Two smart ways to increase the value of your business

How many times have you heard a private equity/PE firm bought a business for $X and a year or so later sold it for 10x? 

Wouldn’t it be nicer for the original owner of that business to have received a bit more considering the PE firm above had made such a fantastic return? 

So, how do you prepare your business to maximise the proceeds you should receive from a potential future sale?

Whether you plan to sell the business, or raise capital to fund your growth objectives, or are simply just intrigued to find out the “how-to’s”, there is a process to get your business ready for investment, so that when that time arrives, you are in a better position to negotiate the best value for your business.

Work on your strategic plan

Why do you need a strategic plan?

Investors are prepared to pay more for a business with a clear strategy: they want to know what your ambitions are for the business and what is in place to show that you can take the business there. A good plan is one with measurable goals and milestones for the next 6, 12, 18 months, or longer. They need to see that your business is a going concern (ie. it will remain in business for the foreseeable future) and with long-term potential.

The strategic plan should also show various ways the business can improve its margins.

Why are margins that important?

Let’s look at an example. Assuming your business is generating a 5% net margin. Your competitor - same business, same product or service offering, same target customers, same region - is making 10% margin. For the sake of making this comparison simple to see, let’s assume an investor offered to pay $5m for your business. Your competitor would likely be offered $10m. Why? In most part it is because their net margin doubles yours!

If you want a better offer for the business, work on your margins.

The strategic plan should also take a complete view of your business operations to identify and develop repeatable and teachable processes. If your business can't function without you, you will have a hard time finding a buyer.

Prepare the capital

If your strategic plan requires an injection of capital or funding to pursue the growth/reorganising or repositioning objectives, you need to learn a new skill: raising capital.

It is often much easier to raise money from friends/family network. Much harder in the external market from sophisticated investors.

Of course you can spend time and learn the skills to do this on your own. Bear in mind that this is a very specialist area. Many business owners we spoke to started out this capital journey themselves, only to see little to no success. Not to mention the enormous amount of time it took them away from running the business and the opportunity costs associated with it.

Your competitors will not wait. If you are slow in implementing the strategic plan that has the potential to double or triple your business value, and if your competitor is quicker at it, they could take your market share and squeeze your margins, both are not good from a valuation perspective.

Sometimes, entrusting a specialist in these areas can help save you time and improve the probability of getting to the desired outcome more quickly.

We will be hosting a breakfast session on this topic on Wednesday 22 May from 7.45am-9am. If you would like to be included in our invitation, please inbox me or comment below.

We are located at Australia Square 264 George street Sydney.