You may know it: worked hard for years to put a thriving business on the map. And then comes the moment where you consider leaving your "kid" over. Whether you're retiring, embarking on a new entrepreneurial challenge or simply entering a different phase of life, creating maximum value is critical. In this article, we give you 4 tips for value creation when leaving your business.
Any preparation begins with a good plan. Provide a clear framework of exactly what will be sold. This is important on a fiscal level but certainly on a value creation level. Will the shares be sold or just the trading fund? Are you selling the entire company or only certain parts? Will the commercial real estate go along with the sale or do you want to keep it to rent out later? To this end, should the business real estate still be hived off or not?
Get guidance from a trusted financial advisor
A common pitfall in acquisitions is unrealistic price expectations. Prepare by having estimates and valuations made, both of the property in question by a trusted appraiser and of the business by a trusted financial advisor. These valuations will provide recommendations for increasing value in the future.
Chart your numbers
This brings us to one of the most crucial elements of an acquisition: the numbers. They act as the connecting link between the expectations of both the buyer and the seller. As the first tangible data the buyer comes into contact with, the numbers are the foundation of trust. They tell the story of your company and provide insight into its financial health.
It is therefore important to present the figures as clearly as possible, with as little additional explanation as possible. Usually the figures of the last 3 fiscal years are used to get a picture of the company. So start in time with the necessary actions to improve the figures and create additional value. With that, two things are important in the eyes of a potential buyer. Namely, the "top line growth" and the EBITDA margin on relevant sales.
"Top line growth" refers to revenue growth with a focus on increasing the company's total revenue.
EBITDA margin (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial measure that indicates the profitability of a company. It represents the amount the company has earned before interest, taxes, depreciation and amortization expenses. In an ideal scenario, a company aims for the highest possible EBITDA margin, as this indicates efficient cost control and healthy profitability.
4 tips for your value creation
The value of the company is roughly determined by two factors: profitability and available liquidity after deducting debt. Herewith we provide 4 tips to positively influence these elements:
- Turnover is a verb: In an acquisition conversation, it makes no sense to say, "With this customer, you can certainly sell 5% more expensively." A buyer only believes what he sees on paper, so untapped sales opportunities are not taken into account. In the years leading up to the acquisition, look for the optimal price elasticity with your customers. Even if you don't sell your company, why not raise prices by 2% if you don't lose customers as a result?
- Thoroughly analyze your cost structure. Examine in detail whether any expenses can be eliminated or reduced, paying special attention to personal expenses that are partly business-related, such as sponsorship contracts related to hobbies. Also identify exceptional costs and prepare a well-reasoned argument as to why they should not be included.
- Optimize working capital. Inventories and outstanding receivables consume cash, while supplier payables provide additional funds. Make sure inventory is appropriate for business operations, as excessive inventory is easy for day-to-day operations but difficult to value in an acquisition. Improve customer payment behavior; even shortening payment terms can improve liquidity. On the other hand, you can maximize the given payment terms from suppliers.
- Think carefully about investments. Are planned investments necessary or rather nice-to-have? Do they need to be replaced quickly or can certain items last another year? Determine what form of financing will be most advantageous, such as a traditional loan or leasing. Invest thoughtfully in the years leading up to the acquisition.
As cited earlier, when analyzing the numbers, you should keep in mind that rising sales and profits increase the interest of potential acquirers.
As an entrepreneur, you yourself also play an important role in the process. It may sound contradictory, but the more independent the business is from you as an entrepreneur, the higher its value. Buyers are willing to pay more for businesses where management is separate from the owner. So make sure you are well surrounded and make the business less dependent on your person. This will make the acquisition go more smoothly, both for the acquirer and for you as the seller.
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