Knowing the value of a business — and understanding how to increase that value — is key to maximizing your purchase price when it is time to sell. Further, focusing on value drivers and industry trends over time can also help you run your business more efficiently. But what value drivers should be considered, and why? To increase value, owners must understand how hypothetical buyers would perceive their business operations.

The M&A advisors at Doeren Mayhew Capital Advisors provide the following key factors buyers look for when valuing a business:

1. Profits and Cash Flow – Investors prefer companies with high profitability, positive operating cash flows and consistent growth patterns, especially relative to the industry and your competitors.
2. Longstanding and Diverse Customers or Clients – Companies that are not tied to one or two key customers and/or that have customers across multiple industries are more insulated against economic downturns, and thus more attractive to buyers.
3. Experienced and Capable Management Team – Strong, decentralized management teams are valuable. If a company is reliant on key people who may not stay with the company, buyers may require an earnout or ongoing consulting agreements with the sellers as a condition of the sale. Also important is having agreements and incentives in place to keep management on board to help run the company post-sale.
4. Proprietary Products and Services – Companies with proprietary products or services appeal to potential buyers because it means the company is poised for future growth. This may include patented or trademarked products or services, or a unique know-how or barriers to entry to implement. These things also bring distinct competitive advantages, further driving business value. To ensure business value is being increased over time, it’s important to maintain these unique offerings by proactively reinvesting and maintaining them.
5. Technology and Systems – Maintaining the latest technology in the business will not only help with post-close integration but will also provide a buyer with security knowing a secure IT infrastructure is in place. This also positions a seller to provide reliable information for diligence and helps them run the business smoothly prior to the transaction.
6. Asset Management – Potential buyers look for efficient collections and inventory management, which can lower working capital required to be left in the business and allow a seller to keep more cash in a transaction. Company equipment or assets not currently in use should also be written off or sold prior to entering a transaction.

Closing the Gap

Often a significant gap exists between what an owner thinks his or her business interest is worth and what it realistically will sell for. If you are thinking of selling your business soon, contact our M&A advisors to get insightful ideas to close the gap and start driving up the value of your business today.