Exclusive insights for owners within the Recycling, Waste, Pallet, and related industries

5 ways to supercharge the enterprise value of a business.

     Maximizing the enterprise value is always a function that comes down to good cash flow, good management, and good contracts. If you don’t have that set, stop thinking about selling and start fixing. This article is about preparing to sell and the basic 5 steps that will make a difference in the timing of your sale as well as the (EV) Enterprise Value that a buyer is going to use to formulate an offer for your business. Now is the time to get serious about maximizing the sale value of your business and fixing those areas that impact Enterprise Value. 

     Spending time to make sure you fully maximize enterprise value should be the mission statement for all business owners who are starting to think about selling their business. With this in mind, privately held businesses should not accept any valuation without first considering a full comprehensive review starting with my 5 Ways to Supercharge the Enterprise Value of your Business. You can’t control the macroeconomics of monetary fund changes. inflation or other world events, but you can drive multiples by making sure that you leverage the value already sitting in the company by starting here.

    Differentiating your business and increasing the sale price is part of a well-thought-out strategic plan BEFORE you market the company for sale. Spending time to enhance the bottom line will positively effect the net proceeds that an owner will walk away with after the sale. Shoring up the ship will remove doubts, questions and risks that potential buyers will be considering as they formulate their enterprise value bid price of your business. While many factors can influence a business’s value, I will touch on five key areas that are particularly important for increasing value in the eyes of buyers. Working on improving these five areas can provide leverage to maximize the value of your business. Growing revenue, widening gross margin, and controlling cost are going to be key factors in building real enterprise value; however, starting with these 5 steps will supercharge the enterprise value of your business. 

1. Good Cash Flow

     The most important thing you can do to increase the value of your business is to maintain historical financials, so a potential buyer can gain real confidence in the financial records that prove your ‘Good Cash Flow”. You need to have a firm grasp on how fast you bill customers when work is complete and be able to measure (DSO) Days Sales Outstanding. If the monthly as well as the year-over-year numbers don’t tick and tie potential buyers will begin to reduce the enterprise value upon which to create a basis to offer a multiple in the bidding process. The more the P&L, balance sheet and other financial records match the presented documents, the fewer questions potential buyers will have, and the lower their risk concerns will be. 

     In addition, having good books and records can help you identify areas where you can cut costs, streamline operations, and increase profitability, all of which can help boost the value of your business. Cleaning up the books is the simplest, though not always easiest, thing a business owner can address. Changing bad habits is difficult for many, but maximizing shareholder wealth should be your goal. Frankly speaking,

You have to get the accounting right!

2. Good Management

     Building value begins by deleveraging the control that is often held exclusively in the office of the CEO, President, and owners. If most customer and vendor relationships are held by very few high-level managers/owners, this could signal significant risk for a potential buyer. You must devalue yourself to avoid the challenges of selling an owner-centric business. Devaluing yourself does not mean you need to be an absentee owner. However, it does mean that you must be willing to share key customer and vendor relationships with key employees. Does every employee and every major customer interact with the president and or senior management team? If yes, it more than likely will devalue your sale value! This means you need to work hard to let go and let the right personnel take the reins in areas where they can manage people, problems, and relationships. 

     This means that various people should be responsible for sales, accounting, and operations. Start by inviting key employees into meetings so they can start to build relationships with customers, vendors, banking, and other key relationships of the company. Devaluing yourself and allowing others to share relationships and make day-to-day decisions can be the toughest recommendation on this list because owners feel they are giving up control. This is one of those strategic changes that are toughest on one person (you) but will also significantly impact your future wealth with respect to selling your company. 

     Finding good people is a common pain point for businesses today more than ever in this post-COVID world. Having talented management and employees that have a good retention history is a huge value-add. Today’s buyers will pay top dollar to acquire a business with a talented and committed team already in place. Additionally, attracting, hiring, and retaining a good workforce is often directly correlated with culture, our fourth focus area.

3. Good Contracts

     Update contracts with multi-year renewals that reduce the ability of the customer to cancel without cause. In addition, you want to fight to have contract provisions that allow you to sell the company without contract language that requires approval by the customer and or any language that allows immediate cancellation. I am not a legal advisor and my consulting tip is borne from selling companies where these provisions have not been M&A friendly. If you don’t address these concepts now, these contract assignment issues can become a hold-your-breath moment for owners that causes more stress than is necessary. Seek appropriate legal counsel to advise you on contract structures that take Mergers and Acquisition scenarios seriously.  

4. Company Culture

     This section is as much about keeping the employer happy (Buyer) as it is about keeping the employee happy. This is the natural next step after a review of cash flow, management, and contracts. There must be equal effort in those programs that manage employees and their overall connection to the business. Buyers want to be assured that if they purchase a company the employees are not going to abandon ship after the sale.   

     Establishing a managed company culture is an increasingly important factor in the valuation of a business. Buyers today are asking owners about the culture of the business including written annual reviews, non-competes, and bonus structures. Creating a company culture that permeates the business can help minimize a buyer’s questions and increase the business’s value.

5. Brand Recognition

     Brand recognition is an important area in growing the value of your business. Potential buyers find well-known brands within their market space appealing but buying a company that no one in your industry has ever heard of can be a red flag. Therefore, having a good marketing plan that has reach and influence within your market(s) builds sell value. Adding intellectual property, patents, and other product and service methods can also help. 

     Growing the value of your business requires a multi-faceted approach. This can include adding a few White Papers on how your company delivers value and thought leadership articles to your website. Appearing in industry publications, or social media as well as doing a few media interviews can have real influence on your brand recognition. By doing so, you can increase the perceived value of your business which will impact the range of multiples, and ultimately achieve a higher sale price when you are ready to sell.