Whether you plan to sell your business in the near future or not, now is always the right time to start preparing for a sale.
Why? Because a selling mindset encourages continual innovation, growth, and investment, helping your business stay ahead of the competition and at the top of its potential. Alternatively, running a business without a selling mindset could spoil your chances for a profitable sale--whenever that may be.
With median business financials on the upswing (the median asking price for businesses sold in the U.S. increased 18 percent from Q2 of 2018), the bar is higher than ever. So it's critical to constantly look for ways to increase the value of your company. An owner's ability to sell hinges on the business's fundamentals.
Start by taking a reality check. Assess what you are doing well as a business owner and identify areas that need improvement. Once you have established a baseline, you can take steps to boost the value of your business and, at the same time, remedy shortcomings that limit your ability to sell at the best possible price.
There are several serious mistakes that can lower business value:
1. Poor recordkeeping
When potential buyers and brokers evaluate your business, they want to review financials going back at least three years. They look at your business's sales history, revenue streams, and operating costs, among other things. They want to know whether or not the business is viable, which requires evidence of scalability. Organized, formal financial statements and business plans with clearly outlined goals and milestones give your business--and you--credibility. Sloppy reporting or the absence of key financial documents are major red flags to buyers and may indicate that you have mismanaged other areas of the business.
2. Delayed investment and improvements
It's often a mistake to stop investing in your business the moment you decide to sell. Instead, invest in the business as if you plan to remain at the helm well into the future. Look for ways to increase cash flow or streamline processes. This shows potential buyers that there is ample room for growth and expansion. You should also evaluate your current operation and identify opportunities to reduce costs. Then, invest the money you save back into the business (for guidance on where to invest, see mistake No. 3). Remember: Stagnation with no promising or possible future growth will quickly devalue your business.
3. Failure to innovate
A lack of tech savviness makes your business less desirable to prospective buyers. Knowing they would eventually have to tackle these tasks could deter prospects from pulling the trigger on an offer. As a business owner, it's important to keep your finger on the pulse of innovative solutions and products. Keep up with industry trends and technologies, and find ways to incorporate them into your current business model, refreshing your suite of products and services to stay competitive. The need to innovate also extends to your business's digital presence. Consider ramping up your online efforts with an updated website and active social-media pages. This will not only help expand your customer base, it will also increase your business value.
4. An unstable workforce
If your business experiences high employee turnover, you need to reduce churn before you list your business. A stable workforce led by competent management provides peace of mind that the operation will continue to run smoothly regardless of who owns the company. Well-trained employees take pressure off buyers by providing an assurance that they won't have to hire or train workers after they acquire the business. Consider ways to attract and retain a high quality workforce, such as training programs, advancement opportunities, flex-time, and other incentives.
Business valuation is a complicated process that involves many different variables. When you're ready to list, it's worth investing in a professional appraiser to accurately gauge the value of your business. But in the meantime, it's important to take steps to increase business value--and avoid costly mistakes that can easily deflate your company's value when it hits the market.