Many of our clients own businesses. In fact, when we look at their balance sheet, that business is not only the source of their income, but often constitutes the majority of their net worth. Regularly those business owners are so focused on running their business that they forget to think about the value they are creating and how to ultimately maximize that value. Many businesses never get to the point where someone else is willing to buy them, but if you can answer “yes” to the following questions, there is a good chance you may be at that level:
- Does the business operate without you there? For small-to-medium sized businesses this is often one of the biggest stumbling blocks. It is counterintuitive. The more you can remove yourself from the day-to-day aspects of running the business, the more valuable it becomes. No one wants to buy something that is highly dependent on anything, much less the person they just paid a big chunk of money to. If you aren’t quite there yet, think about all the things you are doing every day and begin delegating those items to other members of your team. You may need to hire someone or train others, but it is imperative that you aren’t the key to your business.
- Are there are profits after you pay yourself a reasonable salary to run the business? We’ll often see business owners who claim to have fantastic profits, but they don’t ever pay themselves a salary (they just spend what is left or take distributions as needed). That may be fine for their current situation, but a potential buyer will need to replace you with someone else to run the company when you are gone. After they pay that person a salary commensurate for their role (CEO), how much is left? If it isn’t much, your firm may not be worth much either. We encourage our clients to pay themselves a reasonable salary, then assess profitability after those payments have been made. That bottom line number is what most buyers will be looking at and basing the value of your company on.
- Is there is a strong track record of growth and profitability? Buyers will pay more for a rapidly growing business than a stagnant one. When you are assessing this growth you should be focusing both on sales as well as profits. While increasing sales is a great sign, if there is little-to-no commensurate increase in profits, most buyers will not be impressed. When developing your strategic plan, there should be a focus on both revenue and profit. That means an owner focused on building shareholder value is concentrated on expenses as much as they are sales.
- Are you confident there are no significant risks to your business? Most sophisticated buyers will perform due diligence on your company before they are willing to buy it. Do you have any clients that represent an extremely large portion of your sales? Are there any outstanding lawsuits or complaints about your business? Do your key employees have employment agreements making it difficult for them to compete? These are just some of the risks they will be looking at. It is good business to think about these questions now and address them before you are looking to sell your business.
The irony of this is that focusing on shareholder value not only creates more wealth for you in the long-term, but it also creates more value for the owner today. Increasing profitability, developing a leadership team, and minimizing risks are all sound strategic initiatives that owners should be focusing on even if they aren’t looking to sell.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.