Try Maximizing the Value of Your Business
by Steve Whitteberry, Managing Director
For most business owners, investors and shareholders, the largest single portion of their wealth is tied up in the business they spent years nurturing and growing. They desire to maximize the pot of gold from their business to finance their preferred retirement lifestyle and perhaps support worthy charitable organizations.
Gold Nugget #1: Enhance profitability because it is the single most important factor in determining business value. Many owners/shareholders think in terms of net income or taxable income when considering the profitability of their business. However, purchasers are usually more concerned with the “EBITDA” or earnings before interest, taxes, depreciation, and amortization. Purchasers are interested in how much cash flow is available to pay off debt, invest in capital expenditures for expansion, fund the operating needs of the business, and allow for the payment of dividends to the new owners. EBITDA, used in conjunction with other valuation models, more closely approximates cash flow and will often be used as a basis from which pricing calculations are made. Most purchasers consider three years of solid profitability and EBITDA to be a gold nugget.
Often, business owners/shareholders are motivated to reduce their taxable income by expensing discretionary items or elevated owner compensation through the company. This is a common strategy if the owner wants to reduce taxable income and never expects to sell the business; but if selling is a possibility, the owner should focus on profitability. An experienced mergers and acquisition professional, working with your CPA, can significantly increase the selling price of your company.
Gold Nugget #2: Develop a diverse, “golden” customer base so there is not a concentration on a few customers. Exploit a product or service niche and maintain excellence in quality and service, retaining the current customer base while attracting new customers. Buyer’s consider a heavy customer concentration as a negative attribute when considering a potential acquisition.
Gold Nugget #3: Strengthen the operational efficiency of your business. Buyers desire a company with a solid management team in place, current inventory, and procedures that produce consistent results. Developing internal systems which are considered “best practice” will strengthen the overall value of your business. Following a solid strategic plan is key, enabling the owner to work “on the business, rather than in the business.”
Gold Nugget #4: Create an organizational structure that reduces the dependence on one or a few individuals. When the key leaders and managers are away from the business, it should run as smoothly in their absence as when they are present. Hire the right people, provide training, develop leaders, and develop a management succession plan. A sound management leadership team is an invaluable asset when it is time for an ownership transition.
Gold Nugget #5: Structure the best deal by focusing on “after tax” dollars. Much can be done to reduce the taxes paid on the sale of a business. It pays to engage a good certified public accountant and estate planning attorney to work with your mergers and acquisition professional. Remember is it not how much you receive for your business, but how much you keep after taxes are paid.
Creating your pot of gold is hard work, but maximizing it during an ownership transition can be even harder. NuVescor will help you convert your pot of gold into a return on your effort and investment to enable you to accomplish your lifelong goals.