When we take stock of our companies, we don’t often think about how the small things we take for granted play into our valuation. Today we’re going to talk about how the company truck fits into your business’ perceived value and how you can assess what elements you should look at investing in versus waiting out so you maximize your financial gains from the company.
It’s the Little Things
Your industry will have some pretty specific requirements in terms of technology, equipment and staffing if you want to have a successful company. When you examine what these are for you, how do you think your business stacks up in a prospective buyer’s eyes? Would you want to buy your business as is, or would you rather the owner spruce it up a bit before you do?
The trick here is not to focus on multiples or cash flow directly. It might surprise you to learn that you can impact these numbers positively simply by reinvesting in your business in terms of updating your software platform if it’s critical to your business’ operations or replacing that old heating and cooling system you installed thirty years ago when you first started your company. It’s kind of like when you buy a house — you’re not going to pay full value for a house if the roof needs replacing.
Buyers are looking for these kinds of discounts, too. While you’re thinking you’re saving yourself some cash now by not replacing all the computers and telephones your staff uses daily (since what they have is good enough and you’d rather be able to keep that cash), a buyer’s going to look at your setup and think of the cost to them from the start. They’re going to see the value of the computers as zero, despite the fact they still perform the daily duties, and they’re also going to estimate the cost of replacing them, training staff on them if required, disposal, etc. You’ve just given them a reason to take a bit off the valuation since your systems aren’t what they should be.
You can extrapolate this to any industry. Your delivery truck needs replacing, the building has some significant maintenance you should have done five years ago (but knew you were selling so you figured it wouldn’t hurt to wait… it can be the next person’s problem) or you haven’t secured the building lease for 10 more years. Every single one of these “little things” becomes a barrier for someone else to deal with. You have the most experience to handle these issues, yet have not. Why do you think the next guy wants to?
Something you might take for granted, such as the role you fill, can be a significant issue for someone else to handle. When you look at what you do, what titles would you give yourself? Are you valuing yourself and your role fully? Why not? We all want to save a buck since that comes right back to us in terms of operating costs and the like. However, investing in this role can pay out in dividends when you go to sell. We’ve touched on this in terms of de-risking your business, so it should come as no surprise that we’d suggest you hire for the roles you perform if you can to increase your valuation and make your business more appealing as an acquisition.
When you get a professional valuation done, don’t underestimate these factors. If you can at least identify them before the buyer does, you can decide whether or not they’re worth your time to make changes.
Invest or Divest?
You can absolutely simply sell your business as is. In fact, this is best if the circumstances line up. Synergistic sales, for example, are perfect examples of when your equipment or software might not need an update since the acquirer already has what they need. If you’re looking to make a sale like this, you should be looking for buyers who need what you offer — as is.
However, if you aren’t in a position where synergies are strong or present in the market you’re looking to sell in, then you need to take a look at investing in the things that will best help your business succeed into the future. Your financial advisor and accountant can help you figure out what’s worth your time and money to invest in before you make any missteps there.
Start with yourself. If you can look at what you do in a day and swear up and down that you’re only doing work that an owner should do, you’re a mile ahead of most of us. If, however, you’re doing other roles such as lead trainer, CFO, COO, etc., you seriously need to look at the negative impact that will have on your sales process. No buyer is going to high-five you for wearing ten different hats and hand you a check which reflects all your hard work. They’re going to look at you like you’re crazy for doing so much work and run for the hills when they see they’re going to need to hire three different people simply to fill your shoes.
You’re not making your business more appealing by trimming costs like these. You may enjoy the extra cash flow for a year or two, but is it worth the loss in EBITDA or the lower multiple at time of sale? A $125,000 position can cost you four times that (or more!) when you go to sell.
If you’re curious about what other factors will most impact your valuation, you can check out some of our other blogs here or dive directly into our comprehensive guide on valuation here.
Now that you’ve taken a look at what things you can easily replace, improve, upgrade or fill to better your valuation and de-risk your business, where are you going to start? Look at your business like a buyer: What would you want the ideal version of your business to look like if you bought it tomorrow?