Seven steps to building better business value

Aug 25, 2019
You might not know if you want to sell your practice in the future, but it is never too early to start building business value, says Michael Farrell.

There is a lot to plan for if you intend to sell your business in the future. In the beginning, you may have a vague plan in your head, but it is never too early to begin building business value.

Set clear goals

A useful starting point is to think about what you want to achieve from the sale. Whether you want to sell to fund your retirement or to invest in an alternative venture, you will want to maximise the proceeds of the sale and minimise any tax liability that may arise. For example, depending on your goals, and the likely timing of any future sale, there may be opportunities to enhance your business value by changing your business structure.
 
Tax incentives such as entrepreneurs’ relief can reduce your liability for capital gains tax on the proceeds of the sale provided you comply with the relevant conditions.
 
Be clear about what you want to achieve from the sale and what you would be prepared to settle for.

Understand what your business is worth

Obtaining an independent valuation of your business for information purposes will often highlight opportunities to enhance value. A valuation will also provide a baseline for negotiations with any prospective buyer.

Identify buyers

Making a list of potential buyers and considering what is likely to matter most to them is another useful exercise. Since it can often be difficult to see your business objectively, you may need some help. Remember: different buyers may have different priorities which could affect the price they are willing to pay.

Focus on financials

Buyers will always want to see financial data for several years preceding the sale. Planning early will help you to identify areas where cost savings or efficiencies could improve your bottom line and enhance the value of your business for a potential purchaser.

Build a good team

Buyers will also want to feel confident that the business can continue to run successfully when you exit so it is important that it is not overly reliant on you as an individual. Valuing your staff and building a strong team will enhance your long-term business value.
 
Just as over-reliance on the owner can undermine business value, over-dependence on key customers or suppliers is as detrimental. It increases the risk for the buyer. What if the supplier goes out of business or if customers move on once you have left?
 
De-risking your business by putting the correct systems and processes in place will give comfort to your buyer that the business can continue to thrive without you.

Boost working capital

Optimising working capital will also enhance business value because it boosts cash flow and profitability. Strategies that can boost working capital include:
 
  • Prompt invoicing;
  • Managing stock and work-in-progress;
  • Controlling costs;
  • Managing overheads;
  • Reviewing contracts and negotiating better terms with suppliers; and
  • Swapping short-term debt for cheaper long-term debt.

Emotional impact

Remember to factor in the emotional impact that selling your business may have on you and your family. Good communication is important in this regard. Making sure that everyone involved understands that there are sound business reasons behind the future sale can help avoid disputes and conflict.
 
Michael Farrell is a Director at PKF FPM.