Nearly 8 million businesses are owned by U.S. citizens ages 45 to 65. The majority of such businesses make less than $50,000 in profits per year. In other words, most of the companies out there are small, family-run enterprises or businesses that most would consider side or hobby businesses. Regardless of the size of business you operate, there will come a time in the life-cycle of your company when you recognize the need to exit the business. Family pressures, health, disillusionment and even death can all be factors the affect the need to sell a business. When it comes time to sell, there are a number of key pointers to consider in for maximizing the selling price at the time of exit.
Maximize Cash Flows
Business brokers often consult clients on the options for maximizing the sale price of their companies. Luckily, most companies can boost the value of their businesses just prior to the sale by simply increasing sales themselves. Increasing sales to current and new clients does a few key things for your business. First, it mitigates risk by increasing the number of clients your company serves. Any business whose operations rely wholly on less than ten clients has greater risk to the potential acquirer. Second, more clientele means greater cash flow. Greater cash flow increases the value of the business at the time when you’ll need it most: just prior to closing the deal. The value of your company will hinge greatly on the most recent period(s) of operation. If you can maximize cash flows—and thus the sales price—just prior, it will mean a much greater payout. In short, taking a bit more time to grow the company just before you sell it will prove a huge boon to your overall return on investment.
The smaller the business, the less the entrepreneur will obtain in terms of cash flow multiples and valuation calculations. As a result, many smaller private companies will have the added benefit of thinking strategically. This can involve direct targeting for potential acquirers. Instead of simply advertising the “business for sale” on multiple websites and public forums, the truly successful investment bankers will find a way to reach out directly to potential strategic acquirers. These groups are often made up of very targeted and specific candidates within the industry of interest. Rather than doing a shotgun approach to the business sales process, a targeted and honed campaign is almost always best.
While some businesses can be considered lost causes or “legacy” dinosaurs ready for retirement, there are a large number of others who can make quick shifts just prior to broker a merger and acquisition deal that can take the valuation (and thus the sale price) peak at a critical moment. Following a few simple rules can, in fact, help to build acquirer’s confidence and desire to have your private business in their portfolio.