Exit Planning: Secure Your Business’s Future and Maximize Your Investment

“Cash flow is king.” Everything you have worked for boils down to how much cash flow your business generates year-over-year on a predictable basis. A predictable pattern will command a premium price when selling because it reduces the perceived risk for a buyer. The lower the risk of losing cash flow in a transfer of ownership, the higher the value.

Beyond stability, the cash flow from your business needs to be substantial enough to attract a buyer and be in proportion with industry norms. The absolute value of your cash flow should cross a certain threshold to entice buyers and allow them to withstand market fluctuations.

Acquirers typically pay the most for businesses with the greatest growth rate and potential to grow. In some cases, a buyer may even acquire a business that scores high on growth potential but low on other attributes. This happens when the acquirer sees an opportunity to leverage its own assets to help the business grow much more quickly than it could under its current owner.

Businesses with recurring and predictable revenues are among the greatest creators of wealth for astute business owners. Companies that establish reliable revenue streams always attract interested buyers. This is why businesses with subscription models or long-term contracts are often able to sell for considerably more than project-based companies. Buyers are willing to pay a premium when they perceive that your cash flow is substantial, predictable, growing, and recurring.

A broad and diverse customer base increases the value of your business. Relying on a small number of key clients creates dependency and risk. If one of those major clients leaves, it could significantly impact your revenue.

Concentrated customer bases are associated with greater risk and, therefore, lower valuation multiples. Businesses that enjoy a broad community of customers and are not dependent on one or two major accounts will command higher earnings multiples. Similarly, revenue based on a few large contracts can also garner lower multiples due to the periodic nature of those income streams.

Professionally prepared and reliable financial statements are a must. Investing in financial information prepared by a chartered professional accountant is a wise investment in your business’s future value. Never cut corners here.

Furthermore, reliable financial records and supporting documentation will substantiate the claim that your business is what you say it is. Properly organized reports provide comfort to a potential buyer when reviewing past financial performance, leading to shorter due diligence periods and higher offer values. Conversely, poor documentation fosters doubt and results in lower offers.

A: Human Capital – Quality of Staff
Does your business continue to operate effectively when you are away? Are you dependent on a single key employee to keep things running smoothly? Companies with poorly trained or unmotivated staff can see their value diminished. Talented staff forge the relationships with your customers that form the basis of your business’s value. The quality of your team’s experience, expertise, and depth are key profit builders.

B: Operating Systems and Procedures
The establishment and documentation of standard operating procedures (SOPs) demonstrate that your business can be maintained profitably after a sale. It shows that YOU are not required for its continued success. Your SOPs can include computerized and manual procedures used to generate revenue and run the business. Automated systems further show an acquirer that you are less reliant on the human element, making the business more transferable.

How well is your business differentiated from competitors? It is essential to create a business where you have carved out your own space in the market—a place where customers come for your unique offering of services, products, and experience.

The provision of unique, value-added services and products is the glue linking your business to your customers. Creating some form of competitive advantage provides a “moat” around your company. Buyers will pay a premium for a niche that has barriers to competitive entry. This can include proprietary processes, training programs, specialized licenses, service contracts, or even a prime location with a secure lease.

How likely are your customers to return or, even better, refer others to your business? The majority of your peers may not actively seek out or quantify the answer, but your largest competitors certainly do.

Stability, consistency, and reliability are key attributes for establishing meaningful customer relationships. A quality marketing program should create name recognition and build customer loyalty. A long history of efficient operations and excellent service will drive a valuable reputation in your community. While the value of your business is partly related to tangible assets, it is the goodwill that constitutes the majority of the price a buyer will pay.

While some buyers focus almost entirely on numbers, it is important to pay attention to the physical appearance and condition of your facility and equipment. This factor extends beyond the floors and walls to the tidiness of work areas and the appearance of your staff. Missteps here can unintentionally leave an impression that your internal operations are in similar disrepair.

View your business through the eyes of your customers. A fresh coat of paint is an inexpensive way to create a clean, professional new look. Ensure that your team’s appearance is professional and appropriate. A polished image removes uncertainty and builds confidence in the customer’s mind.

Risk mitigation ultimately increases your value. This final profit-building factor is one that is often overlooked by both buyers and sellers. Audit risk can come in many forms: tax audits, regulatory compliance, and safety inspections, among others. We encourage you to create or revisit your documentation protocols and internal controls. In conjunction with your accountant, you should assess your business for tax audit risk liabilities and ensure all operations are fully compliant with industry regulations.