As entrepreneurs, isn’t it easy to get caught up in the day-to-day operations of your business? You may not be thinking about how much your company could be worth when the time comes for a transition. Yet the choices you make either enhance or negate the future value of your company.
There are any number of ways for a company to grow. These growth opportunities include: entering new markets, developing innovative products or service lines, acquiring complementary businesses, investing in talent, and increasing sales. You can grow the business rapidly through outside financing or more slowly by using the company’s own revenue (aka growing “organically”). With so many strategies to consider, I urge you to develop a long-term plan to guide the growth of your business.
Your decision regarding the ultimate disposition of the company may influence many aspects of your current business strategies, including your form of business ownership. You may want to consider a C corporation structure for a business that could go public or an S corporation structure if a private sale is planned. Tax advisors and attorneys can explain the implications of each form of business ownership. Even an LLC that is currently taxed as a flow-through entity can file a change of classification for taxation as a C or S Corporation in the future.
Focus on Assets
Build value by maintaining your company’s transferable assets. These assets may include tangibles like property and equipment OR intangibles (i.e. customer base, brand recognition, copyrights, trademarks, location, and business processes). Companies also derive intangible benefits from a strong management team with the knowledge and connections required to maintain the business after the owner exits.
Seek top line revenue and bottom line profit growth
When growing your business, create a self-sustaining enterprise with steady revenue growth. Implement processes that create a consistent client experience but still feel customized. Starbucks is a great example: no matter where you are in the world, your experience should feel similar when you order a Starbucks beverage.
The financial performance of a company is often measured by its free cash flow, or the cash that it generates before interest, taxes, depreciation, and amortization (less capital expenditures). In assessing the value of the company, a buyer may project a company’s earnings over the next three to five years based on the current cash flow. This projection will consider any outstanding debt. Sale prices are typically computed with multiples. For financial advisory firms looking to sell, a healthy multiple is 2 to 3 times gross revenue.
Align Offerings with Competencies
Businesses are often more efficient when they focus on their core competencies, rather than diversifying too broadly. If your company offers product lines or services not closely aligned with the firm’s core business, consider this question: are they profitable, or do they represent a drag on the company’s resources? Selling off non-core assets may provide funds to reduce long-term debt.
You may also want to restructure agreements or contracts perceived as objectionable by a potential buyer. Long-term leases, licensing contracts, employment contracts, and loan agreements could all be viewed as undesirable in the eyes of the buyer. A short-term lease may be more appropriate if the acquiring company is likely to outgrow its facilities or if the potential buyer prefers a different location. Also consider formalizing verbal agreements with key suppliers or customers to ensure a smoother transition.
For a detailed analysis of your company’s value, contact a professional business appraiser who is familiar with your industry. Even if you have no immediate plans to sell, an estimate can help you identify ways to maximize the value of the business for a future exit. Although my firm SV CPA Services doesn't offer business valuation services, we can be a resource as you contemplate an eventual sale.
Deborah Meyer, CPA, CFP(R)