This is the time of year when business owners are budgeting for next year and planning strategic decisions for the future. Those decisions may involve pursuing a new product, upgrading an IT system or opening a new location. When making strategic planning decisions, are you — the business owner — considering the impact on the value of your business to a potential buyer?
This may seem like a strange question if you have no plans to sell your business in the near term. But, what if you’re forced to exit your business due to an illness or death in your family? What if you receive an unsolicited offer for your business that’s too good to ignore? You should always be prepared to get the maximum value for your business, regardless of when you exit.
Selling a business is often compared to selling a house. Before making significant investments in your house, you likely consider the impact to the home’s resale value. You make improvements based on what you believe a potential buyer will find valuable versus your personal preferences.
For example, you might want to convert your third bedroom into a master closet. This might seem like the perfect solution for you, but most buyers in your neighborhood want at least three bedrooms. Your short-term improvement may negatively impact the long-term value of your home.
The same thought process should apply to improvements or changes you make to your business. This seems logical, but how do you know who will ultimately buy your business?
Generally, there are three types of buyers who share high-level traits:
- Lifestyle buyers are usually individuals looking for a steady income.
- Strategic buyers are similar companies, possibly your competitors, looking to expand customer base, product offering or geography.
- Financial buyers are typically private equity funds looking to maximize cash flow and returns when they sell the business in the future.
Let’s assume your buyer will be a strategic buyer (such as a competitor in a neighboring town). A significant investment in your IT system might not add value to your business in this strategic buyer’s eyes as your system will be merged into the buyer’s system. You might decide instead to invest in obtaining new customers in order to maximize your value to that potential buyer.
If your buyer is a lifestyle buyer, investments in infrastructure such as your IT system could add significant value to your business if it reduces costs and improves overall performance. A lifestyle buyer would be concerned with maintaining cash flow through efficient operations.
Preparing your business for sale means viewing your business through the eyes of a buyer. You know your business inside and out, and a buyer will be starting from scratch to understand the risks and opportunities in your business. When you put yourself in a potential buyer’s shoes, you may discover risks in your business or areas of improvements you hadn’t considered before. This process can improve your business now, regardless of when you expect to sell.
For example, you may be proud of the strong brand you have created for your company through years of hard work and building a solid reputation. If you are critical to the brand and the success of the business, a buyer may view that as a negative. If you want to sell and leave the business, the value of the company may walk out the door with you. If you identify this issue early, you can start training your second-in-command and the rest of your management team to run the business without you.
Even though you may not be ready to sell, going through the exercise of preparing your business for sale will help guide your strategic investments to maximize the value of your business when the time is right to sell.
This article has been republished. You can find the original version here: https://succeedasyourownboss.com/strategic-planning-next-owner-business/