a potential buyer.
Strengthen your market position
All businesses operate in the context of a market. Their position in this market is a strong indicator of their value. Just as good market positioning is essential for growing a business, so it matters when preparing to sell your business.
You need to understand your target audience and what they are looking for. Look at how you communicate to this audience and ways you can improve your marketing messages.
What’s your business’s unique selling proposition (USP) and how can you refine or clarify it?
Clear messaging across these topics is integral to your positioning – not only in your market for your customers but also for potential acquirers of your business.
Analyse your competitors. Ensure that you’re offering something that differentiates you. This type of positioning is critical – if you’re indistinguishable from your competition, the only thing that differentiates you is price. Look instead to gain a competitive advantage.
Minimise your risks
A prospective buyer wants your business to be as much of a surefire investment as possible. Therefore, you must work to minimise risks.
Establish systems and procedures that track, manage and report your financials. Put safeguards in place to protect your assets against damage or loss, including robust data and intellectual property (IP) protection measures. Ensure that everything you do complies with laws and regulations and you have the necessary, up-to-date documentation to prove this.
You’re looking to reassure potential buyers that, should they take over your company, there won’t be any nasty surprises around the corner.
Your business without you
A key aspect of minimising the buyers risk and maximising the value of your business is taking you, the owner, out of the picture.
If you intend to exit, then your business should be able to run without you. It should have the management and leadership structure in place, along with other critical procedures, to function efficiently without your input or decision-making.
If, on the other hand, your business depends on you, then this poses a risk – if, essentially, you are the business, then this will actively repel, rather than attract, any buyers.
Plan now for the future
This might feel counter-intuitive, but once you decide to sell your business, now’s the time to invest in its future.
One way of looking at this is to think of ways you’d want to improve your business even if you weren’t selling it – increasing sales and profits, improving positioning, strengthening systems and procedures – and applying them to prepare for sale.
Someone looking to acquire your company wants more out of it than its name and history.
They want to know they’ll get something that promises future growth and profitability.
These are the qualities to persuade someone to pay more for your business.
At Marktlink, we look at the entire end-to-end strategy for selling a business, including the methods for maximising its value by optimising it.