By Mark Tepper, an EO Cleveland member and president of Strategic Wealth Partners
Unless your buyer has a gambling habit, chances are they’re not looking to roll the dice on purchasing your company. That’s why taking steps now to reduce the perceived risk your company poses to a potential buyer is a smart idea. Businesses with lower inherent risk will fetch a higher multiple and overall valuation.
Convince future buyers that your business has a high probability of delivering the desired returns and of growing in the future by making sure you have the following items in place:
Recurring Revenue. Recurring revenue is more predictable than sporadic revenue, and more likely to continue well into the future. Buyers like that. If it makes sense for your company, implement subscriptions, monthly service fees, retainer fees, membership fees, annual licenses, or renewing service contracts.
Proper Legal Structure. If you haven’t incorporated your company yet, consider filing for “S” status rather than “C.” Both enjoy limited liability, but S corporations are taxed as a pass-through entity, while C corporations are taxed twice. This can scare off a buyer.
Clean Financials. Sketchy financials are not something you want to bring to the sales table. Make sure your company’s records are solid by having your financial statements prepared by a qualified CPA and having an independent accounting firm regularly audit your books.
A Diverse Customer Base. No buyer is going to be happy if they see that the majority of your earnings come from three clients. Focus on broadening your customer base now to provide a buyer with some stability and peace of mind.
A Comprehensive Owner’s Manual. Document everything. Having everything down, from your sales processes to quality control methodology to ways of getting leads will assure a buyer that post-sale transition will be smooth.
A Strategic Growth Plan. Buyers want to see that your company isn’t a one-hit wonder. You’ll receive a higher multiple if you can convince your buyer that your business will grow after the deal closes. You can present the product development ideas, facts and figures on your market and the economy, plans for future acquisitions, and more. Time to do your research.