When it comes to selling a private company, there are several key factors that can greatly increase the price potential buyers are willing to pay. Here are five strategies to consider when looking to maximize the value of your business:
- Reduce the risk of future cash flow projections: One of the most important factors that buyers consider when evaluating a private company is its potential for future cash flow. By implementing strong accounting and internal controls, and by generating recurring revenue, you can reduce the risk attached to future cash flow and increase the multiple paid for your business. Additionally, by providing detailed financial statements and a well-defined growth plan, you can demonstrate your company’s ability to generate consistent and predictable income.
- Reinvest in your business for sustainable future growth: Another key factor that can greatly increase the value of your business is sustainable future growth. By reinvesting a portion of your profits back into your business, you can increase its ability to generate revenue and profits in the future. Even a small amount of sustainable annual growth, such as 10%, can more than double the multiple paid for your business.
- Reduce key person discounts: When a buyer is evaluating a private company, they often take into account the risk of losing key employees or leaders. By making your business operate without you, you can reduce the “key person” discount that buyers may apply to your company’s value. This can be achieved by implementing systems and processes that allow the business to run smoothly without your direct involvement. If you can’t go on vacation for 3 months, you have a key person discount problem.
- Reduce minority interest discounts: Another factor that can greatly reduce the value of your business is minority interest discounts. These discounts occur when a buyer is only able to acquire a portion of a company’s ownership, and they often result in a lower purchase price. By having fewer partners and shareholders, and by implementing shareholder agreements that clearly define the rights and responsibilities of each party, you can reduce minority interest discounts and increase the value of your business.
- Be prepared to take an earn out or VTB financing: Lastly, when looking to increase the value of your business, it’s important to be prepared to take an earn out or VTB financing. An earn out is a type of financing where the buyer pays a portion of the purchase price over time, based on the company’s future performance. VTB financing is a type of financing where the buyer provides the seller with a loan to purchase the company, and the loan is repaid through the company’s future cash flow. Both of these options can be used to increase the value of your business because available financing is often a limiting factor in private company transactions.
Increasing the value of a private company when selling it is a multifaceted process that requires a combination of strategies. By implementing strong accounting and internal controls, reinvesting in your business for sustainable future growth, reducing key person discounts, reducing minority interest discounts, and being prepared to take an earn out or VTB financing, you can greatly increase the value of your business and increase your chances of a successful sale.