It is normal for a business owner planning to sell their business in California to obtain a valuation. Often, they leave the decision to get a valuation when they plan to sell. This means the opportunity has passed to make some changes. They miss being proactive with strategies that will increase the business’s value.
If you’re considering selling your business in California and want to know how to maximize its value, here are a few suggestions.
Start by recognizing the value drivers.
A good and important place to start is looking at the business’s accurate financial statements. Suppose the financial statements are not in good shape. In that case, it’s even more important to start here. It means the owner lacks accurate knowledge of the business’s current and historical performance.
The following is the best and easiest place to start determining the value drivers. Begin with a SWOT analysis. A SWOT analysis examines Strengths, Weaknesses, Opportunities, and Threats. Because adding value is all about your business, identifying the value drivers through a SWOT analysis will give you a clear focus.
Determine your value drivers by comparison.
Once the financial statements are in good shape, the next step is to compare your business against your peers. Look at similar businesses in the same industry. To help do this effectively, there is a wealth of relevant information in your financial statements. This is something you can do yourself, but it does take time.
If you prefer to do it yourself, there is a website that can provide the necessary data. Take the business valuation tutorial.
Another suggestion is to consult with your accountant to see if they offer this service. They can help you identify areas where you need to focus and grow your business.
Is the management team a strength or weakness?
An ominous sign for a business is the owner’s inability to be away from it. Many owners in California do not want to think that their business can survive without them. Still, the strength of a good business lies in its ability to continue operating as usual, regardless of whether the owner is present.
Additionally, a good business has a strong management or executive team in place. If a key manager is unavailable, another manager can answer questions or provide direction to keep the business on track.
Other signs that show the strength of the management team include cross-training. That is, can other employees execute tasks when the main employee is unavailable? What’s the average age of the management team? An average young age can suggest inexperience. However, an average older age can suggest a business culture that is resistant to change or not open to new ideas. An average older age raises the concern that they may be approaching retirement and, therefore, may need replacing.
Is the customer base diverse?
If one or two customers account for more than 25% of the business’s gross sales, then it is vulnerable.
The vulnerability stems not only from the negative impact it could have on the business’s cash flow if they leave, but also from allowing these primary customers to push back on price increases or changes that may be necessary to the products or services the business offers.
What could be even worse than these two scenarios is that you may lose one or two of these key customers when you are on the verge of selling the business. This could reduce its value and appeal to potential buyers.
Making the customer base as diverse as possible adds value to the business.
What’s the primary role of the owner?
A well-balanced business in California has a strong executive team that comes together, makes key decisions, reviews them, and then executes them. Suppose the owner of the business is also a member of the executive team, and all decisions revolve around their decision-making. In that case, the business is at risk if the owner is no longer available.
Put simply, the greater the dependence on the owner, the lower the business’s value. Equally, the more diverse the executive team, the greater its value. This diversity means the business can react quickly and positively to new opportunities.
What about the competition?
One thing I enjoy doing is watching Shark Tank now on ABC. Kevin O’Leary loves to ask presenters about their products. He often inquires whether they have any patents. If they don’t, he says, “you have nothing to offer and the market will crush you like the cockroach you are.”
A business has greater value when it owns a clearly defined product or service that others cannot easily copy. Therefore, it becomes more challenging to defend against imitation.
Are the customers an asset or a liability?
Different business models place different emphasis on the customers. For example, Amazon is committed to providing the lowest prices and the best possible experience.
Are your business relationships about the best products and/or service, or the lowest price? Does your business model require a large number of customers to find each time? Or are they advocates of your business and therefore loyal? The value of a business includes understanding the customer base and whether it’s an asset or a liability.
Just as the quality of customers is part of its value, so too are the employees. Are they outsourced and therefore not rewarded for loyalty? Perhaps they are direct hires, whose performance is directly measured. It is managed and may include success-driven incentives. Are there training programs in place to help them advance to the next level? Are they considered an asset or a liability? What is the average length of employment?
For a business buyer looking to make an acquisition, the answers to these and many more questions will make or break the final acquisition decision. They influence the value they place on the business, especially the executives or key management currently in place.
Critical items will include key employee contracts, non-compete agreements, and the work culture, which will, in turn, influence the final business valuation.
What’s the role of technology?
How essential or effective is technology in your business? Has your company developed a unique application, tool, or technology? Does your technology provide a competitive advantage?
If the answer is yes, then it can be a key value driver in the business’s performance. It may provide a reason in its own right for a competitor to acquire your business, as well as the amount they are willing to pay.
Intellectual property and human capital (the employees who move around within your business) are critical assets that influence the value of the business. The California business owner needs to protect these assets through both effective business strategies and legal protections.
Effective business strategies include incentives and compensation plans to reward and retain high-performing employees. This also involves offering legal protections, such as confidentiality clauses, non-compete agreements, Trademarks, and Copyrights.
Final Word
If you lack the enthusiasm to grow and add value to your business, it’s a good indicator that it’s time to consider selling.
If you would like more information about selling, buying, or business valuation, please visit my webpage, Services.
If you need more immediate assistance, contact Andrew Rogerson, a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew serves the whole state of California.
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