What is your company really worth? Perhaps you're thinking about selling your business in 2017. Maybe you're thinking it's a couple years away. Or maybe you just have an idea that one day, that's the route you'll likely take.
It's never too early to prepare, says David Stang, founder and president of Stang Capital Advisory, who joined Paul Starkey, co-founder and CEO of Vital Management, in a recent CE Pro Summit panel discussion called “You Are In the Right Business.”
“Your business's inherent worth is made up of three things,” says Stang. “Present value of future cash flows, expected growth and continued cash flows, and recurring revenue.”
When referring to RMR, Stang says it's especially important to pay attention to predictable and/or contractual recurring revenue.
It isn't too often that all three things — cash flows, growth and RMR — are looking positive. Starkey asks, how do we break out of this value conundrum?
1. Count and Measure Your Business
The very first thing to do is make an effort to standardize your accounting process. Very few businesses in this industry are audited annually. Invest in accounting software and keep track of billable hours. This isn't something to gloss over.
“I can’t overemphasize this accounting and measurement part of your business,” says Starkey. “Get the accounting right.”
2. Get Profitable
“Whether you plan to sell your business or not, get profitable,” says Starkey. “What percentage of owners are 50 years old or older? If you're 50 or older, the conversation I would have with you is: where are you going to be 10 years from now? What's the plan?”
Not many business owners think about this, especially if they're not yet nearing retirement age. But there's another question you should ask yourself.
“What's the number? What is the dollar amount that you're going to take out of the business and be happy with? If your business is still viable, you'll be able to get three, four, maybe five years of continued income.”
3. Develop Your People
“You can’t leave the business if you don’t have people to run it, whether you’re selling it or gifting it,” says Starkey.
Invest in your people with training, education and conferences. Reward technicians for being under budget and off job early. Empower employees with a stock ownership plan, if possible. This can only improve your business while you're still running it, and it will also help during and after the sale.
“There will be fewer management or sales team holes for the buyer to fill,” says Stang. “That's a good thing.”
4. Don’t Trade Size for Profit
It's true; larger companies typically achieve higher valuation multiples. Strong growth and consistently strong margins will attract significant interest.
But, oftentimes big companies that grew too fast just won't make as much money as smaller companies. “If you're going to scale your business, scale it to keep it profitable,” says Starkey.
Buttom line: don't grow just to grow. Grow with intent or find the right size for your customers, employees and cash flow. Find a size that fits; bigger isn't always better.
5. Build Equity; Eliminate Debt
Don't take on debt in your business in a way you wouldn't in life, warns Starkey.
“Some people take every penny out of the company,” says Starkey. “But this is your personal savings account. The cash in the business is your cash.”
A company with a good amount of debt simply won't sell as easily, so if you plan to sell in one, two, five years then now is a good time to start cutting down on any debt you have in your business.