How To Increase The Value Of My Business (Before Selling)
Want to make your business worth more money? Let's explore how the Four Exit Habits™ can help you improve and optimize your business operations. Many business owners ask how to increase the value of my business, before I sell it?
This article will give you that answer.
TL;DR: The Step-By-Step Process of Selling A Small Business
Know how much to sell a business for (→ READ THE BLOG)
Know how to increase the value of my business, before selling (that’s what THIS article is all about)
Build your exit deal team, list the business for sale, meet with buyers and negotiate the deal
Step 1 - How To Calculate Your Business Value
Business owners typically invest years of their lives and make many personal sacrifices to build their companies. If you're planning to sell your business, knowing the amount you want to sell it for will help reduce uncertainty and also helps you understand what makes a good offer when potential buyers come along.
Knowing how much to sell a business for is not easy. Business value depends on your financials, potential for growth, customer relations, and how solid your operations are.
The most common way to calculate the value of a ‘smaller’ business (defined as < $2M in annual revenue) is to multiply your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a measure of profitability) by a factor (called ‘a multiple’) that's based on industry standards and the unique aspects of your business. This factor is called an ‘ebitda multiple’ and can vary anywhere between less than 1 to more than 10.
Related Content
Want to know how much your business is worth and why?
Understand How Much To Sell A Business For
Step 2 - How To Increase The Value Of My Business Before Selling
Is My Business ‘Too Small’ To Sell?
No, no business is too small to sell. It's a common misconception that businesses under a certain revenue threshold aren't valuable from a buyer’s perspective.
We love to debunk this, highlighting that businesses < $2M in annual revenue are being sold every day.
Why It’s Important To Increase The Value Of A Business
When we work with clients, one of the first things we ask is how much money they want in their pocket at the end of the sale. Many don’t know, which means we have work to do. For those who have a number in mind, we look into what it will take to get to that, given the current state of their business. That helps us determine whether they need to spend a few more years working to increase valuation or are ready to pursue a sale.
It’s important to increase the value of your business for 4 reasons:
It measures your success and potential for growth.
It results in a bigger payout when selling your business.
It can help you raise more capital in exchange for less equity.
It can reassure employees of job security and give their work meaning.
How To Increase The Value Of My Business: Four Exit Habits™
At its core, the Four Exit Habits™ is a simple yet effective acronym. Here's a quick overview:
E
External Habits:
This relates to how a business brands and markets itself. A classic example is the shift from personal branding to company branding.
X
Xpansion Habits:
The cornerstone of growth. It includes elements like growth potential and creating a blue ocean to stand out and have pricing control.
I
Internal Habits:
The backbone of your company. This habit dives deep into the organizational structure, from team building, to decision-making processes and the implementation of SOPs (Standard Operating Procedures).
T
Tangible Habits:
The quantifiable metrics of success such as revenue, recurring revenue, profit, and other measurable parameters.
Getting these habits right can mean the difference between a lackluster exit and a 7-Figure Exit. So let’s dive into more detail.
1. External Habits
Invest in the brand
and marketing.
Branding and marketing need to support your sales team’s efforts. Ensuring your brand is well-defined and consistent helps distinguish your company from competitors and can make the difference between commodity and premium pricing for your products or services. A strong brand can help you attract more customers and retain them better, too.
Stand out from the crowd.
In many ways, selling your company is a marketing challenge of its own. That's why it's important to showcase to potential buyers whatever differentiates your product or service from the competition.
Make sure you create a small monopoly within your niche so you have a strong price control.
Ask some of your long-time clients for testimonials explaining why they are doing business with you and what keeps them coming back. Finding opportunities to develop and demonstrate that you have a clear and compelling market position is one of the most effective ways to boost valuation.
2. Xpansion Habits
Show current growth.
It’s possible that a buyer may be happy buying a business that shows a steady but safe income, but many are looking for growth.
Showing that your business has grown consistently over the course of a few years is a great indicator that further growth could follow, and thus increase business value.
Share any growth plans you have.
Before deciding to sell, you probably looked at different strategies that would grow your business. Depending on how up-to-date and viable these plans are, such growth strategies could be of great interest to any potential buyers.
By sharing these plans with interested buyers, you’re providing them with extra value. They could look at your strategies and use them to inform their own strategy moving forward. If you can show how your business can grow even stronger, this increases business value further.
Create strong sales projections.
Even small price increases can positively impact your sales projections. These projections have strong negotiation power when selling your business, so it’s worth spending time on getting them clear.
While it can be tempting to inflate your projections somewhat, experienced buyers will be far happier to receive realistic and accurate projections. These provide them with room to think about how they could possibly improve upon it, rather than dealing with unrealistic figures that are difficult to get near.
Check that your business isn’t overexposed.
Businesses that rely on the business of just one or two clients can undoubtedly generate good revenues, but they’re also incredibly vulnerable. Should that client leave, your business will suddenly find itself without its main source of income. If this sounds similar to your situation, the acquisition of more clients will dramatically increase business value.
Same goes for businesses that are reliant on one major supplier. You’re powerless if they decide to increase prices, or worse, stop working with you. While strong working relationships are useful with your supplier, it’s worth having a similar relationship with any rivals they may have, just in case. Scope out other potential suppliers before any trouble arises and share this information with interested buyers to put their mind at ease.
3. Internal Habits
Automate everything.
Automating boring, repetitive tasks frees your time for hitting revenue and profit goals, which in turn, increases the value of your business.
Many buyers don’t have the time or desire to run your business. Those who do, want to spend it on meaningful activities such as growing revenue and profit, delighting customers, and developing products or services.
What can you automate? Almost anything – calendars, emails, contract renewals, payment reminders, customer management, order fulfilment, and lots more. Compile a list of tasks you do each day and then pick those that a software would do better. The more you automate simple, repetitive tasks, the more time you’ll have for growing your business and boosting its valuation.
Develop repeatable processes.
Analyze your processes and look for ways to increase operational efficiency, cut costs and control inventory without affecting your operations.
The processes in your business need to be repeatable (and teachable), advises John Warrilow in his book Built to Sell.
And "if your business can't function without you, you will have a hard time finding a buyer," Warrillow says. So…
Build a team & delegate all else.
Train, motivate and empower your people. Pay particular attention to your second-tier management team. Work to solve any internal conflicts and strive to keep employee turnover rate low.
A strong, professional team adds value to the business. Especially in companies with few tangible assets, like service businesses, agencies or SaaS companies. Buyers hope an acquisition will be as smooth as possible, and being able to keep key employees is crucial to this.
Some sectors find it difficult to hire skilled people, so any qualified or skilled employees should be treated as an asset that your business can use as a selling point. One of the last things that a new owner wants to handle is the sourcing and hiring of new talent, so having great staff already in place is a simple way to increase business value.
Show owner independence.
We cannot stretch this enough…
Potential buyers want to see that your business can run efficiently without your involvement.
Most small businesses are dependent on their owners to the point that they become unviable when they leave.
If your business struggles without you, potential buyers will find themselves overexposed to the risk of you leaving after the sale.
Organize your finances.
Your business could be doing amazingly well, but if your financial records are difficult to navigate, your successes can get lost in a maze of confusion.
Worse still, if your books are disorganized, it casts a poor light on your company. It can appear to outsiders that you maybe have something to hide, and that any obfuscation is deliberate.
Beyond this, it simply begs the question, “If they’ve handled something as crucial as their books so badly, how has the rest of the business been run?”.
Have formal contracts in place.
Any buyer of your business will usually take on all your contracts alongside it. This includes any contracts you have in place with suppliers, employees, and clients. If any of these are informal or merely verbal agreements however, they become far less valuable.
In fact, the lack of any formal contract will be a concern to any potential buyer. This is especially true if a supplier’s rates are based on a strong relationship you personally have with them. Without any written documentation, a buyer will have no idea how much they will be charged in the future.
This applies to staff and clients too. While you may enjoy a good relationship with them that provides you with some assurance, the buyer of your business will not have that. They can quickly find themselves vulnerable to changes.
Develop and register your IP.
If you sell something proprietary, such as a product you designed or invented, you can boost the value of your business by securing your intellectual property (IP). After all, if you don’t own the patents, trademarks and copyrights for the product or services you’ve built your business around, what’s stopping somebody else simply copying it and stealing your market share?
Similarly, geographical restrictions or exclusive rights can have a bearing on how attractive a buyer finds your business. While not having a patent or particular rights can hurt the value of your business, obtaining them can seriously increase business value.
Make sure that any IP documentation is secured before you start the exiting process.
Have your clients leave reviews.
A recent survey found that 93% of customers look for reviews before buying a product or service. A strong review rating online can be one of the strongest marketing tools a business can have.
If you don’t have many reviews online yet, you should start asking your customers now.
A simple link to TrustPilot or Google Reviews is all you need to send over in order to start building potential clients’ and buyer’s confidence in your business.
4. Tangible Habits
Boost your profit.
Step 1:
Complete a review of all services and products you offer to determine which are profitable and have future growth potential versus which have poor performance and are losing money. By analyzing each offer’s revenue and margins, you can decide which existing products or services to expand.
Step 2:
When was the last time you took a good look at what you charge for products or services? If your margins can be increased by a simple price bump that customers are ready to accept, what are you waiting for?
Step 3:
Make sure to review your expenses too. Your business may have several expenses that aren’t essential to its running. Look over your outgoings to check that you’re not still paying for unused software or mobile phone subscriptions. Most businesses will also have non-essential expenses like magazine subscriptions, fruit deliveries, or fresh flowers. It’s best to cut these costs before selling to make your profits slightly higher. Potential buyers may not be interested in flowers or fruit, but they’ll be looking at your business’s expenses closely.
Step 4:
As the owner, you also don't want to take too much money out of the business. Good retained earnings on your balance sheet (the portion of the net income that hasn't been distributed to the shareholders) indicates to buyers that the business has been profitable and is healthy.
Go all-in to increase sales.
Brush up your marketing plan and find ways of boosting sales, including tapping into new markets or offering new products and services.
It's a common misconception that businesses under a certain revenue threshold aren't valuable from a buyer’s perspective. That’s not true. However, not all revenue is created equal!
If a business pulls in a cool million from one-time payments, it might be valued at around $ 500K. Yet, if that same million is generated from recurring revenue streams, the valuation could skyrocket to between $ 2M and $ 3M. That’s the magic of recurring income! So when you give it your all to increase sales, focus on recurring revenue above all else.
Build as much recurring revenue as you possibly can.
It’s no secret that recurring revenue – the kind of revenue where money keeps flowing in until a client actively cancels- is every buyer’s dream. Just having recurring revenue and not much else significantly increases the value of your business. Recurring revenue is the gold mine of business value!
Don’t confuse recurring revenue with payment plans, as these are loans given to clients, rather than recurring revenue.
Why do business buyers pay more for predictable, recurring revenue?
Forecasting revenue is simpler and less risky (because it’s repeat business).
It’s easier and up to five times cheaper to retain customers than acquire them.
Buyers can compare your business with others.
SaaS isn’t the only industry to apply the recurring revenue model, other industries can do the same. You might package consultancy services into a monthly contract and offer it as a subscription. Think about what your business offers customers. How might you productize and package your product or service? Could you offer a monthly or yearly subscription?
Improve your cash flow.
If each new bill leads you to check all of your unpaid invoices, then your cash flow management processes need a review. While adding extra -personal- funds to your business’s bank account will undoubtedly help, this is not the way to deal with cash flow problems and will make a potential buyer run away, fast
It’s difficult to slow down the speed in which money is leaving your business company (read: never pay early, just on time is perfect), but there are several ways in which you can affect how quickly money comes into your business. One such method is by shortening the payment terms on the invoices you send to your clients and actively following up unpaid invoices.
Checklist For How To Increase The Value Of My Business
As you can see, there are countless ways how to increase the value of a business. Most of which require time and preparation to maximize the result.
Here’s a checklist to get you on track to achieving your valuation goals.
Calculate your business value today. → READ THE BLOG to know how much you can sell your business for.
Set a target valuation for a point in the future when you might want to sell your business.
Define the actions you should take to close the gap between your current and target valuation (see below).
Calculate your valuation periodically, perhaps every twelve months, to track progress. (our members get one each year being part of our community).
Build your exit deal team, list the business for sale, meet with buyers and negotiate the deal.
Actions YOU Should Take To Increase Value
Different owners have different views on increasing their business value. Some say: “A valuation doesn’t matter, because values go up and down all the time. I’ll take what the market gives at the time of my exit.”
Others might say: “l will just work harder and create more profit because that will increase value.” And it might. Or not, as value is also linked to market circumstances you can’t influence. And we also meet business owners who say: “I prefer to not know how to increase the value of my business or how much my business is worth until the very last minute. I love surprises!”
The owners we work with are being proactive and say: “I should take a more strategic approach to increasing value and hit some of these Four Exit Habits™ through deliberate actions.”
There’s no right or wrong route. Across our many clients, business owners pick all sorts of directions as a way to get to their exit.
But we’ve seen time and time again that owners get big 7-Figure Exits when they are determined to prepare for them.
Want to find out what makes your business already great
and how to increase its value even more:
A Shortcut To Your 7-Figure Exit: Work With Exit Experts
You should get experienced outsider advise to help you with preparing your business for sale, including having an valuation done, getting an exit-readiness assessment completed and receiving a plan so you know how to increase the value.
At The Big Exit, we offer business owners with businesses making < $2M in annual revenue:
An independent business valuation.
An exit-readiness assessment of you and your business.
A personalized value plan.
Education and knowledge on how to increase the value of your business (before selling).
Strategies and a professional network to get your 7-Figure Exit.
Selling your business is one of the most important moments in your life as a business owner. Professional support will help ensure you get it right.
Planning Your 7-Figure Exit
Your business valuation matters most when selling your business.
Your valuation today might not be the one you want to sell your business for. Your final sales price rests on the work you put into growing a profitable and efficient business. The longer you spend on exit preparation, therefore, the easier it will be to justify a higher valuation to buyers.
When selling, you’ll have to justify how much your business is worth to people outside of your company. You need time to hit that valuation goal – so ensure your prepare for your exit early to avoid disappointment and stress later.
Expect buyers to be skeptical since they want to maximize their returns and minimize their risk of losses. No one can argue with cold, hard facts. Financial buyers will want a clear return on their investment. Strategic buyers want to understand how your business complements theirs. Positioning your business for either may require years of preparation.
So don’t leave everything to chance. Prepare early, well, and with a goal in mind.
Related Content
Not ready yet to invest in working with Exit Experts?
How ChatGPT Can Plan Your Million-Dollar Business Sale.
The Biggest Mistake, After Deciding To Sell
Once you’ve decided to sell your business, it can almost seem like a waste to carry on marketing a business that you’re planning to exit. But the biggest mistake business owners make is to take their foot off the accelerator after deciding to sell., and before the actual sale. Potential buyers are likely to have heard of your business when you keep investing in marketing. This not only gives a great impression of your business, but also demonstrates that the business has already built up a name for itself.
The moment you stop investing in marketing, or in your team, equipment, services, and processes is the moment you start reducing the value of your business. So, step up your efforts instead.
Conclusion: How to Increase The Value Of My Business
Exploring how to increase the value of your business involves looking at it from a buyer’s perspective. If you are considering an exit and wish to attract higher offers, it is a crucial exercise to implement those habits that increase your business’s worth.
Preparing for your 7-Figure Exit is also a great way to strengthen your business for future growth.
In other words, it is never too early to familiarize yourself with how to increase the value of your business, before selling it.
