Diversify your revenues.
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.
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.
Improve your margins.
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.
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.”
Improve your executive team.
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.
Plan for the long term.
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.
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.”
