Thinking About Selling? Start by Benchmarking Your Business to Learn What It's Really Worth
When it comes time to sell your business, you want to get the most out of it. Yet, two-thirds of business owners haven’t taken the time to create a business succession plan or exit strategy. If you’re one of them, you’re leaving money on the table.
How important is it to put the right strategy in place? Consider this sobering statistic from the Exit Planning Institute: 4.5 million businesses worth more than $10 trillion will transition over the next decade, yet only 20-30% of businesses that go to market end up selling.
At Clear Advice, we follow a three-step process to provide an optimal business exit strategy:
At the very beginning, however, we need to benchmark value. It’s a critical step that’s too often overlooked. Yet, if you think about it, it’s the logical first step. You must know the value of your business and its potential prior to setting a purchase price.
Benchmarking Your Business
Most business owners don’t know the real value or the market value of their business. Even those that are immersed in the financials may have a false sense of what their business is worth. Like real estate, it’s only worth what someone else is willing to pay for it.
When benchmarking, you’ll want to get an independent appraisal that’s not colored by your personal judgment. A professional advisor will go over your financials with you but look at them through the eye of an investor or buyer.
A typical business valuation study will require extensive paperwork and can run upwards of $20k. It will provide you with a snapshot of your value at the time it’s done. At Clear Advice Business, we take a slightly different approach. We’ll provide a valuation not just once, but update it over time using current financials. This allows you to track changes over time rather than relying on a possibly outdated valuation. Rather than a static appraisal, you’ll get an active one that will reflect current conditions as we work together to maximize your exit strategy. And, the cost is included in our exit planning fee.
Comparison to Industry Peers
This business valuation will establish the current value of your business, but it can also be used to benchmark against other industry peers. It can identify the areas where you are overperforming, underperforming, and where being proactive can enhance the value as you prepare your exit strategy.
For example, let’s say your return on equity (ROE) is 9%. That might sound fine to you – until you discover that your peers are getting 14%. An investor or buyer is going to devalue your business because you’re out of step with the industry. Identifying the shortfall and working with Clear Advice Business can help you figure out why you’re underperforming and develop a strategy to enhance performance and drive value.
When buyers are evaluating your business, they’ll want to see returns that beat the industry and provide a consistent and increasing free cash flow. That’s just one of the value drivers that can be improved to optimize sales. Others include:
Diversified customer base
Sustainable business systems
Effective financial controls
Access to capital
You’ll need to shore up these areas – and your overall financial performance – if you want to maximize your return. This means developing a formal plan and establishing Key Performance Indicators (KPIs) for each value driver to measure improvement.
If You're Thinking About Selling in the Future, It's Time to Act
Too many businesses wait until it’s too late to think about business succession or exit planning. They may think that since they’ve built a successful business over the years, there will be plenty of buyers. In reality, it’s the buyers that have plenty of options. COVID took a toll on small and medium-sized businesses. The International Money Fund (IMF) estimates that nearly one in 10 SMBs worldwide have now closed their doors for good. Those are companies that couldn’t operate and couldn’t sell their business. Instead, many were forced to liquidate and sell off assets to pay creditors. Others had no choice but to declare bankruptcy.
You simply can’t afford to wait any longer. If you’re a business worth an estimated $10 to $100 million and you’re thinking about selling any time in the future, you need to start exit planning now. Selling your business will likely be the largest transaction of your life, lets do it right.
Clear Advice Business is a business advisory firm created exclusively to help owners of small and mid-sized businesses navigate the journey to a successful exit. If we can help, get in touch and let’s talk.