The 4 questions to maximize your business valuation

Profits are returning and owners interested in selling their businesses are watching industry cycles like hawks looking for the upswing, waiting to get the timing right. A critical question for these owners is “where is my own business in its cycle?”

Jacoline Loewen Director of Business Development 

For any business owner contemplating a sale in the next year, here are a few additional quesions to ask to boost their business valuation to increase their wealth after selling:

Does your business have solid management?

The owner may be leaving but buyers want to know whether there’s a team in place with big goals to drive the business forward with equal determination. Having a succession plan is critical, but it is estimated that fewer than 5 per cent have a written document with a strong operator or family member ready to take over. Owner-operators have built their lives around running their businesses and they do not want to let that go. This reluctance may prevent them from seeing the importance of planning for their own exit and they will get dinged on their company sale price for this omission.

Are your key processes institutionalized?

“There is the risk that the company incurs a fatal loss of knowledge and connections upon the exit of the owner,” the president of a manufacturing business told me. “The earn-out helps, but two to three years does not make up for 30 years experience in a company. One way to mitigate this risk is to bring in a guy like me.” Paying a high-quality CEO for a few years will help the owner of a windows manufacturer convert “in the head” knowledge to written processes. “We preserved the knowledge and demonstrated the existence of a reliable management team to a potential buyer,” the president added.

Do you know good buyers?

The sale price of a business is what buyers offer and when a company is in the growth part of its business cycle, there will be multiple offers and phone calls from all sorts of interested parties. “I know the ‘I’m comfortable with my business’ owners where the offers to buy have made great sense,” says succession planning coach Janice Lahiti . “The owners don’t do it because they think their ability to influence a variety of broader agendas will diminish.” As the business hits the mature stage of its life cycle, which often occurs in tandem with the owner’s life cycle, suddenly the pool of multiple bidders dries up and as Janice says: “The owner can no longer command the multiples they want.”
The owner may also miss the opportunity to sell to a buyer who will structure the sale so that the majority of the company is purchased but the owner can keep 20 per cent to 30 per cent with a fixed medium-term buyout schedule. They can also have limited management or board involvement. This structure keeps the owner involved mentally and financially in his or her ‘baby’ while taking some money off the table to free up time to pursue other interests.

What is your opportunity cost, really?

Melanie Kau exited her successful family business, Mobilia, to take on the challenge of running Le Naturiste. “The ‘what next’ after you have worked for 15 to 20 years in a business prevents people from asking themselves the cost of staying where they are because they are comfortable. I know what that feels like because I have just been through it. Therein lies a great deal of value with the experience the entrepreneur has built up: sometimes the business is more like a cage than a platform.”
While you may not plan to sell your business today, it is certainly wise to begin thinking about that day. Careful planning now will allow you to take advantage of opportunities promptly when they materialize. With a plan in place, you will be ready to act and know if you wish to keep making your money through your business - or do a partial or full sale of the business - you do want to reap the full monetary value of your hard work.

Next column, I will address what to consider as the entrepreneur becomes a wealth manager.

Originally published by The Globe and Mail.

For more information on  UBS financial advisors - please feel free to contact Jacoline Loewen.
Jacoline Loewen is director of business development of UBS Bank (Canada). She is also author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.