Selling your business? These nine factors will drive the price
In his best-selling 1986 book, “The E-Myth,” Michael E. Gerber reminds readers that the ultimate purpose of starting or creating a business is to be able to sell it for a profit.
Having been asked the question, “How do I create a more valuable company?” by many owners, let me share what I believe are the nine drivers of increasing your company’s sales. These same fundamental factors will determine how much your business is worth when the time comes to sell it.
1. Revenue growth
The first driver is whether you have a track record of multi-year revenue growth. The more the business grows sales, the better. Having an upward trajectory is important; people can explain one bad year in the midst of great ones, but being on a plateau or a downward cycle will hurt the sale price.
2. Revenue sweet spot
Getting to a certain size of annual revenue is important too. It’s a little like Goldilocks; you want the annual revenue to be just right, not too small and not too large. Specifically, being north of $10 million is better than being at $2 million, but being at $100 million might limit the buyer pool.
3. Customer mix
How you get the growth is critical as well. Buyers run away from companies with a customer concentration issue; too much is at stake when a single client is responsible for more than thirty percent of annual sales. Spreading the risk is important to buyers.
4. Business cycle
The fourth driver that will determine how much you’ll get for your business is where its industry is in its business cycle. As the song says, “When you’re hot you’re hot, when you’re not you’re not.” Industries run in cycles, so be aware that ups and downs will affect the price.
5. Profit margin
The fifth driver is profitable sales. As one client told me, “Getting a ten-percent profit margin means we did okay. But if can get to twenty percent, that means we have done something very different.” A higher profit margin is valuable; sustaining it over multiple years is ideal.
6/7. Cash flow/managing overhead
Two intertwined drivers are cash flow and management of overhead. Having strong cash-management tools improves the viability of your business and assures lenders that you can pay back what you borrow. As I have mentioned before in this column, the owner needs to personally own the management of company cash flow. It cannot be delegated.
Overhead is a virus in many companies. It’s where “cost creeping” is most likely to occur. Rising overhead is the number two cause of reduced profits (unprofitable sales being number one). Learning to say “No” to requests for non-essential spending is the best cure. You may not be well liked but your income statement will look better.
This means you have a business model that you’re constantly improving, that you have a turnkey operation, and most important, that your company is entirely dependent on you as the owner.
Improving your business plan requires vision and processing of a strategic nature, something few employees are likely to have. A turnkey operation is one in which all processes and policies are in place so that each person in the company knows what to do, when to do it and how to do it well. This “cookie cutter” mentality is worth a lot of money to buyers.
If your current version of an organizational chart looks like a wagon wheel and people are lined outside your office each day, the company is overly dependent on you. A company is far more valuable when it gets past the point where everyone is waiting for the owner to show up and unlock the door each morning.
9. Management team
The final driver is having a strong management team in place. If your dream is to hand over the keys to the business with one hand while accepting a large check in your other hand, you must have a capable management team in place to run the business for the next owner.
If you aren’t sure where to get started, let me suggest that you begin focusing on the task of generating profitable revenue while at the same time you start looking for managers who understand what you are trying to do and will help you to achieve your goals.