5 Ways to Ruin the Value of Your Business

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Summer time is vacation time for many of us. But some business owners rarely take time off. Others go on vacation but call it a business trip and expense it to their company. As it turns out, your decisions about vacation can ruin the value of your business, making it very hard to sell for a fair price.

piggy bank1.Exaggerating expenses. Are you using your business as a piggy bank? We often see business owners writing off their family trips as a business expense. That’s one way to fund a trip you can’t afford and get a tax write-off, too.

But this type of practice can get you in trouble, inflating the expenses that show up on your P&L and reducing the net income of the business, making your performance look less than ideal.

When bankers consider your business for a line of credit or a loan, they have to look at the numbers on your tax returns; they can’t consider the back-story you provide. If you’re charging personal costs to the business, your expenses will look higher and your margins will appear lower than those of your competitors. This kind of practice can even force a banker to call an existing loan. We’ve seen it happen.

Excessive personal expenses made one client’s P&L look so bad that we couldn’t advertise his business for the price we needed. Now, he’s trying to go back and amend his books to show the actual expense figures. But his accountant is concerned the changes will inspire an audit. That’s not a good place to be when you’re looking to sell.

2.Not recognizing revenue to delay taxes. Have you ever gotten a chunk of revenue toward the end of the year and been tempted to report it the next year to delay the taxes? That’s another good way to ruin the value of your business.

We had one client who moved a large payment from December to the next January. He definitely dodged some taxes for the current year. But that move threw off his financials, reducing the value of the business by $2 million. To make matters worse, he did this while a buyer was in discussions with him and the buyer had to reduce the amount he was willing to pay!

customer3.Concentrating on only a few customers. Having a large customer or two can give you a great short-term advantage, but it also presents a huge risk for a buyer. You may be allowing one or two customers to overly influence your business decisions.

And the loss of just one customer could ruin your value. As a rule, it’s best not to allow any one customer to represent more than 25% of your revenue.

4.Skipping vacation. Do you find it impossible to take a real vacation from your work? Would the company fall apart if you weren’t there? These are signs your business is overly dependent on you – which means you’ll have a hard time selling it. When your success is too closely tied to one individual, it’s tough for someone else to take over.

If you’re controlling most of the client relationships or your skills are the primary ones driving the business, you need to start delegating responsibility. A business whose owner never goes on vacation isn’t attractive to a potential buyer – not just because of the lifestyle factor but also because of the vulnerability.

5.Having no marketing presence: You don’t have to be a social media maven to manage your basic marketing presence. But you do need a visible, up-to-date website. Potential buyers want to be able to verify your public presence and do a little research on you. If they can’t find your website or your LinkedIn profile, they’ll wonder if you’re hiding something.

All these factors affect your ability to build trust with a potential buyer. One or any combinations of these mistakes can make a buyer question the long term viability of the business and whether the business will provide a reasonable return. Owners need to focus on both the price of the business and the marketability of the business. To get a better price, the business needs to be widely attractive. 

If these value-reducing practices look familiar, now’s the time to begin reversing them. Making some changes will boost the value of your business – and maybe even let you schedule a little R&R!

If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!

6 Critical Factors That Make Businesses More (or Less) Attractive To Buyers

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Valerie VaughnPost by Valerie L. Vaughn, Certified M&A Professional (CM&AP) | Certified Business Intermediary (CBI) | Business Broker

Six factors can make the difference between selling at a premium—or a discount.

If you’ve decided to sell your business now or in the next few years, you might stop and ask yourself if anyone will want to buy your business. Seriously.

Is your business going to be attractive to buyers? Will they value it as highly as you do? Is your baby ugly to everyone but you, or could it win a Beautiful Baby contest?

Business owners are frequently unaware of what buyers value and are surprised when they go to sell and learn that their business isn’t ready or won’t bring the price they want. If you want to maximize value, then plan to sell. Few businesses are ready without preparation.

Here’s a checklist of six key value drivers that make businesses more or less attractive to buyers. They make the difference between selling at a premium or a discount. How does your business measure up?

Management and key people. Owner-centric businesses are more difficult to sell. Buyers prefer strong management teams or the next level of key employees to already be in place. Can you leave the business for extended periods of time without worrying that it will go off track? If your answer is anything but “yes,” it’s time for a change. Your employees can add value to your business. Are you treating them well and developing them appropriately?

Customer concentration. Most buyers want to see a diverse customer base rather than a concentration of revenue from one or a handful of customers. What percentage of annual sales is attributable to your largest customer? Your largest five customers? For most industries, no one customer should represent more than 10 percent of revenue.

ThinkingBiggerThere’s still time to register online!

Systems and procedures. Buyers like to see systems and procedures that make the business easier to manage and transition. This includes manual, automated and information technology-based systems and procedures. Do you have written policies and procedures in place? Are employee roles and responsibilities defined in writing? Is your company’s information technology up to date?

sell a businessSales and marketing. Sales and marketing should be delegated or outsourced and not dependent solely on the owner or founder. If you are still the face of the company and hold most or all of the customer relationships, this is an area that needs some work.

Financial record keeping. Clear and accurate financials accurately tied to tax returns add value to a business. No kidding, folks—this one is really key. You can’t tell Uncle Sam that your business isn’t profitable or just barely breaks even and then expect a buyer to trust you that it’s truly very profitable. No earnings, no value.

Revenue and earnings trends. Buyers and banks that finance buyers focus on historical trends over a three- to five-year period; increasing trends are obviously best. If revenue and earnings are in decline, you still might be able to sell the business, but be prepared for a smaller pool of interested buyers. Be able to explain the downward trends, and know that your business will likely sell at a discounted price.

If you haven’t already begun, start to look at your business through the eyes of a prospective buyer. Run a SWOT analysis and work to strengthen your weaknesses and develop barriers to threats. Preserve your strengths and position yourself for opportunity.

With a little forward planning, you can significantly increase the value of your business and the odds of a successful sale. If you aren’t sure how to start, connect to a knowledgeable business intermediary.

Valerie L. Vaughn is a certified business intermediary and a certified mergers and acquisitions professional with Apex Business Advisors. If you or someone you know is interested in buying or selling a business, please call us at 913-383-2671 or contact one of our Apex Business Advisors today!