EP 118: Improvement Tips to Help Make Your Business More Saleable in 2024

Ed Mysogland  0:20  
Welcome to another edition of the defenders of business value podcast. I'm your host, Ed Mysogland. And today, we're gonna do a deep dive into a topic that I hear from a lot of listeners about how to improve their business in order to either a make them more valuable or be make it more saleable, or likely see how to do both. And so today, we're gonna, we're gonna dive into some strategies that you can easily employ in your business. Now, before we get started, I mean, the first thing, the first thing we need to establish is, regardless of whether your business is on the market or not, you, you have to assume that you're going to be unable to sell the business. And that that is the most conservative posture you can take where you are in a spot where the decisions you make are, are optimal for you, assuming you're going to keep the business. And don't worry about trying to make the business more marketable for a particular type of buyers, or particular buyer set. Because it just may or may not happen. So always operate as if you're going to be the long term owner. All right, so let's talk about the how to make the business more saleable. Alright, the first segment is optimizing the business operations. And the first thing is shutting down poor performers. And that could be a line of business, it could be a location, it could be a type of service that you're performing. And if it doesn't make money, you need to get rid of it. And, and the pushback I, I often receive is, hey, it's, it adds revenue to my business. Well, revenue doesn't sell your business earnings, sell your business. And so where I'm heading with this is that if you take two businesses, alright, let's say you have a business that that is making $200,000 off of a million dollars in revenue. And then you have a another business that's doing $2 million in revenue, and making 200,000 in cash flow. So which one's worth more? Well, theoretically, they're probably worth pretty close to the same because the earnings that are being generated can only support so much of officers comp as well as debt service. So So my point is, don't worry about the revenue, worry about profitability. So next thing in optimizing business operations is personnel. So a lot of a lot of business owners are reluctant to cut people. And this day and age where it's so hard to find good people, I certainly understand why but if there's an opportunity that you might be able to eliminate and automate, that's probably not a bad road to at least explore. Next is managing receivables. So when you have a lot of receivables, right, receivables eat up cash, and the the longer your receivables are being strung out, the more risk your company has and as and when there's more risk to your company, theirs is worth less to the buyer. So what we want would be ideal is to to sell off or to clean up the old receivables. Alright, so anything that is you can you can take a look, either through Robert Morris, or it's sorry, it's not it's no longer Robert Morris anymore. Its Risk Management Associates or the IRS all have ratio analysis where you can look up and see what is the average amount of number of days that businesses tend to have receivables and then you can back into what you need to do in order to clean those up. But the the more optimal your cash machine is meaning how quickly you can convert that receivable into cash. The more valuable your company will be. Alright, number two, legal and financial adjustments. We often, you know, when there's disputes, I mean, most business buyers don't want to get involved. Alright, just because they don't know what's going to happen and, and whether that be a dispute with employees or vendors or, or competitors. You know, that's one thing and but I'm going to add divorce in there too. So when there is any kind of when the business is being stressed tested legally, you may you want to get, you want to get all that behind you before you enter the deal theater, because I can assure you that any buyer is going to either a pass or B, they're going to paint penalize you from a value standpoint, just because of the fact of what's going to happen following this, this set of circumstances. Alright, next, you want to improve your margins where you can, I've always said, and you've heard me say this repeatedly, it's not about revenue, it's about earnings. And the more the more you can squeeze out of your operating profit, the higher value your company will be, or the end. So when you start examining, you know, how to reduce operating costs. There are lots of lots of places to look, I mean, the The first is a lot of where your discretionary expense, your discretionary spending is, for example, meals and entertainment, travel and entertainment. The subscriptions, one of the, you know, monthly recurring subscriptions that everybody seems to have, one of the strategies that somebody shared with me is that every year and we do it here at the, at the brokerage where we change our credit card every single year, and we just changed, you know, get a new credit card with new numbers. And it forces us to examine subscriptions. And so I would suggest doing something similar, but my point is that in the value game, it's it's a battle of inches, not, it's nothing more than that. So the more we can squeak out, the greater the value, and the next on legal and financial adjustments, I would look at handling long term commitments. When you have, whether it be a lease, I can tell you, especially for those companies that are SBA candidates, I mean, that lease is going to have to be the length of time for the SBA term, which is 10 years. Now, that doesn't imply that you need to go out and renegotiate your lease. Not at all your what you but what you do want to to look at is what are your long term commitments? And what's the likelihood that they're going to transfer to the next to the next person. And so as you as you examine them, you know, there's different ways that that the agreements can be transferred to the buyer, whether that be through assignment or through through a stock sale, where the they're automatically assumed, but regardless, you need to get your arms around what is what are the commitments that you have made that are let's say more than three years out, because we either A, the buyer will may not want that. So it's not like I said, I'm not implying that you need to go out and, and, and solidify contracts. And you know, but you do need to get your arms around where those contracts are and what the risks are to your company. Alright, so let's move to segment three which is marketing and sales you know, if there's unproductive marketing expenses, condom you know, the so often and this is a probably a terrible example but like a lot of the charitable expenses you know, while we always add them back, you know, as you're looking at selling the company, you know, if you want to be charitable, do it do it personally, not necessarily corporately, and you know, drop as much as you can to the bottom line. So next you want to you want to

Ed Mysogland  9:52  
you want to address any kind of sales trend, and I know this is easier said than done, but When you have declining sales, you need to understand why it's not so much, you know, every, every small business has ups and downs. But the problem is when you can't explain why. And that's where, again, back to the buyer, as a buyer looks at this particular business, this is about predictability, that you have a clear understanding of how this business works and how you get revenue, and then it's, then it's just a matter of adding, adding sales to the, to the engine that you've already built. So you need to keep in mind what kind of marketing you're doing, and what kind of sales promotion, and what kind of adjustments need to be made in order to dial that in, so you understand where business is coming from. And then, you know, it's funny, I have a number of people these days that are, that are asking for our help to grow through acquisition. So it's true that if you, you know, as you get critical mass, you become, you know, you've become targets for bigger companies and, and subsequent to private equity, and then private equity continues to roll up companies into and until you have a extremely large operation. And, and again, I mean, it just kind of depends on as far as acquisitions go, rule of thumb is always it's about 20% of your size. So if you're a million dollar company, you shouldn't be buying a company that's, you know, that's valued of 200,000 or more, because there's just too much risk, and conversely, and that's a general rule of thumb as you work your way up. But my point is that, we're seeing lots of people that are coming to us that are looking at growing through acquisition. And while ordinarily, it depends where you're at in your ownership lifecycle, if you have some runway, alright, Aqua growing for acquisitions, a good idea, but if a sale is eminent, I would probably pump the brakes and not do it. And the reason being is that it's the acquisition is really the easiest part of this, it's the post, PMI post merger integration. And that's where the challenge is, is getting, you know, all the systems aligned, all of the people aligned, all the customers aligned, and then you have your opportunity to get your one plus one equals three. So as we as we're looking at this particular type of growth, you really need to be mindful of how you're going to do that. Because, you know, if, you know, not only are you probably taking on debt to do so it's just there, there's more to it. Before you recognize the value of the acquisition, so, so the long and the short of it is if you have time, if you're you know, two to three years out of out from selling, boy, now's a great time to be picking up companies raps. Absolutely. SBA is doing some remarkable things with small business expansion loans. And if you if you're interested in learning more about that, just drop me a note and I'm happy to share, share with you what I know as well as the people I know that are doing it. So, but be sensitive, that's a that's a big, big under undertaking that can erode value just as fast as it can, can grow it. Alright, some additional thoughts, you know, anytime let's talk about customers, I mean, a diverse customer base will always be worth more than a one that is either there's a concentration and type where there's a concentration as a single customer. So you want to diverse diversify as much as you can. Because again, it diverse as the name implies, it diversifies the risk also. Next, you want to, to develop key people in the organization, you know, give them more responsibility and help them become more involved in the leadership of your company. And I say that because, believe it or not, they may be your buyer. And like I was telling you about expansion loans. SBA is also doing great things to to help keep people become owner operator raiders in their business and, and whether it be through fractional sales or through an outright sale where you you as the business owner can remain for an extended period of time, but nevertheless you get the, you take some risk off the table. But my point is that you always need to be preparing your bench. And, you know, everybody always asked, well, how do I do that, you know, the the easiest, you know, aside from you know, hiring exit planner and, and coach and kind of digging deep, if you want to just kind of dabble in this a little bit, take a day off, take a week off, and don't call just see, just see what fires begin to burn. And therein lies where you will want to start focusing your attention. Alright. And the other thing, the real easy thing for you is to start documenting processes. Alright, next, is I want you to clean up your financials, you know, confused, buyers don't buy. And, you know, and I can't tell you how many, how many deals fall apart because or don't even get off the ground. Because of just the the total mess of the financial statements. If, you know, if a bank won't lend on it, you know, chances are someone's not walking around with, you know, a few 100,000 Or a million dollars to buy your business, just because you keep crappy records. And that and again, poor financial, a poor financial record keeping will now capsize your deal. And so, my point is that, you know, clean, clean things up the the cleaner, the better, you know, I don't wanna I don't want you to I want you to minimize taxes as best you can. But I want you to do it legally as well as I want you to, to be in a position to to cite all of your discretionary expenses on your on your income statement that drives the value. And then lastly, believe it or not, most business owners don't have a plan of how they're going to run their business. And I think it shocks business buyers. Because most business buyers, if especially if they're if they're being funded by the SBA, they're required to have a business plan. And so it's kind of remarkable that these business owners come to the business sale and and the business virus or will you know, what's your, what's your plan? You know, is it written is it you know, how are you going to grow the business, and they're unable to share that. And so, so my point is that you probably need to plan as if you're going to own the business for an extended period of time. And that can be one page, or it can be a living document that is extensive, and showcases how you're going to own and operate the business for the next few years. Alright, so those are the key things that I wanted to share with you and, you know, strategically preparing your business for sale, it involves not just, you know, cleaning up financials and operation, but position as a thriving and most importantly a scalable entity. So by so when you combine clear strategies, and, and, and, and examples of how you are going to grow, you know, you can paint a picture of how the next guy can elevate your company to that next level. And, and, and again, there's there's a lot of things you can do the but if you if,

Ed Mysogland  19:11  
as I'm going to lead you, I think the first the two things that you need to do is number one, you got to clean up your financial statements. And number two, you got to you need to to see where the chinks in the armor are. So take a couple days off and find out you know where the fires are burning. All right. So that concludes today's episode. I hope you enjoyed it. And again, I recently I've been doing solo episodes because people have been asking for different things. So if you have an idea for an episode or you'd like me to deep dive into how businesses are valued or how we sell companies, I'd be more than happy to to do You know, devote an episode or two or 10 to, to providing you the information that you need. So, as always, you know, thanks so much for for joining me. I value each and every one of you for listening. And if you haven't subscribed or you're a new listener, I sure would appreciate if you would subscribe. And we'll see you next week.