5 Steps That Build Company Value

Business owners take risks every day. They guarantee debt. They dig into their pockets to finance growth. They put heart and soul and twelve-hour days into growing and nourishing their companies. The object of this all-absorbing quest is the creation of value. The ultimate reward is cashing in on that hard-earned value. So what steps can you, as a business owner, do right now to create value for the future sale of your company?

Step 1. Building A Niche

All buyers of companies look for the seller who has carved out a powerful niche in which to do business. The focused niche player has strong margins, is more profitable, and has greater barriers to competitive entry. They are often dominant players selling products or services in a particular focused market - and they usually offer some products/services no one else does. They typically have a defined business category which they understand well - and this gives them the ability to be first with the changing technologies and trends deemed desirable in their business segment.

Therefore, the better you understand your customers and the products which attract them, the easier it becomes to build and grow that solid niche presence in your marketplace.

Step 2. Building A Financial Track Record

Buyers look closely at financial history in assessing value. They look for strong profitability, steadiness of progress over recent time periods, and solidity of fundamental balance sheet.

The more you can keep costs well controlled and profits growing, the better. It is easy in the mature company to become increasingly complacent about cost control. To stay in that A+ category requires ever-vigilant focus upon improving profitability.

Also, as you build, your plans should include steady and fairly aggressive pay down of debt. Most buyers, when they pay a multiple of cash flow, generally begin with a cash flow definition known as "EBITDA" (earnings before interest, taxes, and depreciation allowance), less normal recurring "Cap X" (Capital Expenditure Requirements). The amount they offer is what they expect to pay for a normal mix of assets and liabilities, excluding interest-bearing debt. Excess cash on the balance sheet can typically be added to the price. Thus, the truly healthy company with minimal debt and/or strong cash, is highly reassuring to buyers, and quickly generates strong confidence.

Step 3. Understanding Growth Potential

A business preparing to sell should begin with a SWOT analysis (strengths, weaknesses, opportunities, threats). To optimize strengths, in obtaining an attractive analysis, measure the size of your primary customer segment both in terms of current size and the potential for future growth. Keep in mind that even the best niche market in the world, if tiny in size with little potential for growth, is not very attractive.

As you begin to see weaknesses in the market road ahead, look for replacement segments in emerging new markets for growth possibilities. Analyze the forward prognosis in demographics and retail trends, and in every other bit of information you can glean, to give you glimpses of the possible future.

Step 4. Securing The Intangibles

Intangible assets enhance value. The most obvious intangibles relate to patented products, or products subject to exclusive supply agreements. As your market presence and distribution networks become increasingly powerful, it gets easier to command exclusivity in sourcing the product.

Trade names and trademarks create value. Be diligent about the legal maintenance of such intangibles.

An equally important, but often neglected, intangible asset is key people. Depending upon the state laws, non-compete agreements may not prevent you from losing good talent, but they can prevent key people from walking out and taking business from you.

A firm non-compete is something that needs to be in place for top management, as a matter of course, well in advance of consideration of sale. If non-compete agreements are put in place immediately prior to sale, employees are likely to resent the change, and feel unfairly treated by both the exiting seller and the new corporate buyer.

Step 5. Doing Regular "Housekeeping"

The basic "housekeeping" which precedes sale is enormously simplified if it has become a real habit of the organization. "Housekeeping" means maintaining clean financial records with audits or reviews on an annual basis by an outside CPA firm. It means to have defensible tax positions - nothing outrageously risky or "on the edge," and having clean environmental and safety records. It means complying with OSHA, ERISA, and any other governmental rules and regulations. It means fully and properly adhering to rules for sales taxes, use taxes, franchise taxes, etc.

All of these areas and more will be reviewed in depth by an incoming buyer, and major uncertainties or exposures will show. Additionally, any buyer paying an aggressive price will expect the seller to make certain representations and warranties about the condition of the company being sold. The seller is not required to make reps and warranties about the future in any way, except he will need to say that he has fairly disclosed known threats and claims. He will also have to attest that he has been truthful and has not intentionally misled the buyer.

Positioning For The Future

You should build into your business plans the mechanisms to enhance value of your company. By doing so, you ensure that your company will be worth more in the future, as well as increase its stability and security right now. It will secure your employees' future, in that they will be more desirable to a future buyer of the premium company. By taking the necessary steps now, when the time comes to sell, you will ensure the best possible outcome for everyone from the owner/CEO to the mailroom clerk.

Deborah Douglas, Managing Director and Author
DouglasGroup.net

'Ripe: Harvesting The Value of Your Business'
‘Cashing In! Selling Your Company for Maximum Price'