value-240In today’s environment, it’s important for Maine-based small business owners to concentrate on the value of their company and what drives it, especially when considering putting it up for sale. This article is focusing on value drivers for operating businesses, and not businesses that are asset-based, like real estate or securities holding companies.

Most commonly, operating businesses are valued based on how much cash flow they’re expected to generate in the future. In this way, cash flow determines value.

If you want to increase value, you need to increase sustainable cash flow.  It’s important to note the sustainable part. A short term increase might seem good for a while, but an educated buyer will see through any non-sustainable increases and adjust those in determining the purchase price.

Here are some ideas to help the company for sale look its best, while increasing sustainable cash flow at the same time:

Adjust compensation to a level that is on the level of what an independent owner, who is not active in the business, could expect. If a small business owner is depending on the business to make a living, then they might find other ways to receive the same cash flow. It is possible, if the business is a pass through entity, such as an S Corp, LLC, LLP or partnership, for the owner to use distributions as a method of extracting cash from the business, for example.

Adjust business expenses to a level that would be anticipated by an independent owner. Eliminate any perk expenses that owners and executives might be taking out of the business. Also, analyze the company’s expenses from top to bottom and get rid of items that are not essential to the company’s operations. Usually, small business owners can find fat to trim, without affecting efficiency and employee morale. Remember that a cost study can be an effective way to increase value.

Increase revenues. This seems obvious, but sometimes businesses that are relying on established customer relationships have forgotten to focus on selling new business.

Review all policies, procedures, processes, contracts and agreements. While this isn’t directly related to increasing cash flows, a buyer expects to see all of these things in good shape when considering the purchase of the business. Some things to review are:

  • Real estate and equipment rental agreements,
  • Employment and noncompete agreements,
  • Supplier agreements,
  • Customer contracts and lists,
  • Insurance policies, including company-owned key person life insurance plans,
  • Mortgages, lines of credit and other financing agreements,
  • Fixed asset listing,
  • Technology inventory and licenses,
  • Brochures, catalogs, websites and other marketing programs,
  • Job descriptions,
  • Formal policies and procedures manual, and
  • Organizational charts.

This article covers the basics of increasing the value of a business, and there are many other things that can be done. Contact Filler & Associates for assistance in getting your business ready for sale.