Most business owners want to sell their company for the highest possible price — so it can be a shock to find out that their business isn’t worth as much as they think.
Often, it’s similar to selling a house — homeowners sometimes believe their abode will go for more than it does. Why? Because they are emotionally invested in their asset.
“Business owners take a lot of pride in what they’ve created, so it’s hard to ascribe market value to a lifelong project,” said Scott Cathcart, corporate finance lead for SunTrust specializing in middle market companies.
Although some business owners will accept a lower valuation, others prefer to make their company more attractive to buyers and therefore boost the sales price.
Here are five ways to increase your businesses valuation:
Diversify Your Revenues
Buyers want to see growing revenues, but they’re not just looking for a total dollar amount — they also want to see that revenues are expanding and sustaining a higher level. That’s why it’s important to diversify your revenue. The more ways you can earn money, the better — whether that’s by focusing on new customer groups or adding products.
“You want to minimize customer concentration,” Cathcart said. “Sell your product to a broader number of buyers.”
But how can you uncover a potential new audience or decide what products to launch? Meet with your customers to gain better insights into what they want, said Will Mitchell, a professor of strategic management at the Rotman School of Management. “Companies that have deep understanding of their customers, and what they’re willing to pay for, will be able to create new opportunities,” he said.
Improve Your Margins
Gross margins — the difference between revenues and costs — provide an important metric when valuing a business. The bigger the gap between the sales price and the cost to make the product, the better, Cathcart said. Typically, businesses improve margins by running more efficient operations. That might involve reducing overhead, cutting unnecessary staff or investing in processes that make the company run faster.
“You want to do more with less,” Cathcart said.
Companies will also want to chart better margins over several years — it can’t just be a one-time tactic to make the business more attractive in the short term. Owners must properly manage their expenses consistently and plan for future expenditures. “Know what purchases you’ll have to make, or what improvements to your infrastructure you’ll need to do,” Cathcart said. “Having good visibility on what that looks like impacts what the valuation will be.”
Improve Your Executive Team
Buyers look for a winning executive team. Even though you may be a star, you also need to have top-notch people around you. They will be key to business success after the sale.
If the team isn’t strong enough, a buyer may have to find other people to run the business. “That could create a discount to that business if there’s not someone there to immediately run it,” Cathcart said.
Set Yourself Apart
You have to aim higher than your competition does. What can you do differently? Whether it’s beating their margins or generating faster growth, you will need to do your homework to stand out from your rivals, according to Mitchell.
Market research is an important part of this process. Find out as much as you can about your competitors, as well as your industry as a whole. “Look at other businesses, but also suppliers, distributors, complementary firms — what gaps do they have in their service?” Mitchell said. Then make investments to fill those gaps for potential buyers.
Plan For The Long Term
Companies are more willing to pay a higher premium if there’s a clear road map to achieving higher returns down the line, according to Cathcart. Sellers need to clearly understand what bidders expect from the sale and deploy the right strategy to help achieve the buyer’s goals.
“Some buyers might expect a certain return over five years,” Cathcart said. “If you don’t have a road map to that return, then you’re not going to get paid a whole lot for your business.”
You will need to provide high-quality, substantiated, quantitative and qualitative financial forecasting that can indicate future results.
If the math doesn’t add up? Keep improving the business. “It’s like exercising — you can run a six-minute mile or a seven-minute mile,” Cathcart said. “If you want to do better, you’ve got to tighten up, time yourself lap by lap and introduce measurable metrics.”
Ultimately, if you can improve your business to a point where a buyer can see the potential for sustained growth, you’re likely to command the price you want.
“You can work more on the business,” Cathcart said. “But then you have to deliver.”