We’ve asked several business brokers, owners, and company CEOs what they do to prepare for an acquisition, and found that there were several simple and practical tips for increasing profit. According to an article in the Entrepreneurs section of About.com, “5 Steps to Increasing the Value of Your Small Business,” if you ever want to sell your business at a decent profit you must plan ahead.
A recent book by John Warrillow, “Built to Sell: How to Turn Your Business Into One You Can Sell,” six suggestions stand out. These are certainly not the only tips, but following them could put you on the path to financial freedom.
Ask yourself if your business can demonstrate the following to a potential buyer:
Recurring revenue: This is not simply the bottom line revenue you’ve been reporting every year; it is the regularity of your customer base. A business is much more valuable when customers return again and again, and it will give buyers more confidence for the future. In order to achieve a more loyal customer base, you might consider a “loss leader” product or service, preferably one that is consumable or needs to be repeated on a regular basis. For example, if you sell printers and other business machines, why not become the place that’s known for the cheapest toner cartridges? Or be extra generous with credits for recycling old cartridges at your store.
Track record of revenue growth: Buyers will want to see your top line revenue growth because it helps them project the size of the business in the future. In fact, this piece of information is even more important than the growth of your profit. It’s easy for a business owner to juice the profitability of their products but it’s nearly impossible to duplicate that “secret sauce” that makes people want to buy the product in the first place.
Cash flow: Think of it this way; if your company earns more money than it has to spend, a buyer will pay more for your business. Buyers are trained to look for opportunities by calculating the rate of return on the money they invest. The more cash your company generates, the less of their own money they will have to contribute to fund its day to day operations. Keeping more of their cash means a better return on investment, which is a big thing for most entrepreneurs.
Build a better mousetrap: Your business will sell for a higher dollar figure if you’ve done a good job differentiating your products and services. This allows buyers to see the value of buying your business over a similar one in the same industry. They will also be able to estimate the profit potential available to them if they take ownership.
Focus on the multipliers: Business valuation is dependent upon a few key calculations, so it’s important to understand how it works. Your industry might use standard multipliers to come up with a “fair market price,” but if you put in the extra effort you can drive up those multipliers. You may be surprised at the value you can create by taking a long-term approach now.
Clearly, the most important way to add value to your business is to give the buyer more confidence. Whether it is differentiated products, better cash flow or other value enhancing benefits, buyers are willing to pay more for a business with profitable potential. The best way to find a qualified buyer for your business is to list in an online business directory.
Photo Courtesy of Stuart Miles / FreeDigitalPhotos.net