- Early start – Even in the first year of operation an owner should have a plan in place to improve business valuation. It’s too late to do it in the middle of a sales process.
- Focus on strategy – “You should be clear about the short and long-term strategic aspirations of your business and have them aligned with your team, customers, suppliers, investors and other stakeholders. These should be set out as a strategic intent for the business and in a three-year plan and an annual operating plan,” says Martin Brown, Director of business advisors Elephants Child.
- Recurring revenue streams – Kevin Uphill, Corporate Director at M&A and Corporate consultants Avondale says: “If you have two businesses each with annual profits of £1million then the one with a recurring revenue contract model will be valued higher. Revenues are more stable and predictable than a one-time revenue model.” Examples of recurring revenue structures could include subscription models or service agreements.
- Be transparent – “A buyer wants to know the ins and outs of your business. So be transparent in keeping a track of your top 10 or 15 customers and how much they spend with you monthly,” recommends Kevin. Businesses should outline their real time KPIs, demonstrate increasing and solid cashflows, market share and whether they are a preferred supplier.
- Polish up the balance sheet – Sell off any unwanted assets and reduce cost per sale. Look at the terms and conditions of supplier contracts to seek efficiencies. Ensure your financial statements are reliable, accurate and timely. Also have realistic long-term growth forecasts.
- Customer diversification – “You shouldn’t be too over-reliant on one customer or one supplier,” says Martin. “I worked with one business which booked 98% of its revenues from one large blue-chip customer. They thought that was all they needed but this concentration was seen as a risk by a potential buyer. You need to have a wide pool of, and a good mix of, customers to make your revenues less vulnerable.”
- It’s not all about you – “An entrepreneur can dominate their business, but a sale is not about them,” stresses Brown. “A buyer wants to know that the management team below the leader also have skills and motivation. A succession plan is therefore critical, and you need to determine whether you have the necessary skills in-house which can be developed or if you need to recruit from elsewhere.” Kevin adds: “Hold your employees more accountable, get their roles clearly defined and invest in training and wages.”
- Operationally sound – A buyer wants to know that the business has both strong and secure IT operational systems. “Scale-up your IT architecture,” says Martin. “Often SMEs have disparate systems, with Microsoft here, and Sage and Excel over there, that aren’t linked to each other.”
- Blue sky thinking – “As a leader you need to think more creatively about new products and territories,” says Kevin. “Give yourself space to do this by getting other managers to run the day to day business operations.”
- Get the timing right – “Timing is luck to an extent, but you can influence it. Look at the way your market is going and try to catch the wave,” Kevin says. “Sell when it is the right time for your company, not you. Take your ego out of it.”
10 ways to improve your valuation
We outline some ways to improve the value of your business before disposal
- January 27 2018