A lot is learned when selling a business. Often, there are steps taken to increase a business’ value when the owner wants to sell, yet these adjustments can help the business run more efficiently even if there are no plans on selling in the near future.
If your clients are selling their business and want to increase its value or you simply want to help them run their business optimally, the following guide can help.
1. Reduce Reliance on the Owner or Key Employees
Business owners or key employees often become an integral part of operations to the point that operating without them is difficult or impossible. Unfortunately, this dependence can be detrimental, whether a client wants to keep their business or sell it in the future.
Reliance on one person will:
- Make a business more difficult to sell
- Put the business at risk if the person gets sick or suddenly leaves
Instead, you can increase a business' value by:
- Documenting the key tasks the individual(s) complete from start to finish
- Begin delegating some of these tasks and cross training others to perform them
- Adjusting processes to ensure tasks can be completed without the person if needed
For example, if a key employee left the business tomorrow, would a new hire be able to step in their shoes? If not, you need to create standardized processes and procedures that can be followed for task completion.
Owners and key employees may want to go as far as creating videos on how to complete difficult tasks or create training on these tasks. Eventually, the goal should be to have all processes and procedures documented.
Streamlining operations will pay off today and in the future if the business is sold.
2. Source High-Quality Talent
High-quality talent will drive a business forward. Key employees with specialized skills or a wealth of experience will increase a business's value. Roughly 62% of talent acquisition teams state that they source this talent rather than wait for inbound applications.
Why is talent important?
Buyers value strong, experienced teams when acquiring a company. If you invest in high-quality talent, it will:
- Strengthen your business
- Help improve business value
Often, a buyer will evaluate your existing employees and will be more keen on acquiring your business if you have the right talent in place.
3. Review the Business’ Products and Services
When was the last time the owner reviewed their products and services? Some offers may be profitable, but are there ones that are more profitable and favorable when compared to others? Businesses should take the time to:
- Review products and services
- Review pricing policies and costs
- List the items from most to least profitable
Shifting the business to deliver the best user experience and focusing on the major sellers can help further strengthen revenue. It is important to consider cutting some of the “fat” by eliminating products or services with low-profit margins and sales.
However, it is important to remember that just because something sells does not mean cash flow is healthy. You want to focus on your most profitable products and services.
One of the fastest ways to go underwater fast is to have low cash flow. A review of the business’ cash flow should be conducted to find:
- Expenses to cut back on
- Cash flow bottlenecks
- Areas to improve upon
Cash flow is crucial for a business' financial health and stability. If the business’ cash flow is low or negative, it will make the business far less attractive to buyers. Strategic steps should be taken to increase cash flow, including:
- Reviewing billing and collection processes
- Reducing expenditures
- Setting up automated invoice sending and reminders
- Cutting out late-paying customers
- Increasing prices, wherever feasible
Tough decisions may be necessary to bring cash flow back to a healthy state. Employees may need to be laid off, or teams may need to be outsourced. If cash flow remains too low, outside funding will be necessary, and interest payments can be very expensive going forward.
5. Diversify Revenue and Create Recurring Revenue Streams
Diversification is one method of risk reduction that all businesses should practice. When you diversify, you protect against one product or service impacting your operations too much if there is a downturn.
You should work on diversifying revenue by:
- Removing reliance on one or a few major customers
- Creating new, innovative products
- Looking for complementary products or services
In addition, you’ll want to diversify so that you don’t rely 100% on a specific vendor. When you diversify, you strengthen a business and reduce the risk of one client, vendor, or product impacting operations too much.
Further, I always recommend helping your clients create recurring revenue streams where possible. If they currently sell a product or service on a one-time basis, are there ways they can turn it into a subscription?
If you follow the steps above, it is possible to increase the value of the client’s business if they want to sell in the future. In the short term, it will improve business operations and position the business for growth. And why wait until you are ready to sell to improve your business?
Christopher Hayden, CPA, CMA, CGMA is the managing partner of Hayden Nelson & Yoder, a CPA firm based in Pennsylvania. You can learn more about him and/or the firm HERE.
Like what you're reading?
Subscribe to our FREE newsletter and we'll deliver content like this directly to your inbox.