You’ve likely heard a story about a local small business that was run by an individual for 30 plus years only to shut down when they were ready to retire. Without a plan, and likely no idea of the business value, the exit plan is often to liquidate the assets and shut down the business.
Determining business value is an essential step in identifying the best path for your exit planning strategy.
In Part I: It Took a Lifetime to Build Your Business – But This One Mistake Can Erase It All we explored the substantial oversight so many businesses – 70 percent to be exact – are making by not creating a transition plan or road map for their company.
What are the plans for your business? Will you sell it, merge it into another company, transfer it to a family member, or liquidate your assets and close? The tools to determine business value that we’re sharing below will help you create an informed exit plan.
Exit Planning – What About Your Employees
About 80 to 90 percent of business enterprises in North America are family firms.As a business owner, it’s relatively likely that you’re employing your family. Exit planning outlines what happens to employees when you relinquish ownership. It’s necessary to protect them from unemployment.
If a merger is in the cards, your employees may be at risk of a layoff during the transition. Ensure their continued employment and financial security by outlining the details in your contract.
The makeup of your business and your personal financial goals will help you lay out the best exit plan.
What you have in mind for the valuation of your business may not be accurate if you’re ignoring financial figures, the current market, or its future outlook. It’s easy to overshoot your business’s worth based on your investment of time and money over the years, but it’s not rational. Be realistic and use quantifiable data to establish a value.
One option for determining the value of your business is by comparing your company to industry benchmarks. FocalPoint can supply you with these industry benchmark reports. Our industry codes are based off of the NAICS codes (North American Industry Classification System).
There are four different reports:
- Benchmark Basic – provides financial and KPI data by industry code
- Benchmark Enhance – same as basic report but include tips and recommendations from improvement in the areas of liquidity, profitability and sales.
- Company Comparison – same as benchmark report, but included your client’s specific financial data to create a comparison.
- Narrative Report – same as comparison report, but is writing in narrative form with graphs rather than financial tables. Non-financial types, sometimes prefer this report.
An assets-based valuation is an alternative method for estimating your business’s worth but conveys the lowest value. Everything from manufacturing equipment to computer keyboards and unused office supplies can be sold. Looking at your net-assets (assets minus liabilities) is one of the simplest ways to define business value.
FocalPoint offers multifaceted business valuations in the form of two reports:
- Brokers Opinion of Value Report
This report forms a potential listing price for your business. It’s about 20 pages long and made up of a financial summary, three different calculation methods for business value, and a summary of the valuation.
- Discounted Future Cash Flow Projection Report
A report based on a formula that uses cash flow projections for the next three to ten years at the discount rate. The discount rate is the expected annualized rate of return required for a buyer to earn their investment back.
How to Maximize Your Business Value
Twenty percent of the total United States population will reach the traditional retirement age of 65 by 2030. If you are in this segment, then you should be using the next ten years to prepare for your future. Boost your business value and make it more enticing to potential buyers with these ten tips.
- Eliminate the business’s dependence on you. The organization must be able to run without you in order to remain open after the sale unless of course, your continued employment is a part of the transaction.
- Increase sales. Create business goals and take the needed steps to achieve them. Revisit your marketing plan and tap into new markets to diversify your customer base.
- Lower expenses. Cut costs and control inventory waste to lessen the burden on your bottom line. Look for ways to streamline your operations and remove any inefficiencies.
- Differentiate yourself from the competition. Help your business to stand out from others in your market to attract more customers and ultimately, a higher-paying buyer.
- Improve customer satisfaction. Collect feedback from your customers to see where your business needs to improve. Happy patrons will refer you to their friends and bring repeat business.
- Seek business coaching from a trusted and reputable advisor. Not only will they be prepared to give you an expert valuation, but they can also help find new ways to increase revenue.
- Establish recurring revenue agreements. Long term contracts with clients will give peace of mind to a new owner knowing they have guaranteed income in the future.
- Document all processes. Recording routine steps will aid in making the business scalable and able to run without you or your current employees.
- Institute long term benefit plans or incentives for employees. Encourage your employees to stay at the company when the new owner takes over by providing incentives they won’t want to pass up.
- Upgrade the physical appearance of your business. Paint, new furniture, and minor renovations can go a long way to creating a first impression that attracts a higher price for your business.
Understanding what your business is worth gives you the needed information to determine your next steps. Your exit planning strategy may differ contingent on the proposed value.
The sale or transition of a business will likely be the single largest and most important financial transaction of a business owner’s life, and its level of success will impact the rest of their life in retirement. A Business Coach is an integral member of a team of professional advisors (Business Coach, Attorney, CPA/Accountant, Financial Advisor, Banker, Insurance Advisor, Business Broker, etc.) The Business Coach will help identify the risk factors affecting the value as well as help the owner capitalize on the value drivers of the business.
Stay tuned for part three of this three-part series. In the next article, we will review why hiring a business coach is essential to a business owner’s exit strategy.
Schedule a free consultation with Jack Belford to learn more about our options for identifying what your business is worth to investors and how we can help you improve business value.