Build business value now for sale down the road

Like many people, you may invest in the stock market. But the people in charge of Target or Ford or Chesapeake will probably never call you to ask your opinion on how to operate those companies.

Go figure. Therefore, aside from deciding when to buy or sell, you have no control over the value of your stocks. Given the volatility of the stock market, if stock investments are all you’re counting on to get you through retirement, you may be seriously out of luck.

If you’re a business owner, the good news is that you do have a great deal of control over the value of your business. Since value means the price someone else is willing to pay for something you’re selling, how can you start maximizing your company’s value in case you want to sell it someday?

For an expert’s opinion, we spoke to Ron Chernak, President of First Business Brokers, Ltd. and former chairman of the International Business Brokers Association. Ron started FBB twenty-nine years ago and the company has since completed more than 900 transactions, so he understands what creates value from a potential buyer’s perspective.

We began by asking what potential buyers look for in a company. “Industry size, location, cost and quality of earnings are usually the first things,” Chernak said. “Size and cost often go hand-in-hand, and are very subjective — a matter of ‘beauty in the eyes of the beholder.’ Buyers look for something in their price range and a first-time business buyer often can’t afford to spend as much as someone buying their second or third business. Buyers also want to verify that the earnings will meet their financial criteria for operating the business, repaying debt, and their personal income.”

Regarding how an owner can make a company more appealing and valuable to a prospective buyer, Chernak began with the financial side. “Timely, accurate and well-formatted financial statements are critical to obtaining good value for a company,” he said. “Most buyers are risk averse and good financial statements — preferably showing a consistent and growing income stream — reduce the perceived risk in a transaction.”

The second criteria Chernak listed for business appeal was a diversified customer base. “Buyers and lenders shy away from businesses that have one or only a few very large customers. The potential risk is too great if one of those customers stops doing business with them for any particular reason.”

Next, Chernak cited having well trained second-level management. “If the owner walks out the door, what happens to the business? Will the buyer need to be at the company every day or can it operate without him or her? The less critical the owner is, the more the business is worth.”

“Buyers and lenders also look for a well-organized company with a business plan,” said Chernak. “I’m constantly surprised by the number of businesses I encounter that don’t have a current business plan.” He added that good documentation is essential. “Do they have written contracts with customers? If intellectual property — trademarks, trade names or patents — is part of the purchase, is it well-documented?”

When asked how soon someone should start preparing their company for sale, Chernak replied, “The owner should work with a timeline, starting by identifying when they want to be out of the business, and work backwards from there.” He explained that the training and transition period usually takes one to six months. The process of improving the quality of financial statements can take up to two years.

“The average time to sell the business once it’s on the market is approximately 10 months for a smaller company, and up to two years for a larger, more complex company,” Chernak said. “Owners should start preparing for sale several years before they plan to be exited from the business.”

Chernak concluded with two thoughts for about selling a business in the next few years. First, there is a lot of buyer activity going on right now, partly because of low interest rates. Second, he believes the federal taxes on business sales could increase by more than 50 percent as of 2013 because of increases in capital gains and Medicare taxes. (An article on this subject is available on FBB’s website at http://fbb.com/clock.)

Unlike the stocks you own, you have control over much of what affects your company’s value. If your exit plan includes selling your business sometime in the future, it’s wise to start planning and preparing now to increase its value. Get a good price for your business when you sell it and then whatever you earn in the stock market will be icing on the cake.

Laddie and Judy Blaskowski are partners in several businesses, including BusinessTruths Consulting. They are authors of The Step Dynamic: A Powerful Strategy for Successfully Growing Your Business. Judy@BusinessTruths.com.