Prioritize business improvements before selling
Where should you invest your time and resources before selling, and how do you even get started? There are many things you could do, but only a limited amount of time to realize results. Understanding opportunities, their potential impact, and the level of effort required can be challenging, but you don't have to figure it out on your own. Sellers can benefit from external help that brings knowledge and experience, assisting with identifying and prioritizing improvement opportunities to best position your business for a successful exit.
Some business owners might feel that they don't have the capital to invest in their business, or that it doesn't make sense to spend the money if they are selling. However, there are often low-cost improvements that can result in significant benefits―boosting both the profitability potential buyers are looking for, but also enhancing what they are willing to pay for that profitability.
When prioritizing opportunities, owners should consider a few key variables:
- Degree of change involved
- Time required to implement
- Level of investment or spend
- The potential expected impact
While addressing lower performing areas of the business can often achieve noticeable results, it is important to evaluate against other options to maximize value creation prior to sale. Once again, thinking like a buyer, ask yourself: where can I get the bigger, longer-lasting profit bumps?
What buyers are looking for: Essential improvement areas
The following are three key areas that owners should prioritize when contemplating a sale. We consistently see significant opportunities for improvement in these areas, and proactive planning is essential as they often take time to implement effectively.
1. Leveraging digital enhancements
Business processes at many companies are still highly manual, and buyers—especially private equity firms—want to see more modern, efficient technology in place. Obsolete or antiquated technology reduces the value of a business since the buyer will most likely have to invest time and resources in updating the digital architecture.
In addition to being more inefficient, relying on manual processes to accomplish tasks—for example, using Excel to do finances or manage inventory—exposes you to disruption caused by employee turnover. High reliance on manual processes is a common reason why buyers apply discounts to company valuations.
2. Succession planning is paramount
Having a clear succession and transition plan in place is critical when preparing to sell your business. Potential buyers prefer businesses that can operate independently from their owners, or that provide a clear timeline and plan to transfer owner knowledge and responsibilities.
Owners need to be honest about where the business relies too much on themselves, and work to address gaps prior to sale. Likewise, it should be clear to buyers what the owners' role will be after the business is sold. Understanding key personnel gaps and addressing them with enough lead time is a proven way to achieve a higher valuation in the eyes of potential buyers.
3. Forecasting into the future
Business owners are often focused on day-to-day issues of running the business with limited capacity to reflect on future growth potential. Investing time to understanding market trends and opportunities well before a sale will better prepare you when the time comes. This foresight allows you to address questions from buyers regarding business expectations and future profit potential, which can significantly influence perceived value. Owners can then undertake initiatives aimed at leveraging those opportunities and mitigating against threats and risks to the company's success. Owners that are well informed, have a clear perspective on future growth potential, and have a strategy in place often have stronger engagement from sophisticated buyers.
When buyers are assessing a business, there are many value drivers that can impact their perception of a company's strengths, opportunities, risks, and weaknesses. By carefully identifying the value drivers relevant to prospective buyers, owners are better positioned to identify strategies and tactics they can undertake before a sale that optimize and improve the company's results in line with those drivers; ultimately increasing the value of the business and the sales price in a transaction.
Plan early for a successful exit
Ideally, we recommend that owners start planning an exit two to three years in advance of going to market. As mentioned earlier, some initiatives do require a longer lead time to execute, and ideally the benefits of implemented initiatives should be demonstrated with at least 12 months (or more) of improved performance. For example, replacing a manual accounting system with a new, more automated cloud-based system can take up to six months, depending on the complexity of the business. Additionally, you need at least 12 months of successful operation under the new system prior to going out to market, making it an 18-month initiative from inception to demonstrated results.
Any strategic or operational improvement change must clearly show that it has been successfully implemented and positively impacted business results, ideally over a sustained period.
Let BDO help you sell your business
With a proven track record in the M&A space, BDO is ideally positioned to advise owners on increasing the value of their business before going to market. Having worked with numerous organizations on a wide range of business issues, we understand the unique challenges and opportunities faced by owners and business leaders in their day-to-day operations and during the critical period of preparing their business for sale.