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Get the best offer when you sell.
When it’s time to sell your company, you’ll naturally want the highest price. You’ve put a lot of time and hard work into making your business a success. It’s your most precious asset, and your sales price should reflect that.
“Business owners take great pride in what they’ve created,” explains Scott Cathcart, head of corporate finance at Truist. “But it’s hard to put a price tag on a lifelong project.”
You’ll want to make sure your business is as attractive and highly valued as possible. Here are five ways to increase your business’s valuation:
Buyers want to see growing revenues, but they want to see that revenues are diversified and can be sustained at a higher level. The more ways you can earn money, the better, whether that’s by focusing on new customer groups or adding products.
“You want to minimize customer concentration,” Cathcart said. “Sell your product to a broader number of buyers.”
But how can you uncover a potential new audience or decide what products to launch? Meet with your customers to gain better insights into what they want, said Will Mitchell, a professor of strategic management at the Rotman School of Management. “Companies that have deep understanding of their customers, and what they’re willing to pay for, will be able to create new opportunities,” he said.
Gross margins—the difference between revenues and costs—provide an important metric when valuing a business. The bigger the gap between the sales price and the cost to make the product, the better, Cathcart said. Typically, businesses improve margins by running more efficient operations. That might involve reducing overhead, cutting unnecessary staff, or investing in processes that make the company run faster.
“You want to do more with less,” Cathcart said.
Companies will also want to chart better margins over several years—it can’t just be a one-time tactic to make the business more attractive in the short term. Owners must manage their expenses consistently and plan for future expenditures. “Know what purchases you’ll have to make, or what improvements to your infrastructure you’ll need to do,” Cathcart said. “Having good visibility on what that looks like affects what the valuation will be.”
Buyers look for a winning executive team. Even though you may be a star, you also need to have top-notch people around you. They will be key to business success after the sale.
If the team isn’t strong enough, a buyer may have to find other people to run the business. “That could lower the value if there’s not someone there to immediately run it,” Cathcart said.
Companies are more willing to pay a higher premium if there’s a clear road map to achieving higher returns down the line, according to Cathcart. Sellers need to clearly understand what bidders expect from the sale and deploy the right strategy to help achieve the buyer’s goals.
“Some buyers might expect a certain return over five years,” Cathcart said. “If you don’t have a road map to that return, then you’re not going to get paid a whole lot for your business.”
You will need to provide high-quality, substantiated, quantitative, and qualitative financial forecasting that can indicate future results.
If the math doesn’t add up? Keep improving the business. “It’s like exercising—you can run a six-minute mile or a seven-minute mile,” Cathcart said. “If you want to do better, you’ve got to tighten up, time yourself lap by lap, and introduce measurable metrics.”
Ultimately, if you can improve your business to a point where a buyer can see the potential for sustained growth, you’re likely to command the price you want.
“You can work more on the business,” Cathcart said. “But then you have to deliver.”
Don’t sell for anything less than you deserve. Talk to your Truist relationship manager about boosting your company’s valuation.