lbmjournal.com – It is said that the value of a business is its brand and people. They’re right, but this is a vast oversimplification about what makes a business valuable to an acquirer. Let’s discuss several more granular business ideas you can focus on when driving your company’s value—regardless if you want to sell or not. As an owner or business executive, your primary job is to increase equity value; here’s a few ways you can go about it:
1. Always be positioned to sell.
You may never sell, but that doesn’t mean you shouldn’t prepare to sell. Clean up that balance sheet. Get your shareholder agreements in order. Address the under-performing location today. Doing so gives you the option to be opportunistic when the market swings your way or if family/ownership dynamics unexpectedly change and you want to execute a transaction.
2. Have great people.
One of the quickest ways to turn off a buyer is to build a business where the owner/executive is the business. Right or wrong, buyers won’t believe owners who receive millions of dollars in a transaction will be as motivated. Fair enough. Your job? Build a bench of great managers with a track record of success in your industry. Taking it a step further, as the owner, you should work yourself out of a job and let your successor build a track record of success in his/her post before you sell the business. If accomplished, you’re selling a turnkey business and there’s a lot of value in that. Fail to do so, and buyers will factor this into valuation as they’re assuming the risk of new managers not working out.
3. Strive for superior financials.
Through peer groups, industry roundtables, or by buying benchmark reports, ensure your operations measure up with best-in-class benchmarks (or understand and have a good reason why you don’t) for financial metrics such as EBITDA margin, inventory turns, ROA, and collection days. These metrics are closely watched, as they indicate the health of the business, the talent of the management team running it, and the local market conditions it’s dealing with. Best-in-class businesses are an easier sale/get paid more, and those below the bar are quite difficult to sell/get crushed on valuation.
4. Invest in or upgrade the ERP system.
If you have aspirations of becoming a much larger business or consider private equity firms as potential suitors, using an antiquated ERP software system will hurt you. If you have time, it’s worth the investment many times over to get the right system in place which can grow with you (i.e., “scalable”), can provide you with all the data you could ever want, and the ability to manipulate said data in whatever means necessary. The importance of having a good ERP system can’t be understated, not to mention system conversions are risky in and of themselves. You’re going to pay for that risk one way or another.