Want a Bidding War? Follow These Steps To Raise Your Business Evaluation

When business owners decide to sell their businesses, of course, they want top dollar from a potential buyer. Usually, the business owners don’t think about or strategize about how to increase the valuation of the business until they put it on the market, which is too late.

Ideally, the business owner should work with an expert in business evaluations at least five years before the date of sale to do a thorough valuation that determines what the rule of thumb would be for the value of the business at that time. That rule of thumb valuation will tell you what times gross revenue or EBITDA your company is valued at. This number can be viewed as a marker that will improve over the years, as your sales improve or your margins improve as a result of improved processes, or better purchasing power with vendors. Using the rule of thumb approach should allow the business owner to have an idea of what the business is worth each and every year that the business owner applies that formula, so that there are no surprises about the time of a potential sale.

In addition to obtaining the valuation is the analysis. If the owner knows what the business is worth today, the other part of the value from doing this is to determine what things can be changed in the business that will add to that value over the next five years.

Here are some ideas of what changes can increase the sales price and cause the business to be pursued by several potential buyers that may raise the sales price of the business:

• In a smaller business, the business owner tends to occupy all of the major “seats” in the company. For instance, the business owner may be the Chief Executive Officer, the Director of Sales and Marketing, the HR director, the CFO, and the like. What the business owner needs to do in that scenario is to start replacing themselves in these roles, so that they can become the visionary, expanding the business by purchasing other like businesses and looking for other growth opportunities, but not being in charge of everything on a day-to-day basis. The idea is to make sure that team is handling things and realizing the right team is probably better at that specific job than the business owner is. If the team shines and creates that additional value, the company has more value to a buyer, because they will not have to sit in all the seats and there is direction and vision for the established team. The buyer is buying a company that is successful and has a great team on board with the same vision. The buyer may not even have to hire a COO to run the business when it is purchased as the seller’s team is already shown to be successful and is in place.
• A business can grow in value organically by adding sales through strategic partnerships with other businesses, or by buying other businesses that can be integrated into the existing business successfully. Some businesses use both methods. Either way requires a lot of planning by the team. This growth adds a lot of value to the company.
• One thing that many business owners may forget is the value of long-term contracts when looking at the value of the business. If the business has had long-term relationships with its customers, the next step may be structuring longer term contracts with these customers. A buyer is more likely to pay more for the company with these types of contracts in place, as the buyer may view the purchase of the company as less risky. If the company does a great job for those customers, it may help to cement the relationship with them into the future.
• Upgrading the existing team may also increase the value of the business. For instance, if the person who is leading sales is not great at closing larger deals, or that person does not have the contacts with larger companies, the business may replace that person with someone who is a better fit and laterally move the current head to another position that is a better fit. Alternatively, the company may give that person intensive sales training to upgrade their skills. That can be done with each of the team members. The adage may be true—those who invest in people invests in the growth of the company.

These are but a few ways to increase the value of the company. The important thing is to start with the valuation of the business and tailor the engagement to work with the business valuation person and the company’s business attorney to determine what steps can be taken to increase the value of the business over the time between now and the date that the business is placed on the market. At the end of five years, the business will have a lot of potential buyers for it, or the business owner may feel that it is more fun and lucrative to stay involved in the business! In either case progress and financial gains increase.

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Denice Gierach

Gierach Law Firm

Denice Gierach is an attorney, CPA, Northwestern University business master's graduate, and has owned several businesses from real estate to manufacturing. She is the lead attorney at Gierach Law Firm in the Chicago area. With more than 30 years of experience, she has been a respected and sought-after resource for businesses looking to grow, sell, solve problems, and succeed long term. Her insights across business areas gives a fuller lens to business issues and solutions, and helps businesses grow and succeed with less time spent on legal issues and other time-consuming problems.

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