10 steps to maximising the value of a business on exit

Global economic uncertainty due to war conflict and future elections may have delayed the exit plans of baby-boomer business owners, however, for many, their need to exit has not gone away.

Adding to the complexities, the value of the average business has been limited. The key reasons for this include: most businesses have been structured and operated with the tax legislation in mind; profit has been kept low to minimise tax, and little effort has been invested in removing waste from the business.

Owners generally have wanted to fund their lifestyle, and even their children’s’ lifestyles, rather that invest in growth. Another factor is that the ability of some owner’s to manage a growing business has been limited, resulting in a reluctance to learn about leadership or invest in consulting services to develop growth capacity.

In this article we explore ten steps that can be taken in order to maximise the value of a business, splitting these steps into three distinct phases, including:

• Optimising business performance
• Polishing your business
• The creation of the sale

Phase 1 – Optimum Performance

Step 1 – Profit Improvement
Improve the profitability of the business by removing waste. There is no point to putting more business through an ‘incapable’ business. A key measure of how efficiently a business converts its sales is by looking at the profit of the business. Instructing an experienced account and their team at the start of the value optimisation process will enable them to get under the skin of your business,  delving into your profit and loss, identifying areas of leakage and realistic ways to reduce the waste.

Step 2 – Growth Plan
Put simply – grow the business. Ultimately, you are looking for a positive trend line of the sales growth, providing confidence that the sales process in the business is working well.

At the end of this first phase the business performance should be optimised, cash is created to fund the next phase of the process, and the sales and profit trend lines show a continuous and predictable improvement. It is at this point that Phase 2 can be commenced.

Phase 2 – Polishing the Business

In this phase make sure that all the elements of a great business are in place. There are four distinct steps in this phase.

Step 3 – Lock in revenue (contracts)
Make sure that, wherever possible, the future revenue of the business is locked in, preferably with long-term contracts. A buyer of the business needs a degree of certainty of the five year revenue outlook, so contracts with customers need to be robust.

Step 4 – Lock in management (no reliance on founder)
Establish a management infrastructure that removes reliance on the owner. The management skills and experience (and processes) to lead the business in the absence of the owner need to be in place.

Step 5 – Brand
Protect the brand of the business. Mechanisms for this include the web-presence, social media, patents, and other intellectual property protection.

Step 6 – Reduce Debt (clean up your balance sheet)
Reduce the debt levels of the business in order to clean up the balance sheet. The cash created in Step 1 can be used to retire debt and remove loan accounts.

At the end of Phase 2 the business looks as good as it can and it is now that the sales process can formally begin.

Phase 3 – Creation of the Sale

The key success factor in maximising the sales price is to find a buyer who “needs” to buy the business.

Step 7 – Find a buyer who ‘needs’ the business
Ideally several potential buyers have been identified at this point (through brokers or other industry contacts) and an analysis of why the business is essential for each potential buyer is carried out. This analysis often requires changes to the look and feel of the business. The information gained from the analysis enables a specific sale process for each potential buyer to be developed and implemented.

Step 8 – Negotiate well for the seller
Make sure that the negotiation process goes well. Often the business owner needs to be coached on their role in the sale. The psychology of the sale process must be clearly defined and followed. There is no point in having built a valuable business and then handling the negotiation of the sale badly.

Step 9 – Anticipate all objections and value reducing tactics
Anticipating all of the likely objections that will be raised by the buyer and their value-reducing tactics in the sales process are just part of the sales process planning.

Step 10 – Manage all the risk
To manage the risk in the sales process we suggest using a Failure Mode and Effect Analysis (FMEA) process to control all identified risks.

Get in touch

If these ten steps are rigorously followed over a period of 2-4 years the probability of getting a high price for the business is maximised. Don’t leave the opportunity to make these critical changes too late, ask for assistance. To find out how we can support your business to maximise its value, give us a call on 0203 912 9933, or email info@verallo.com.