As you work long hours to grow your business, it would be nice to know that somewhere down the road you could exchange some of your hard earned equity for cash. But selling your business for a high price will only be possible if you’re taking specific steps today to increase its value.
Start with an exit strategy
In general, beginning with the end in mind is a good idea for business owners. You can always change your plans and continue with the business indefinitely, but a solid exit strategy will help you define what’s most important so that you can focus on building the foundation for a solid business that demands a premium valuation.
If your goal is selling your business for a high price – and it should be – these are the five factors that a purchaser will look closest at.
Selling your business for a high price means building a set of repeatable processes into your operations that deliver a level of efficiency that a new competitor can’t immediately replicate. These are hard won insights into the best way to design, manufacture market and sell your products. Each individual system within your operation may not be particularly unique, but taken as a whole, they represent a proprietary approach to doing business that differentiates you from other companies.
Getting the right systems in place also helps you achieve the holy grail for most entrepreneurs: building a business that is not dependent on you to run it. This allows you to play at work, working on the business rather than in it, while also freeing up your time to focus on passions outside the workplace. And from the potential purchaser’s perspective, it gives them the security of knowing that the business can continue successfully without you needing to be involved.
There are 3 types of relationships common to every company:
- Long-term customer relationships that support repeat purchases and valuable word-of-mouth marketing for your products.
- Strong vendor relationships that can increase efficiencies and stability for your business over time.
- Loyal employee relationships that foster a positive, proactive culture helping to attract the high functioning team members you need to help grow your business faster.
Successful relationships require honest communication, respect, and clear accountability. The extent to which you bring these principles to all of your relationships will determine the quality of your enterprise and a valuation that supports selling your business for a high price.
Your brand is the sum total all of the thoughts and emotions that others associate with your business. The perception of your brand can be influenced by a myriad of factors including
- The design of your products
- How and where they are manufactured
- Your prices relative to competitors
- What you say about your products
- How you visually represent your products
- Where you sell your products
- How you sell your products
- The type of relationship you have with customers and suppliers.
The best way to insure a strong, positive brand is to be intentional and consistent about how you want your business to be perceived. Creating and aligning yourself with clearly defined brand values will allow you to make sound business decisions about what you stand for and what you don’t. Over time, this will strongly differentiate you from competitors and allow you to demand a premium valuation.
4. Profit Margins
Most people speak about the size of their business in terms of revenue. However, anyone purchasing your business will be more interested in your margins, since they will tell the true story of your business’s competitiveness and sustainability.
Gross profit margin is the average amount of profit you are able to capture from the sale of a single product, before accounting for overhead and expenses. Standards will vary by industry and category, but for a consumer products brand, a good rule of thumb is 50%. In other words, the costs associated with producing your products represent 50% (or less) of the price you are able to sell them for.
Net Profit margins are what you are able to keep after paying all of your overhead and expenses, excluding, taxes, interest payments and amortization expenses (typically write-downs in the value of your equipment or facilities as they age). Again, standards will vary by industry but if you’re capturing more than 10% of revenues as pure profit, you’re doing reasonably well.
A purchaser will often place less emphasis on net margins because they see the opportunity to realize increased operational efficiencies by combining your business with an existing back office. Also, companies that are scaling quickly require a lot of capital investment to sustain growth – cutting into profits – but will eventually realize long-term profitability.
Your rate of year over year growth will also have a big impact on selling your business for a high price. While growth is generally good, you should be mindful of chasing growth at all costs, since growing too quickly can have a destabilizing effect on your business.
Obviously, it’s much easier to grow a very small business than a larger business. It’s not uncommon for a new business to experience annual growth rates of 100% or more in the first few years but this will typically slow. While investors or purchasers will be very interested in your growth rate, there are a number a factors that will impact how they frame and interpret your numbers, such as the average category growth rate, your growth rate trend (ie. is your growth rate increasing or decreasing and by how much) and the relative size of the business vs competitors. However. Assuming you are well past the launch phase of your business, annual growth rates of 20% – 30% or higher are very attractive to investors and will allow you to demand a premium valuation.
Having the goal of selling your business for a high price forces you to focus on what is most important to an objective 3rd party. This can help you take a more holistic look at your business and set long term goals that will help you prioritize your activities today.