Ready to sell your business? Increase the enterprise value of your company to achieve greater profit
The opinions expressed by entrepreneurs contributors are their own.
Most people in the US don't rush straight to a dream home - I know I didn't. Instead, they usually start small and gradually improve. When they are ready to sell, they try to make improvements and add value to the property to maximize their return. In the same way, if you are considering selling your business, the right decision is to work intentionally to increase the value of the business, i.e. its enterprise value.
Enterprise value is the overall value of your business. However, owners should remember that there are a number of subtractions to this number resulting from debt and transaction costs, such as legal advisers and business brokers. It reminds me of selling my first house and then seeing how much we sold it and all the line items from various people who got a piece of it.
Many business leaders don't go into improving business value as deeply as they should. This is because they are more comfortable with organizational tasks in which they have some expertise. But if you want to create the greatest value for yourself, your team, and the brand's legacy, you have a responsibility to get comfortable. The good news is that you can consciously drive business value if you understand it.
Related: Let the Other Side Win If You Want to Negotiate a Really Good Business Deal
How to increase business valueLike many organizational projects, creating business value requires good planning. But no plan works if you don't know what you really want. Start by setting a clear expectation. This could mean selling in five years and trying to increase the value of the business up to $1 million or $100 million.
Once you have set these parameters, ask yourself, "How can we achieve this goal?" You will realize how difficult it is to increase value and close a sale, and that is common. There are performance documents to gather (usually based on the last 12 months), reviews to get, marketing, negotiations and other jobs involved. This is one of the main reasons why 54% of brokers say you should allow between six and 11 months to close a sale.
You will also need to find your valuation range, which usually requires relying on a financial measure, such as earnings before interest, taxes, depreciation and amortization (EBITDA). Hire professionals to examine the dynamics around your business, such as size and industry. They can then find "comparables" or "comps", which are businesses similar to yours, and find out what price they sold for. Each offset value is expressed as a multiple of your financial metric, such as five times EBITDA. By looking at the lower and upper values of your comps, you will discover a range in which your business could likely sell. This scenario is like your real estate agent informing you of the sale price of similar houses in your neighborhood.
As you develop this profile for your industry, identify what each company has that contributes to its price point. In a home sale, you might see factors such as finished basements, proximity to public transportation, or energy-efficient appliances provide an advantage. For companies, competitive factors that increase value can be dedicated staff, intellectual property, or the number of strong brands within the company. Can you incorporate any of these pilots into your own business? If so, you may be able to push your business up the valuation range.
Keep in mind when looking at value factors that not everyone will see them the same way. A swimming pool can be a drawback if you are buying a house and have young children running around in the garden. If you envision your family relaxing in this pool every summer, this is suddenly a plus. It is therefore important in selling your business to know what type of buyer is attracted by specific factors and to highlight or expand on the factors that attract the type of buyer you...
The opinions expressed by entrepreneurs contributors are their own.
Most people in the US don't rush straight to a dream home - I know I didn't. Instead, they usually start small and gradually improve. When they are ready to sell, they try to make improvements and add value to the property to maximize their return. In the same way, if you are considering selling your business, the right decision is to work intentionally to increase the value of the business, i.e. its enterprise value.
Enterprise value is the overall value of your business. However, owners should remember that there are a number of subtractions to this number resulting from debt and transaction costs, such as legal advisers and business brokers. It reminds me of selling my first house and then seeing how much we sold it and all the line items from various people who got a piece of it.
Many business leaders don't go into improving business value as deeply as they should. This is because they are more comfortable with organizational tasks in which they have some expertise. But if you want to create the greatest value for yourself, your team, and the brand's legacy, you have a responsibility to get comfortable. The good news is that you can consciously drive business value if you understand it.
Related: Let the Other Side Win If You Want to Negotiate a Really Good Business Deal
How to increase business valueLike many organizational projects, creating business value requires good planning. But no plan works if you don't know what you really want. Start by setting a clear expectation. This could mean selling in five years and trying to increase the value of the business up to $1 million or $100 million.
Once you have set these parameters, ask yourself, "How can we achieve this goal?" You will realize how difficult it is to increase value and close a sale, and that is common. There are performance documents to gather (usually based on the last 12 months), reviews to get, marketing, negotiations and other jobs involved. This is one of the main reasons why 54% of brokers say you should allow between six and 11 months to close a sale.
You will also need to find your valuation range, which usually requires relying on a financial measure, such as earnings before interest, taxes, depreciation and amortization (EBITDA). Hire professionals to examine the dynamics around your business, such as size and industry. They can then find "comparables" or "comps", which are businesses similar to yours, and find out what price they sold for. Each offset value is expressed as a multiple of your financial metric, such as five times EBITDA. By looking at the lower and upper values of your comps, you will discover a range in which your business could likely sell. This scenario is like your real estate agent informing you of the sale price of similar houses in your neighborhood.
As you develop this profile for your industry, identify what each company has that contributes to its price point. In a home sale, you might see factors such as finished basements, proximity to public transportation, or energy-efficient appliances provide an advantage. For companies, competitive factors that increase value can be dedicated staff, intellectual property, or the number of strong brands within the company. Can you incorporate any of these pilots into your own business? If so, you may be able to push your business up the valuation range.
Keep in mind when looking at value factors that not everyone will see them the same way. A swimming pool can be a drawback if you are buying a house and have young children running around in the garden. If you envision your family relaxing in this pool every summer, this is suddenly a plus. It is therefore important in selling your business to know what type of buyer is attracted by specific factors and to highlight or expand on the factors that attract the type of buyer you...
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