Creating a valuable and equitable business involves strategic planning in all aspects of your operations. This can involve strategically managing your capital, building a tangible brand, diversifying and re-investing in your operations. Your business should operate as an asset to itself, and all of these factors are important to ensuring sustainable value and equity by the time you’re ready to sell your business.
In their narrowest sense, "equity" and "value" refer to dollar amounts at a given point in time. Equity is your assets minus your liabilities – for example, if Kate has a fleet of cars for her bakery business worth $50,000 (her assets) and she has $15,000 left on her fleet loan (her liability), she has $35,000 of equity in her business. Value is the monetary worth of an asset at a given time - if your business generates a profit of $120,000 per year, you can say the business has an ongoing value of $120,000 per year to you.
In their broader senses, "equity" and "value" include non-tangible assets that will help your company generate revenues or reduce costs in the future. For example, you may derive equity from negotiating an exclusive sponsorship, offering a customer loyalty program that increases sales, or a strong relationship with a vendor to be able to negotiate a lower price per unit.
Your brand is more than just your image or reputation in the marketplace – it’s the desire of your target customer to buy from you because they believe you have a unique selling differential. This might include your price, which positions your company in the marketplace, or customer service, which sets you apart in customers’ minds if they’ve had positive experiences.
Marketing is not advertising, PR, social media and sponsorships, which are all forms of marketing communications. Marketing is the activity, set of institutions and processes for creating, communicating, delivering and exchanging offerings that have value for customers, clients, partners and the communities in which a business operates. In order to effectively market your business, you need to make a coordinated effort to connect your product to your pricing and place of sale.
One way to turn your marketing into an asset is to create an inbound marketing sales funnel in order to keep customers and potential customers coming back to your website for your educational content, including blog posts, white papers, podcasts, videos, survey results and other content. When you sell your business, you can show that your inbound marketing is an asset using data from your digital engagement, including number of website visitors, page views, leads, conversions, click-through and sales, which show buyers the monetary value and growth potential of your business.
When you sell your business, a buyer will want to know your historical, current and long-term financial situation. Setting up a strategy to manage your capital is important for optimizing your value and increasing your selling price. Areas on which you’ll need to focus include:
Building cash reserves and keeping debt low for multiple years will help build your business equity and value, increasing your eventual sale price. If you can defer taking a raise in salary the final few years you own your business in order to use that money to keep debt low and cash reserves higher, you might end up with more personal cash based on a higher selling price.
Exclusive or special deals and relationships with vendors, suppliers, trade associations, charities and other partners can strengthen your sales funnel and increase your value. For example, if a local sports medicine practice can become the official athletic trainer of its area's college or university sports program, that's an asset its competitors can't duplicate.
If possible, look for ways to diversify your business into new product or service lines. For example, a restaurant owner might consider opening a catering business using their existing resources. This diversification also opens up new sales opportunities and increase awareness through different outlets. This type of business expansion requires careful planning, but if executed correctly, offers new ways to increase revenue and the final sales value of a business.
One way to increase sales and revenues is to re-invest profits back into your company. This could include retaining top employees with bonuses and raises, replacing or repairing machinery to make products cheaper, replacing older trucks to reduce maintenance and operating costs, or buying instead of leasing your workspace. Some benefits of re-investing in your business include avoiding debt, no dilution of ownership through seeking outside investment, and a demonstration of confidence to potential investors.
Re-investing capital can temporarily decrease your profits, so you'll need to work with your accountant to make sure you can show a potential buyer why profits were not higher during periods of re-investment, how that re-investment increased revenues, and what this will mean to the company in terms of sales, revenues and profits for the immediate future. In many cases, re-investment improves a business's long-term value more than not spending that money in order to increase a company's short-term equity or cash value.
Business buyers want to know the balance sheet value of a business at the time of sale and the annual profit they can take out of a company, but more importantly, they want to know what type of long-term equity and value the business has. Buying a new machine at a cost of $75,000 that will reduce your production costs by $25,000 per year for the next five years adds $125,000 worth of long-term value to your company, while not making that purchase only strengthens your balance sheet value by $25,000. The short-term cost of buying that machine will be made up in three years, and every additional year of use contributes to your long-term value.
It’s important to have a plan in place for the transition period once a buyer is interested in your business. When someone buys your business, will you and your key employees leave? If so, how likely is it that a new owner will be able to operate the business as well as you and your staff did? Remember, many people who buy a business don't plan on just doing as well as you did—they believe they'll be able to do better.
Take a look at your key staff members and determine if you are too reliant on one or two key employees (such as a lead salesperson). Can you stay with the business as a consultant for one or more years after you sell your business? Can you offer one or two key employees a bonus to stay with the company one or two years after the sale? Do you have a written operating manual that provides not only day-to-day directions for running the company, but also some institutional memory and strategies for the future? Having a plan for transition once your business has been sold will make the process easier on you and your future buyer.
If you want to create a business you can sell for its optimal potential selling price, you must build business equity by creating a company that has definable value beyond its balance sheet that can be transferred to someone else. If you can't sell your company today with the confidence that a competent buyer can operate it as profitably—and hopefully more so—as you, then you have not built the right kind of equity and value in your business for an optimal sale price.
Do you own a small business or plan to start one? Learn how Seacoast Business Banking solutions can help you grow your equity and create a saleable business.