7 Ways to Increase the Value of Your Business Before You Sell

You’ve reached the decision to sell your business maybe now, in 12 months or in three years time,  how much will it be worth?

As any reasonable owner, you want to maximise the sale value as much as possible. But how is a small business valued?

How to Calculate the Value of a Business for Sale

As a general rule of thumb, a small business is valued at 2.5 to 3 times net profit, with the net profit figure being adjusted for non-operating expenses such as interest expense and above market wages paid to the owners.

If the owner has not been drawing wages and benefits while working in the business, an adjustment is made for the commercial wage that would normally be paid.

So one way to boost the sale price of your business is by increasing its profits. You can also improve your company valuation by increasing the rate that is applied to the net profit of the business, ie. ensure that the rate applied to the net profit is 3 or higher.

How can this be achieved?

Consider these seven practical tips to increase the value of your business before you sell:

1. Document standard procedures.

The documentation of standard procedures ensures that there is consistency across business operations. A potential buyer will find your business attractive if its processes, procedures and standards are well-documented because it means a team member or two can perform tasks autonomously in the event of resignations or annual leave.

2. Innovate for efficiencies.

Continuous innovation allows the business to keep abreast of technological advances, encouraging efficiencies in productivity. This can lead to reduced operation costs and/or increased volume of trade.

3. Have a long-term lease in place.

Smart buyers want a guarantee that the business can operate in the same area for a considerable amount of time. The existence of a lease provides certainty for a buyer that the business location will remain after the purchase.

4. Keep up to date, well maintained equipment.

If the equipment is run-down, the values of the business will likely be reduced as a buyer would be concerned about paying for a replacement for equipment, or incur high maintenance costs. Further, well-maintained equipment will likely operate more efficiently, thus reducing running costs.

5. Retain an engaged team with authority to make decisions.

Having an engaged team is critical. They are more productive and consider options for improving business processes. A team empowered to make decisions allow the owner to step away from the business. This improves the value of the business because it is able to operate without the constant need for the owner’s presence. A potential buyer will find it appealing that employees can guide them while they learn about the business operations.

6. Prove the company’s growth in sales.

Evidence of growth in sales shows that the business has not gone stale or stagnant. Know your numbers and prepare to cite your company’s positive financial performance to ideal buyers for a profitable sale.

7. Maintain a comprehensive customer database.

A customer database can be used to record and manage detailed and updated data  of your customers and prospects such as their age, gender, suburb, previous purchases, etc. A deeper knowledge of your customers creates an opportunity for targeted marketing, resulting in more successful marketing campaigns.

How does your business fare in respect to the above elements?

Regardless of whether you wish to sell your company or not, it’s important to understand the factors that will lead to a more profitable business.

These elements will also affect your level of involvement as a business-owner – how often you can be involved in or absent from the company.

Since you are aware of these key pointers, you can start planning now to prepare the business for sale in the future. If you still feel overwhelmed, try to seek out an experienced advisor to help you successfully handle this deal or transition.

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