5 Ways to Boost the Value of Your Business

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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If you think a possible exit strategy for your business is to sell it for all its worth, then maximizing its value seems like the smart thing to do. The price your business may fetch has a lot to do with the perceived value of your business in the eyes of the buyer. Increasing your business value, therefore, is directly correlated to doing the things that will augment the perceived value of perspective buyers.

Here are five ways to make your business sellable for the highest price possible.

1. Take a Vacation

No, really. Get out of the office. This has two benefits.

First, getting away from the “day-to-day” of your business for at least a few days will help you think more strategically about the direction you are headed. Chances are you’ll come back with some new ways to improve your performance, always a boon to business value.

Second, you’ll demonstrate that your business can survive without you (or discover that it cannot, in which case, you may have some work to do). Yes, a company that thrives in the absence of its owner always fetches a higher price when it’s time to sell. Why? Because the acquirer finds more value in a business that runs on processes and systems, not on a “one-man-band” owner that has to pull all the levers and trick all the switches to make it work.

2. Revenue Recognition

How many days between when you get paid by your customers and when you have to pay for the materials, labor, and other inputs directly related to offering your products and services? The more days, the more working capital you have to commit to operating your business as opposed to growing it. The fewer days you have, the better.

Prospective buyers love businesses that require little or no working capital to operate because all of the resources in the business can be focused on growth. And these types of businesses almost always have revenue recognition problems, meaning they need to make accounting entries to spread their revenue out over time rather than recognize it all when they get the cash. If you need a high-level accountant to fix your revenue recognition regularly, then you’re likely maximizing your value.

3. Increase your EBITDA

Short for Earnings Before Interest, Taxes, Depreciation, and Amortization, EBITDA is a quick way to determine the amount of cash flow your operations generate each year in your business. Each industry usually applies an average multiple of somewhere between three to six times EBITDA as a method of valuing a company. Doing things to increase EBITDA will, therefore, increase your company’s value.

4. Quantifiable and Validated Sales Cycle

A company with a proven process for generating leads along with validated conversion rates of those leads into paying customers are always more attractive to buyers. They can quickly determine how much money they would need to invest to grow the business, which is often a major motivation when someone or some company considers buying another.

5. Sticky Key Managers

A buyer will likely plan for the owner to exit within a few years, if not much sooner, after they buy a business, but they will want to see that you have built a strong management team that knows how to run, grow, and improve the business on a day-to-day basis. In addition, they’ll want some assurance that these key managers won’t bolt as soon as you get your check.

In his book Built to Sell, John Warrillow teaches that long-term incentive plans usually help keep the management team around long after the business has been sold.

It’s no easy task to build a business, let alone one attractive enough for someone else to buy. But if you want a big payout when you leave your business behind, these five concepts will have you on your way to maximizing the size of that final check.