Six Common Issues That Diminish Business Value

by Dave Driscoll

Every company has a natural life cycle, and ownership changes are a common occurrence. While the name on the business may remain the same, the philosophy, goals, and objectives evolve as the ownership changes. Unfortunately, many owners damage the value of their businesses by failing to plan for the eventual transition to a new owner.

Maybe you don’t want to sell your business today or tomorrow, but the day will come when you want to move on. The options for yo Five Top Challenges in Today’s Workplace ur business’s future are quite clear: Your company will be passed on to the next generation, sold or closed. Unless you want to close your business, avoid these common pitfalls that undermine business value during negotiations.

• Failing to train your replacement. Many companies are run by an owner/operator. From a buyer’s perspective, this owner dependence is a major weakness. While the owner may experience a sense of satisfaction knowing the business can’t operate without him/her, that severely diminishes its value to a buyer. To enhance business value and ensure all your employees’ jobs are secure, train key members of your team to handle every phase of the operations side of your business. The test of success is the business’s ability to continue to operate smoothly while the owner is absent for extended periods.

• Failing to diversify. While it’s easy to ignore other revenue sources when a business is making money, lack of product and income diversity can negatively impact the worth of your company. Diversity provides protection from economic downturns and changing fads, so buyers prefer companies that aren’t dependent on a single source of revenue.

•Failing to keep accurate, descriptive financials. Buyers typically expect to review tax returns and financial statements for the past five years. If your financials aren’t in order and do not clearly define the operations and costs of doing business, the buyer has no basis to support the valuation of the business. Without accurate and complete financials, expect a significantly lower offer.

• Failing to develop an operations manual. Anticipate that a new owner will not understand the business as well as you and your employees. A well-structured, comprehensive operating manual provides a valuable blueprint the buyer can use to guide the business going forward. Even if you don’t end up selling, the exercise itself has lasting benefits in directing your employees to continue consistent business processes.

• Failing to establish solid accounts receivable collection procedures. Many small-business owners tend to ignore past-due receivables until they become uncollectable. Experienced buyers won’t have any interest in paying for receivables over 90 days old. A healthy receivables collection average of less than 45 days shows a buyer that your customers are trained to pay within reasonable terms.

•Failing to ensure the “team” remains intact. Long before you’re ready to sell, lay the groundwork for retaining your key employees. Retention agreements can be an effective tool to ensure that employees important to business succession stay on the payroll post-sale. To sell your business for the highest price, eliminate future operation uncertainty for the buyer. When your entire team is committed to working with the new owner, that confidence will be reflected in the offer you receive.

Someday you will leave your business. There are many heartbreaking and discouraging stories of family-owned businesses not selling or being sold at “fire sale” prices because of sudden illness, death or retirement. Failing to plan for the sale of your business years before you’re ready will result in a lower sale price. You’ve spent a lifetime building your business to eventually finance your Life Beyond Business, so don’t sabotage yourself with poor planning. Start preparing today to exit your business when you want, at a value that benefits you and your family. You deserve to reap the rewards of your hard work.

Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and succession/exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.