The value of a business is set by (1) how much the business earns, and (2) the “multiple” the business is sold for.
There’s a bunch of rules-of-thumb for what your multiple should be, for example, many people think they’ll be able to sell their business for 2 times the earnings the business. For them, their multiple would be 2.
Rather than leaving your multiple to chance, here’s 11 ways you can increase your multiple:
1. Historical Profits
If your accounts are a bit of a mess, then prospective buyers may not believe what’s in them (and drop what they’ll pay you). The step to take today is to get your house in order (through something like Xero), with all invoices loaded. You also want to make sure that you can repeat your profit from year-to-year (i.e no one-off good/bad years).
2. Terms Of Sale
People often pay more for businesses where the existing owner isn’t stepping back immediately. Make sure you’re selling your business before you have to leave, to help smooth the transition to the new owner. Today, you can start by working out where you want to be in 2, 5 and 10 years. If you’re wanting to be out of the business in 2 years, then you might need to sell today.
3. Business Type
Different buyers prefer different types of business. Some prefer franchises, others hate franchises. For some, a stand alone business is preferred, while others look for a business holding distribution rights to a particular product.
4. Business Growth
People like buying a business with an upside. They want to believe that they can make more from your business than you can. Today, start thinking about the ‘story’ you’ll sell them, and how they can make more from your business. Also think about the timing of your exit – you need to sell before you’ve squeezed every ounce of juice from your business.
Is your premises tidy and up to scratch? Do you have modern technology, or is it all a bit tired? Buyers reduce their multiple if things are, well, a bit shabby or old. What (cheap) improvements can you make today to improve things? Alternatively, if you did an expensive refit, would you get your cash back when you go to sell?
How well can the buyer market your business? You want to show them a clear marketing plan, telling them how to attract new customers, and retain the existing customers. You can build this marketing plan today.
How desirable is the industry you’re in? For example, engineering businesses appeal to those in the industry already. Hospitality businesses appeal to anyone who want to employ their family members, or those who think hospitality is easy (yeah right…). Can you describe the sort of person who’d buy your business (remembering what we covered last week)? If you know who the buyer is, it’s easier to find them.
Do you have your market sewn up, or are you constantly under attack from competitors? If you’ve got a strong market position, you’ll get paid more for your business. Could you introduce a new product line, or revenue stream, so that you’re in a more dominant position in your market?
9. Industry Growth
Is your industry taking off, or are you in decline? If you’re running a book shop, the chances are your industry is slowing down. This reduces what a buyer will pay. What steps can you take to mitigate the downturn? If your industry is taking off, how do you reduce the risk of over-heating and everything falling apart?
People pay more for businesses with a strong team of employees, who run the business (or most of it) on their own. Today, you can start empowering and training your staff to run things without you. Of the things you’ve done today, what could someone else have done?
11. Goodwill Transferrability
As with buying a house, people pay more for houses that other people like. If I buy your business today, and it turns out I don’t like it, can I sell it to someone else?
Why you’d bother
Here’s the secret to why you’d bother – business who build their multiple, generally find that the profit of the business increases on the way through.
For example, say you want to build your multiple by making staff more independent, and able to run the business on their own. If you do this successfully, you’ll have more time to work on your business rather than in it (yes, that old saying again…). By working on your business, you’ll earn more money. Sounds simple right!
Then when you go to sell, the profit is higher, the multiple is higher, and the cash in your bank account higher.
TO DO: If you’re serious about increasing the multiple of your business, email us and we’ll send you through tips over 5 weeks to help you sell (almost) any business.