The easy way to add value to any business is to add sales, which, if your margins stay consistent, should add to your bottom line. Adding sales is intuitive. But what if it is not easy to add sales? What else can a potential business seller do to increase the value of their business?
1) Add Infrastructure– What do we mean by this? Promote from within and add a layer of management. Add a head of sales, head of operations, etc. Even if this title does not add anything to the employee in the way of monetary value, having a team around the owner makes the transition to a new owner seem a little less scary for a potential buyer. Ideally, a new owner can step right in and the transition will be seamless for that new owner. Having a management staff around that new owner will give the buyer confidence that they don’t need to know every aspect of the business to be successful. Remember, as a business seller, you have perfect information about the business. The buyer does not, even if they have direct experience with that same type of business. Every business is different. Adding a layer of management makes the transition less scary for a buyer.
2) Subtract Responsibilities– This is along the same lines as #1, except different. No buyer wants to work 100 hours/week. In the same vein, no buyer wants too much responsibility when they take over a business. Many business owners are the bookkeeper, HR department, marketing department, strategist, etc. The less a new owner has to do, the more attractive a business can be. Although every dollar is precious, some of these functions can be outsourced for far less than it would take to hire someone internally. For instance, ADP, the payroll company, has many of these functions. You can outsource these functions to them for a low cost. While this may not seem attractive, as money is flowing out the door, this frees up time for the business seller. The seller can then focus on what they do best; growing the business or simply adding better clients and subtracting those that eat up 80% of your time.
3) Add Margin- Every buyer wants a special business. As Warren Buffet would say, buy a business with a moat around it. This moat keeps the business safe from attack from competitors. How can you as a seller add margin? In every industry, there are products or services that have extra margin to them. They might be hard to get or take a special technology, but there is a reason why you, as a seller, can charge more for that product or service. Maybe you have an exclusive contract, rights, or a protected territory? Margin is proof that there is something special about your business. With margin, you can show a buyer empirical evidence, rather than simply telling the buyer that your business is special. Adding margin, in the form of special products or exclusive contracts, can make a buyer feel better about expansion opportunities or simply make them choose your business over the other hundreds of opportunities that are out there in the marketplace.
Many business sellers, right after they ask, “What is my business worth?”, ask, “How can you add value to your business?” Following these three guidelines will help.