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When you’re getting a new business off the ground, selling it is likely the last thing you’re thinking about.
However, the truth is that it’s much easier (and much less costly) to develop your exit plan from the start than it is to restructure your company to sell. For business owners, the best course of action is to grow a sellable company right from the beginning.
Not sure how to develop a sellable business? Here are some tips to get you started.
How do you improve sellability while building a business?
Making your business sellable doesn’t only benefit you when it comes time to make a sale. The businesses that command the highest sale prices are also the most profitable, so when you’re building a sellable business, you’re also setting yourself up for success as a business owner.
One of the keys to building a sellable business is making early investments to improve scalability over time. You can do that by focusing on the following:
- Implementing high-quality, efficient technology systems
- Hiring executive leaders
- Having financials regularly reviewed and audited
- Building human capital function
These might sound like obvious investments to make to some. Still, many founders do not want to make the necessary investments in infrastructure to be able to scale the business, instead viewing it as ‘overhead.’
Investing in infrastructure from the outset may involve a substantial cash outlay, but it will dramatically increase your business’s value when it comes time to sell. Align Business Advisory, a leading M&A advisory for small and mid-size businesses, also points out that a third-party advisor can greatly help businesses to figure out ways to improve their overall scalability with services like business valuation and exit planning.
If your company has quality infrastructure that can be built upon, potential buyers are looking at a turnkey sale. You’ll be poised to make significantly more from the sale in this situation. If a buyer sees that they will need to restructure the company for scalability after they purchase it, they’ll pay much less.
How do you help your company sell for a higher multiple?
Even if your company has already been in business for years, there are still several things you can look at to optimize total value. If you want to make sure you’ll make as much as you can from the sale of your company, start with these steps.
1. Enhance operational efficiency
Many smaller business owners are owner-operators; their presence is essential for business success. However, when it comes to making a sale, this situation can dramatically decrease what a buyer is willing to pay.
Why? If the buyer purchases a business like this, they’re taking on considerable risk. Once you leave the business, there’s a possibility that daily operations will suffer or key customers will leave.
If you can demonstrate that your business functions well without your involvement, buyers will see a purchase as much less risky, so they’ll likely pay more when the time comes to sell.
2. Optimize gross margin and EBITDA
Not all revenue dollars are created equal. For instance, If a company must spend $99 to make $100, then that $1 of profit is not as valuable. So, regarding profitability, the cash in your business’s bank account isn’t the only thing that matters.
To ensure your profit margins are high enough to draw in quality buyers, you’ll want to look at your EBITDA (Earnings Before Interest Taxes Depreciation Amortization) margin profile.
Your EBITDA margin indicates your operating profit as a percentage of your total revenue. In most cases, buyers want an EBITDA margin of at least 10%. Many buyers view businesses with lower margins as too risky.
3. Diversify your customer base
Having one or two customers who routinely spend large amounts at your business can give you a sense of security. But buyers want to see diversified revenue. If most of your revenue comes from a few customers and those customers stop patronizing your company, your finances will suffer.
In most cases, buyers look askance at any business where a single customer accounts for over 20% of the revenue. They may still purchase your business but are likely to pay substantially less.
If you currently rely primarily on a few customers for steady income, make an effort to diversify income sources. That could mean offering additional products or services or using targeted advertising to draw in different demographics.
Build a sellable company from the ground up
Creating a business that’s built to sell can be a challenge, especially if you’re wrapped up in running that business from day to day. However, it is vital that entrepreneurs prioritize sellability from the start of their business journey.
The tips above provide ways to help maximize your business’s total value and attract quality buyers. By proactively working toward sellability, you are not only positioning yourself for a successful sale, but also setting yourself up for long-term business success and profitability.