Selling a business is a little bit like the Olympics. Sentiment and a lifetime of hard work are suddenly reduced to cold, hard numbers. The same is true of selling. Buyers will base the value of your business on its pre-tax earnings and a multiple. The former is up to you. The latter is up to the buyer based on industry norms and some subjective evaluations.
If you want to bump up your number, here’s what you need to do now.
Minimize the Buyer’s Risk
You know that owning a business means living with risk. Buyers don’t like risk, and will make their assessments with an eye toward minimizing hidden risks. Diversification offers an antidote to risk. Diverse customers, products, suppliers, services, and revenue streams can earn a higher multiple.
Find and Dominate an Industry Niche
Every industry is filled with niches. A digital printer might provide 24/7 services to customers in specific industries. Whether you’re in consumables or construction, a niche is key. It shows expertise, attracts customers, and can increase your multiple.
Develop Recurring Revenue Streams
Every business must generate sales. But if every customer requires shaking the money tree or a new marketing strategy, you’re taking on too much risk. If you’re the one who brings in new customers, how will the buyer do it without you? Evergreen contracts and other recurring streams of revenue offer more security. Buyers love security, and they pay a premium for it.
Show Consistency, or Consistent Improvement
A great performance is a good thing, but if it’s surrounded by stumbles, it can lower the overall score. The same is true of businesses. If your business has seen a dip in performance, this may affect your valuation and multiple. It doesn’t matter if the reason is plausible, because buyers dislike risk.
The best time to put your business on the market is after a pattern of consistent or—even better—improving financial growth for 3-5 years. Sadly, this is the time when owners are most reluctant to sell. They mistakenly believe the business will continue improving in perpetuity. That’s rarely the case.
Be Better Than Average
Buyers want to know how your metrics—gross and net margins, expenses such as rent and payroll—compare to industry averages. Be better than those averages. The more you outperform industry averages, the more impressive your performance is in the eyes of a buyer, since it is your own industry that reveals the most about your performance.
Most owners only get one chance to sell their business—just like most athletes only get one Olympic competition. Preparation counts. Earning high marks from the buyer-judge can affect your financial wellness for a lifetime, so channel the Olympic athlete and prepare for the big moment.