For Sale: 5 Effective Ways to Increase Your Company’s Valuation
Recently there’s been much discussion among our members about selling their remodeling business, or perhaps handing the business over to a 2nd or 3rd generation family member.
These discussions are typically driven by a company’s founder or current owner who is nearing retirement age and wants to take advantage of the value they’ve built up over the years.
The fact is, only a small fraction of remodeling companies are successfully bought or sold. However, that number is increasing as more business owners plan ahead and take the steps necessary to build a business that can grow and thrive even when they are gone.
So, how do you build a business that someone will want to buy? Here are five tips that can help you maximize your company’s valuation:
1. Be Consistently Profitable
Buyers value bottom line profitability. Although profit is always a business goal, it’s important to establish a track record of consistent profitability in the years leading up to a potential sale. In addition, profits that are growing every year are important as well. If you keep profitability and your exit strategy top of mind, you may find that you make different decisions than you might have otherwise.
2. Learn to Delegate
Many businesses revolve around their founders or current owners and remodeling companies are no different. A business built that way is not attractive to potential buyers, who need to know that the business can survive and continue to thrive without the founder/owner.
It is key to avoid the typical “hub-and-spoke” business model that is all too dependent on the owner. In this model the owner is the hub and performs most of the critical tasks, while employees aid the owner in performing these tasks, expanding the owner’s ability to do more. Employees are mere “helpers” and the owner is a never-take-a-real-vacation superhero who must perform most key functions, such as sales, product design, management — you name it.
There’s no meaningful delegation and a true sign of this is if the owner goes on a long vacation without a phone and computer, and everything falls apart.
The founder/owner needs to concentrate on growing the company, rather than taking care of day-to-day operations. Owners must build a company that is not reliant on him/her and that means distributing responsibilities throughout the organization.
3. Create Systems & Operating Manual
When you are preparing to sell your business, you will maximize your value if you can provide a buyer with an operating manual. A potential buyer wants to know the business will continue to run smoothly without you, beyond the transition period and that the institutional memory will be retained when there is staff turnover in the future. By making it easier for someone to step in and operate the business, you will directly affect the perceived value of the company, which will lead to a higher payout for you when you are ready to sell.
4. Clean Recordkeeping
Accurate and detailed recordkeeping is an important element in positioning your company for a higher sale price. Financial statements and other records need to be thoroughly compiled and updated. If buyers suspect that your records don’t accurately reflect the business, their subsequent offer will be lower, or worse, they will lose trust and the sale may fall apart.
5. Build a Strong Bench
Hire the most talented people you can afford and put them in critical roles. Let them take on larger roles as your business grows. A prospective buyer will see that they can purchase your company, keep the executive team and plug in their own new leader. The purchaser will have a viable, and likely improved, business. I know that it may sting a bit to think that your business can go on without you, but you can feel comfort in knowing that you built a strong, profitable business that will continue to grow.
The bottom line is that the process of building a business that you can sell isn’t overly complicated, it’s just very different than running a company that you have no interest in selling one day. Building an exit strategy that works for you and your family takes planning, consistency and a little extra effort; but the effort pays off in the long run… Literally.