1. Build a solid management team. A business with sales of $5 million and up should have a good management team in place. Having a solid couple of levels of management can remove the stigma of “the one man band.” Not only will this build a stronger company, it will increase the value to a possible acquirer. Smaller firms should also strive to build a strong management team.
2. Loyal employees. Happy and loyal employees make for a strong company. Top management and sales people should have non-compete agreements. Solid benefits plans for all employees is a real plus. A company’s greatest asset is its employees and perhaps its biggest value-increaser.
3. Growth. Some smaller companies are kept small to maximize the owner’s benefits – minimizing investment for growth. However, if building value is the goal, then developing new products or services, building market share, expanding markets or opening new ones, is critical. This generally requires a financial investment, but building a strong growth rate also builds value.
4. Understanding your market. The value of a company may be contingent on its industry, its place in the industry and the direction of the industry itself. How big is the industry, is it headed up or down, who is the competition and how big is the company’s market share? Is it time to change direction or diversify?
5. Size counts. Companies with less than $5 million in sales and an EBITDA of less than $1 million can be perceived as small. However, over the past few years corporate buyers, as well as private equity firms, have seen the advantages of purchasing smaller firms, particularly as add-ons to their platform companies. Obviously, companies with $10 million or more in sales and an EBITDA of $1 million or more are considered as solid and able to stand on their own.
6. Documentation for certain expenses. In many privately owned businesses, especially smaller companies, owners may include expenses that are outside the needs of the business in order to reduce their profit and taxes. Documenting these unnecessary expenses to be able to prove the true earning power of the business is critically important to achieve the greatest value for the business when sold.
7. Diversification. A major problem with many small companies is that their business is concentrated on one or two major customers or clients. Ideally, no customer or client should represent more than 10 percent of sales. Expanding to new markets, introducing new products, and finding new customers must be considered without deviating too far from the company’s core business.
8. Name and brand identity. Nothing beats name recognition. Small firms may not have the brand or name recognition of the “Cokes” of the world, but they can work at it. This recognition is especially powerful in the consumer product area.
Keep in mind that the best time to consider selling is when business is good, the business is running profitably, and many of the above “value-adders” are in place. By contacting Keate Partners you can explore which of the above will add the most value to your firm, so it will be ready to sell when you are.