When It’s Time to Sell Your Business: Understanding Value Enhancement.

by: Colleen Kelley

Your children don’t want to take over the business you’ve worked so hard to build.  The realization that you will likely be selling your business hits you smack in the face!  It’s a more common scenario than you might think.

With baby boomers retiring, the number of business “exits” over the next 20 years in Canada will be significant.  For business owners, the great concern is valuation: how to sell a business at a fair and hopefully premium value. Here are some things to consider now, before you make the move.

One big misconception among business owners is that the value of their company is irrevocably tied to their personal leadership.  This does not need to be the case.  When evaluating enterprise value, experienced purchasers and their advisors consider three elements:

  • Financial Performance
  • Sustainability
  • Transferability

Tied to these three elements are at least 18 key business drivers, which together determine the valuation of a company. One of the most important elements is the presence of a strong management team that is not reliant on the business owner.  None other than renowned management consultant and author Peter Drucker states in his classic book Innovation and Entrepreneurship that one of the requirements for creating a successful enterprise is “. . . building a top management team long before the new venture actually needs one and long before it can actually afford one.

Taking a systematic approach one can evaluate a company’s performance against these business drivers to determine the gaps that stand between a premium valuation and a subpar valuation.  Value enhancement is the process of making changes to a business to drive the enterprise value of the company. Our experience shows that investing in targeted value enhancement can increase the valuation of a company by approximately 25% to 40%.  This equates to a significant amount of increased equity for the business owner when it comes time to sell.

With so many factors to consider it is critical that you begin planning for an exit now.  Get started with Business Assessment Discovery from Stratford Managers.

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