Like everything else, a business must be built on a good foundation. In another post, we will be looking at Key Drivers of business value, but here we look at the things that a business just has to have for it to have any value at all. Often when coming to sell a business, I have discovered a glaring hole or something else missing that could have been and sometimes was fatal to the sale of the business. So let’s look at the things we need to ensure at the very least are in place so that we can sell our business at all.
If one of the foundations of business value is missing the business may be worth nothing at all even, if it is making $1 million a year. That’s how important the following points are
Lease
If you are in retail or other commercial premises and length of lease is important for the business to be able to be carried on, you must ensure that you have enough lease to make the business viable for the buyer. Either you must have that length of lease to transfer or there must be an indication from the landlord that such a lease is available.
Intellectual Property
You need to protect your intellectual property. If you have a product that relies on a particular design or patented process you need to consider whether that should be protected under IP law. If in doubt register it.
If you have a particular name, whether it is your trading name or the name of a product, you should consider trademarking that name. Owning all the assets to your brand and business play a big part is maintaining business value.
Also trademark your domain name including the “.com” or “.com.au” suffix. It is very easy and you can do it yourself online for very little money. Just search on Google “register my intellectual property.” By owning the domain you will make your business easy to find for customers. This brings the business value because the easier customers can find you, the more business you will get.
“If you have created a piece of artwork, article, manual, book or design then copyright law automatically protects your “copyright” in the creation. You don’t need to do anything more, except put the market on notice that it is your copyright.
Company, Trading and Domain Names.
On many occasions, I have seen where a business owner does not have the right to the trading name under which he or she operates. If you own a company name that will often overcome the problem however it is wise also to register the trading name as well. You should also ensure that your domain name registration is up-to-date and that you have all the details of domain host, domain server details and details of anyone working on the site now or in the past.
Client and Supplier Contracts.
If a particular supplier is important to you what arrangements do you have for continued supply? Would your business be safer if there was a contract between you and the supplier? Should you look to protect yourself by finding an alternative source of supply, in case your current supplier goes out of business or increases prices too much?
Clients
What about clients? Would some of your clients sign a contract promising to deal with you for a specified time in the future? If so, consider asking clients to enter into such contracts. In my experience the current owner doesn’t think about contracts, and the buyer always looks for them.
Just be careful however to ensure that if you do sign such a contract, it would not adversely affect the sale. For example a buyer might not wish to be bound by your contracts. Just take care in this area. Get the balance right between flexibility and certainty of future business.
Credit Rating
Ensure that you have a good credit rating. Your balance sheet will disclose the size of your creditors and if there is an abnormal ratio between sales and creditors it could reflect badly on your business. When you sell your business you don’t want a whopping creditor liability which will need to be paid out of the proceeds of sale.
Financial Figures
The worst thing you can do when your business goes on the market is to present financial figures that are messy, contradictory or hard to explain. One could write a whole book just on this area however at this stage one just needs to acknowledge that the financial figures should be
• Accurate
• Complete
• Relevant
• Easy to understand
• Supporting the other facts of the business
Let me just say a few things about this area: –
Uncertainty about the financial position of the business makes a buyer nervous about the purchase. If you are saying that the business employs 10 people and financials show wages for six, then you are creating uncertainty in the mind of the buyer.
If your official figures don’t match the actual trading figures of the business then you will need to come up with a way of establishing actual trading figures that will satisfy the purchaser. You could do this by offering a trial of the business or produce other evidence to satisfy the purchaser of the financial position. Alternatively the buyer will hold money back after purchase while the true position of the company’s performance is established. And that is to be avoided.
History, Track Record And Trends
A buyer, when looking to buy your business, will be looking at future income, future cash flows and assessing where the business is headed. However, history is a good guide to what might happen in the future. For example, your business might show poor trading over a number of years and then a sudden increase in the last six months. This will make a buyer nervous, unless of course it can be explained through examining the economic cycle. A buyer might think the business has been pumped up for sale and there’s not enough evidence to suggest the improvement will continue.
If the trend for gross profit has been going down over the last couple of years, the buyer will want to know why. You will need to explain this. Have your margins being compromised by stiff competition?
If sales go up and down like a seesaw with no pattern, then a buyer has nothing to go on in trying to determine where the business is headed.
The ideal scenario is to show a number of years of consistent sales growth and consistency in important indicative ratios of the business. Here I include gross profit ratio, net profit ratio, wages to sales ratio and other important ratios. Cover these issues and you are well on the way to building a strong foundation for the sound growth of your business
To recap, you need to build a strong foundation upon which the value of your business can be based. It doesn’t matter that you have a profitable business that might have been profitable for a number of years. If there is a weakness or fatal flaw in your business, then no buyer will invest and you will be left with a business that only has value for you. Check out our free e-book, showing you how to grow your business into a valuable asset.
BCI is able to help you find ways to boost business value. To start simply use our free business check tool.
If you would like a coach to help boost business value then consider our consulting services.
Tony Arena
Want to know more about the value of your business?
