One of the most popular questions we receive here at Transworld is “how much is my business worth?” Most often, people are disappointed in our valuation as their expectations are beyond what the market will pay.
But today is your lucky day, because I am going to outline 10 ways to increase the value of your business in the future. Using the data points required to eventually value your company, here’s how to increase the value.
It will be the first thing everyone wants to see when valuing your business. With today’s computer systems, you have no excuse not to have your business records completely automated.
Uptrends are very important. A buyer will value the future earnings based on past results. If past earnings are going up, the value will be higher as they are used to predict the future.
Many business owners expense unnecessary items in their businesses as a tax strategy. That’s OK, but keep track of these items by using a separate credit card, accounting notation or a journal.
Small businesses are valued on one owner/operator. If unpaid family performs jobs that must be replaced, the value will be negatively impacted. Your best bet is to phase the family out and have paid staff that will stay on after a sale. Also, no buyer wants to work 60-plus hours a week. Workaholic business owners will find it harder to sell.
If your business is limited by the current facility and equipment, the valuation will reflect that ceiling of revenues and profits. Either sell well before you need to invest or buy the equipment, expand facilities and sell in a few years.
(Getting the picture yet?) There are several great certified public accounting firms in your area. Use them!
Your business is primarily valued based on the profits using multiples, and the multiple increases as profits increase. For example, a business making $100,000 may be worth two times that ($200,000), but a business making $500,000 may be worth three times that amount ($1.5 million).
The value of equipment and businesses will be higher if everything works and looks nice. Also, buyers will want everything in working order at the day of closing – even that old piece of equipment that you do not use anymore.
Do not play with inventory as a tax-savings strategy. It will catch up with you someday, and you will not like the consequences. Keep your inventory lean and moving. If it’s old, donate it or mark it down.
You’ve got it now, right? Any bank looking to finance the acquisition of your business will look for at least three years of earnings to decide how much they can lend. If a buyer cannot get enough money from a bank, you have two choices: seller financing or sell for less. Good books and records will allow your business to sell fast for a high valuation and be financed with third-party financing – all things that are good for you.
All business owners should plan for their eventual exit. The problem is, plans sometimes change. If you keep your business in order through these simple steps, you can exit at any time. Call me at (517) 492-0039 if you have any questions or need clarification to any of the information I have provided.