How to Avoid Killing Your Business Value
- No or low profits
There are some “good” businesses that just never really make a profit. Few of them sell for anywhere near what their value would be with profits. Get highly profitable today. In 90% of the cases we see unnecessary expenses which defer profit is a bad habit not a necessity for growth.
- Recent sharp drop in results
Do not take your eye off the ball until after closing. Sharp drops in top or bottom line results kill deals. It raises suspicion and increases perceived risk. Any increase in buyer risk results in far greater price reductions.
- No clear systems and processes
Businesses are a series of systems that produce cash flow. A great system will produce extraordinary results with ordinary people. How do yours stack up? Think of an ATM. You follow a process and you get money. While this is a simplification that is what buyers want and you should strive to give them.
- Key people
No matter how good the systems are they require qualified trained people to operate. Who is going to remain after the sale that can continue to bring in the sales, produce the product, and do all the administrative work. Remember, if your key people are all retiring when you do that is little support for your buyer or justification for a high price.
- No or short-term lease for location-dependent business.
If your business is location based and you cannot guarantee a transfer of the location you have no value. This is particularly prevalent in retail businesses but industrial uses, particularly well located warehouses etc. can impact the value of other businesses. With the consolidation of the shopping center industry the problem of transferring leases has expanded geometrically. Talk to your landlord early and have plenty of lease extensions.
- No professional liability insurance for professional practices.
In many professions like engineering in many states professional liability for past work is hard to shed. Plus many professionals are risk adverse. They want to know that you have insured your risk and often they will require you to buy tail insurance so there is no risk of them getting stuck with your claims. Always be conscious of how you might shed liability including proper insurance.
- Unwanted, long-term, expensive assets or obligations
Do not make major investments as you near your exit that may not be wanted by your purchaser. Items like an expensive new warehouse for a small chain of stores (the majors already have much larger warehouses). A long term lease on expensive office if your acquirer may want to consolidate, etc. Supply or franchise agreements if your buyer has other branding or sources. “Unnecessary” continuing expenses reduce your value in the eyes of the buyer.
- Contingent liabilities, lawsuits, or other above normal market risk uncertainty
Lawsuits create a perception of risk that is usually much greater than the actual dollar amount at risk. Outstanding contingent liabilities like unfunded pension liabilities or even high warranty claims all create uncertainty greatly reducing value.
- Sloppy accounting, tax reporting, and general messiness
First impressions count. Physical organization, neatness and cleanliness is interpreted as well run and generate comments like, “I could see myself here”. After all, the purchase and sale process runs on emotion. Get your documents and taxes in order. Make sure you can prove your add backs. Have your operations neat and professional.
- Ancient equipment
While over investing is a mistake no investment is too. Your buyer will quickly figure out if he is going to need to massively recapitalize because you have not. This capital investment is going to come out of your price. Do not over invest but do keep your business and its primary assets fully operational.
- Weak balance sheet, advertising the likelihood of business failure or other problems.
The best negotiators look at balance sheets then income statements. If you have not retained earnings and can barely pay your bills they will negotiate tough even if your current income statement says you are highly profitable. Keep your debts low and build up a reserve. Be able to look any buyer in the eye and tell them “I think I will just keep running it” and be happy to do so.
These deal killers crush the sales value of otherwise profitable business transactions. Make sure you have these items addressed early and be prepared to make the most profit from your business exit.