You might have heard of the business life cycle…. That’s the idea that businesses tend to begin as start-ups, then go through a growth period then move on into maturity and eventually the owners sell the business. Of course it doesn't always work this way. New business owners sometimes buy into an existing business and retiring business owners sometimes pass them onto the next generation. The fact of the matter is that at some point most businesses end up either being shut down or sold. And for those that make the cut and end up getting sold, the owners are always laser-focused on maximising sale price.
But, regardless of how the final price is arrived at, let's talk about the things that you can do in practise to maximise the value of your business when it eventually does get sold.
Interestingly, the things that you need to do to position your business for sale are almost exactly the same things that you need to do to maximise your profit and cash flow even when you’re not looking to sell in the immediate future.
So, when you’re looking to sell your business, the first thing you need to do is what you do when you sell anything else. You need to put yourself in the mind of the buyer. What is it that buyers want? This is actually not a difficult question. Just think about what you would want if you were buying a business for the first time. Let's list off a few things:
First of all, you would want a business that you can understand. All other things being equal, most people will not put down a pile of money on something they don’t understand. This means that the business needs to be well-organised and its processes need to be straightforward and properly documented. New business owners want to be focused on growth and profitability and cash flow right from the get-go, and they are absolutely not interested in spending a lot of time learning the bizarre intricacies of a complex business.
Secondly, buyers like to see all the components that they would expect to see in any modern business. They want to see a working productive marketing system, they want to see a smoothly running workflow management system and they want to see a clear pathway to grow the business without having to do a whole lot of preliminary work first. So in short, if they see your business as a fixer-upper, they’ll either want a big discount or they’ll walk away.
Now, so far we just talked about the things that are going to maximise your chances of selling your business to a qualified buyer. But now that we’ve got the buyers interested, let's look at the two key things that maximise the price.
Both of these things relate to cash flow. Firstly, buyers are interested in the amount of cash flow that they take out of the business on a reliable, ongoing basis. This is called the free cash free cash flow of a business. Secondly, they’re interested in how well the business is positioned to grow that free cash flow into the future. So in short they’re thinking “what can I take out of the business now and what are my opportunities?” So remember, because businesses are ultimately valued on free cash flow, anything you can do to improve that will have an effect on your business value.
Now to wrap up, do you remember when I said that the things that you need to do to position your business for sale are almost exactly the same things that you need to do to maximise your profit and cash flow even when you’re not looking to sell in the immediate future. Let this be your guiding light. One of the best ways to get your head into gear when you’re running your business is to run it as though you’re always positioning it for sale in the near future.
If you just follow that one principle, you can’t go wrong.