When you decide to sell your business, one of the most important questions is how much your company is worth. After all, small business owners see sales proceeds as their security for retirement. The question of how it can be increased relates directly to your company’s value.
You can increase your company’s value. Qualitative influencing factors, also called soft criteria, have a significant influence on the valuation of a small company. They provide information about future developments and take into account company characteristics that cannot be measured.
The most important qualitative possibilities to increase the enterprise value of medium-sized companies include:
- Reduce owner dependency
- Document organizational processes
- Increase customer loyalty
- Promote employee qualification and loyalty
- Define corporate strategy
- Make investments.
1. Reduce Owner Dependency
Perhaps the most important influencing factor when evaluating medium-sized companies is the company’s dependence on the owner. Particularly in very small businesses, the owner is also the managing director. The question every prospective buyer asks is what happens when the owner leaves. This gives rise to further questions. Do customers or employees leave the company if the owner sells? Do sales collapse after the company is acquired? How much is technical, operational, and financial know-how exclusive to the owner?
In the case of external company succession, it is best to reduce its dependence on the owner to dispel worries that the company is worthless without the owner or that a change of ownership might have negative consequences. Therefore, owners should always ask themselves before selling a company: What happens if I am no longer there? Preparatory measures that enable the company to run independently are worth gold for sale.
What should I do?
- Give employees more responsibility.
- Pass on know-how to employees
- Build up a second management level.
2. Document Organizational Processes
Due to their size and short communication channels, business activities in small companies are often coordinated on-demand. While everyone in the company knows who is responsible for what, it is more difficult for an external person to understand business processes and determine responsibilities.
Different levels of knowledge lead to different risk assessments when selling a company. This information asymmetry must be reduced to ensure the transaction’s success. Education, disclosure, and risk distribution are means to give buyers (who, by definition, know less about the company) security and reduce their perception of risk. The type of risk, information technology, and monetary or contractual measures can create a win-win scenario for seller and buyer and lead to a successful transaction. Carefully prepared documentation of relevant information regarding the company helps to familiarize the potential buyer with the company quickly, give him security, and reduce his perception of risk.
For this reason, processes should be documented as thoroughly as possible so that an outsider can understand how the company works. This is extremely important because a prospective buyer wants to understand a company before buying it.
What should I do?
- Create an organizational chart
- Outline processes
- Define responsibilities.
3. Increase Customer Loyalty
How big is the company’s most important customer? Are there any contracts with customers? Business owners should be prepared for these questions when selling. Prospective buyers want to assume as little risk as possible with their investment and protect themselves accordingly. As a company seller, you can mitigate their fears by clarifying whether the company is sold irrelevant to the customer. This can be achieved through appropriate preparatory measures.
What should I do?
- Conclude contracts with customers
- Maintain customer relationships
- Hand over customer responsibility to employees.
4. Increase Employee Qualification and Loyalty
In a tight labor market, the availability of skilled workers gets worse day by day. This impacts the M&A market. Through company acquisitions, companies specifically “buy” personnel or know-how. It is not just an empty phrase that employees are a company’s most important resource. Their knowledge, experience, and competence are associated with the employees, so retaining employees in a small company is essential.
What should I do?
- Conclude long-term contracts with employees
- Investing in training
- Further promotional measures for employee loyalty.
5. Define Corporate Strategy
Rarely does a prospective buyer maintain a company that he buys exactly as he bought it? That is precisely why a long-term corporate strategy is of great importance. It defines corporate goals and guides the company’s growth. Whoever sells a company sells a perspective. Buying a company is often a bet on the future. For this very reason, it is advantageous to have some kind of roadmap for its future development.
What should I do?
- Show perspectives
- Working out potential
- Develop strategies.
6. Make Investments
Often the thought arises that if a small company is about to be sold, it is no longer worth investing in. The opposite is the case. This can be clearly explained with the simple example of selling used cars. When selling a used car, you bring the vehicle back into shape before it is sold. The vehicle is cleaned, scratches are polished away, and, if possible, one invests in smaller repairs. These cosmetic repairs yield a significantly higher sales price on the used car market. This is similar to the sale of a company. During the sales process, the company should show itself at its best. This doesn’t mean the seller must buy a new fleet of vehicles. Still, even small investments in updated office equipment, for example, can improve the company’s overall impression, which has a positive effect on the sale’s proceeds.
What should I do?
- Make further investments
- Bring operations into shape
- Show full commitment.
What Definitely Shouldn’t Be Done
In addition to the things you should do to get more sales, there are also some things you should avoid before selling. View them more or less as mirror images of the measures that increase company value. If you want to sell your small company at an attractive price, you should by no means stop investing energy in the company. This relates to the quality of the company’s services or products, employee management, long-term strategies, investments, and many other company areas.
What not to do:
- Stop investing
- Reduce marketing budgets
- Reduce the quality of services or products
- Neglect employees
- Shut down engagement.
And Then Comes Marketing
Like any other product, small companies are usually advertised to draw attention to the sale and generate demand. The immediate question is: How do you market a company professionally?
In general, the successful marketing of a company depends on three different factors:
- Professional sales documents
- Selection of marketing channels and confidentiality
- Address and timing.
Professional Sales Documents
Before the sale begins, all documents relevant to the sales process must be prepared. This includes both quantitative and qualitative information. While quantitative information includes annual financial statements, qualitative information relates to “soft” characteristics such as customer structure, employee qualifications, and owner dependency. Appropriate data preparation and creating a clear and complete company presentation are mandatory before initiating the sales process. It is important to ensure that the company to be sold is presented from its best side and complete the presentation.
Selection of Marketing Channels
Of course, no two companies are the same, which is precisely why every company needs an individual marketing strategy for sales to find a buyer. In general, every marketing strategy is based on three channels that can be used to address potential buyers:
- Buyer network
- Contact lists
- Advertisements on company exchanges and in trade/industry magazines.
Approach and Timing
In addition to sales documents and suitable marketing channels, approach and timing also play a role in marketing. The approach determines whether prospective buyers are contacted by post, telephone, or email. Use the approach attracting the highest degree of attention from potential investors. Of course, costs should also be taken into account, concerning the number of possible contacts. In most cases, it is advantageous to contact all potential buyers at the same time. The parallel negotiation with investors strengthens the seller’s negotiating position and prevents delays in the sales process.
Sprint to the Goal
To get a higher return on the sale of a company, it is necessary to put all of your energy and strength into the company. That takes a lot of discipline and time. We advise company sellers to put themselves in the shoes of potential buyers and prepare the company for the sale accordingly. Specifically, this means that the company should show its best self, document processes, and ideally develop in a positive direction. To the entrepreneur, selling a small company is like a runner’s sprint at the end of a marathon. Only those who give everything again will win.