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Most people in the US don’t jump right into a dream home – I know I didn’t. Instead, they usually start with something modest and gradually upgrade. When ready to sell, they try to make improvements and add value to the property to maximize their returns. In the same way, if you are planning to sell your business, the smart move is to deliberately work on what the business is worth – its enterprise value.
Enterprise value is the total value of your company. However, owners should remember that there are some deductions from that number due to debt and transaction costs, such as legal advisors and business brokers. This reminds me of selling my first house, seeing how much we sold it for and all the line items from different people getting a share.
Many business owners don’t dive as deep into improving business value as they should. That’s because they feel more comfortable with the organizational tasks in which they have some expertise. But if you want to create the greatest value for yourself, your team and the legacy of the brand, you have a responsibility to: to get comfortable. The good news is that you can consciously drive business value if you understand this.
Related: Let the other side win if you want to make a really great business deal
How to increase enterprise value?
Like many organizational projects, driving enterprise value requires good planning. But no plan will work if you don’t know what you really want. So start by setting a clear expectation. That could mean selling in five years and trying to increase the value of the company to $1 million or $100 million.
Once you have those parameters, ask yourself, “How do we achieve that goal?” You’ll realize how big a bite is to increase value and complete a sale to chew, and that’s common. There are performance documents to compile (usually based on) 12 months backlog), appraisals to get, marketing, negotiation and other jobs involved. That’s a major reason why 54% of brokers say you should allow anywhere six to 11 months to complete a sale.
You also need to find your valuation range, which usually requires you to lean on a financial measure, such as earnings before interest, tax, depreciation and amortization (EBITDA). Hire professionals to look at the dynamics around your business, such as size and industry. They can then find some “comparable” or “comp’s,” which are companies that are similar to yours, and find out what they’ve been selling for. Each comp value is expressed as a multiple of your financial measure, such as five times EBITDA. By looking at the bottom and top of your comp values, you’ll discover a range for where your business could likely sell. This scenario is similar to your real estate agent letting you know what comparable homes in your area have been selling for.
As you develop this profile for your industry, identify what each company has that contributes to their pricing tier. When selling a home, you may find that factors such as finished basements, proximity to public transportation, or energy-efficient appliances provide an advantage. For companies, competitive factors that increase value can be dedicated staff, intellectual property or the number of strong brands within the company. Can you bring one of those drivers into your own company? If so, you may be able to push your company towards the higher end of the valuation range.
Keep in mind that if you look at value drivers, not everyone will see them the same way. A swimming pool can be a negative if you buy a house and have young children running through the backyard. However, imagining your family relaxing in that pool every summer suddenly becomes an asset. So it’s important when selling your business to know what kind of buyer is attracted to specific factors and to highlight or develop the factors that attract the type of buyer you want to sell to.
Related: How to maximize the value of your business through marketing
Prepare to grow
In many cases, when a company goes through the above process, they realize that in order to sell in the time frame they want, at the price they want, they need to change some of their plans or practices. The latter often means opting for faster growth. How you grow will depend on your culture and resources, but may include options such as investing in sales and marketing.
In the age of social media, improving your online presence can be a great way to add value and grow. Your website and social media channels give you opportunities to provide a higher ‘wow factor’ that will leave people impressed and willing to engage with you. Statistics support the idea that social success is important. 77% of consumers will choose a brand over a competitor if they have a positive experience with that brand on social media, and 91% of executives expect their company’s social media marketing budget to increase over the next three years. So make sure your online channels reflect the same experience people have face-to-face with you.
When setting a growth target, keep in mind that small percentages may fool you into thinking there isn’t much of a difference — 5% may not feel that far from 8%. But if you apply a higher percentage for a few years in a row, that can relatively translate into millions of dollars more added value.
When you’re preparing to sell, reducing your tolerance for things that don’t contribute to the business becomes more important so that you end up with the highest possible growth and ultimate valuation. Ultimately, that reduced tolerance should translate into improvements in the way you run the business.
Related: 5 ways to create value from your intellectual property
Creating business value supports everyone
Many homeowners who don’t plan their home properly before selling their home end up scrambling to make improvements that they should have implemented much earlier. They can never really enjoy any of those improvements and instead go through the sale exhausted and stressed.
Don’t make their mistake. By striving to create additional business value well before you leave your company, you have more control over your choices and get the chance to feel the satisfaction of everything coming together. Most importantly, it helps you think more critically about how you lead and then improve your leadership. Because that makes both you and the company grow, it’s a win for everyone.