Increase Transaction Value When Selling A Business

By Achim Neumann

A significant portion of our efforts have been to develop “Strategic Business Valuations” for owners. “In other words,” says Achim Neumann, President A Neumann & Associates, LLC, a full-service M&A advisor and business brokerage firm based in Atlantic Highlands, New Jersey, “we are approached by business owners to have the value of their business determined two to four years prior to its contemplated sale.”

One of the key outcomes of such strategic business valuations is the definition of weak points in company operations and a plan of action to make changes to maximize value. Generally speaking, how can a business owner improve value?

Consistent Cash Flow

Investors consider top-line revenue and cash flow to be the two most important criteria in buying a business. “The more consistent the cash flow is,” says Frank Arcoleo, Managing Director of Central Pennsylvania, “and the more secured by ongoing agreements, the higher the premium that can be obtained.”

Growth Potential

Every investor will look to grow the business – “Status Quo” is not acceptable. Thus, a business owner who can convincingly demonstrate growth opportunities, and, better yet, has a formal business plan in place for obtaining such growth, can successfully defend a strong asking price.

Diversification of Customer Concentration

A wide customer base, with few customers constituting more than 5% to 10% of revenue, significantly diminishes investor risk. This diversification minimizes the cash flow impact should one or two customers leave after the sale, thereby ensuring the ability of the business to survive – and prosper – in such a scenario.

Product Spectrum

A wide spectrum of products and services not only offers more opportunities for growth, it also mitigates the financial risks associated with only a few products or services. Thus, businesses for sale with a good product mix will always obtain a higher transaction value.

Financial Reporting

Reliable, consistent, and systematic financial records are an essential part of the management of any successful business. Whereas the current owner might run the business “from the hip,” only solid financial records will convince an investor of the viability and value of the acquisition.

Employees

Long-term employees able to assist in the business transfer, a dedicated management team that does not solely rely on the owner, and a good reporting system are all factors to enhance the value of a business.

Facilities & Equipment

Clean facilities, well-maintained equipment, and easy-to-locate inventory should all be in place PRIOR to the commencement of the sale process. Nothing is worse than for a prospective investor to conclude that the current business owner does not exercise proper care for the business and its assets, as reflected in the condition of facility and equipment. The immediate, implicit conclusion will be that the remainder of the business is similarly disorganized.

In sum, just focusing on these seven simple criteria will allow a business owner to obtain a higher asking price when they’re ready to position their business for sale. More importantly, if a strategic business valuation has been put in place well ahead of the actual sale, it will help to identify any shortcomings and provide plenty of time to implement corrections.