Business values wax and wane, but there are some strategic steps you can take to increase value before a sale. It’s rare that a business owner can substantially impact values enough to alter sales price if they don’t start working months or even a year or more ahead, though. If you think you might want to sell your business in the future, consider taking some of these steps to boost value.
1. Find ways to improve the profitability.
Profit is one of the biggest factors in the valuation of any business. Unless your business has an extremely unique product or something else to offer an investor, it may be difficult to sell at all if there’s little hope for profitability. In the months leading up to a sale, you can improve profit margins by finding ways to cut costs. Instead of resorting to low-quality materials, look for smarter ways to do business and possible process efficiencies. Buyers won’t be impressed if you can show a profit but you’ve put brand reputation and customer satisfaction at risk to do it.
2. Create proof of future revenue.
Even if your current revenue isn’t as robust as you like, documents proving future revenue can increase the value of your business in buyers’ eyes. Many sellers make the mistake of mentally checking out of their business long before a sale is final. While it’s tempting to do so, remaining focused on the needs of the business can ensure that you continue to sign contracts. Recurring revenue streams that automatically pass to the new owner can boost the sale price substantially because it reduces buyer risk.
3. Diversify your revenue streams.
Speaking of buyer risk: investors are less likely to buy into (or pay more for) a business that comes with substantial risks. You can’t always mitigate every risk, but you can diversify your revenue streams. If all your revenue comes from one or two customers or if 50 percent of your revenue comes from the top few clients, potential buyers have reason to worry. It’s not unlikely that a change in ownership will result in the loss of a few loyal customers, and a buyer won’t invest if the actions of one or two clients could significantly damage the business.
There are, of course, exceptions to this rule. If you have contracts that would be difficult to break or are in a niche where a large client, such as the Government, regularly plays a large role in revenue, valuation may not be impacted as much by a less diversified customer list.
4. Invest in upgrades if data points to ROI.
Many sellers turn immediately to physical upgrades to increase valuation, but this isn’t always profitable. Consider working with a broker to decide if you should make upgrades to equipment or the premises prior to selling your company. You only want to do so if:
- The upgrades are required to attract buyers
- You can’t legally sell the property as is
- The changes are likely to increase the sale price more than the amount you paid for the upgrades
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