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Most people in the U.S. don’t jump right into a dream home — I know I didn’t. Instead, they usually start out with something modest and gradually upgrade. When they’re ready to sell, they try to make improvements and add value to the property to maximize their return. In the same way, if you’re planning to sell your business, the smart move is to work intentionally to boost what the company is worth — its enterprise value.
Enterprise value is the aggregate value of your business. However, owners need to remember there are a number of subtractions from that number resulting from debt and transaction costs, such as legal advisors and business brokers. This reminds me of selling my first home, then seeing how much we sold it for and all the line items of various people getting a slice.
Many business owners don’t dive into improving enterprise value as deeply as they should. That’s because they’re more comfortable with the organizational tasks in which they’ve got some expertise. But if you want to create the greatest value for yourself, your team and the legacy of the brand, you have a responsibility to get comfortable. The good news is that you can consciously drive enterprise value if you understand it.
Related: Let the Other Side Win If You Want to Negotiate a Truly Great Business Deal
How to increase enterprise value
Like many organizational projects, driving enterprise value requires good planning. But no plan works if you don’t know what you really want. So start off by setting a clear expectation. That might mean selling in five years and trying to get the value of the business up to $1 million or $100 million.
Once you’ve got those parameters, ask yourself, “How do we get to that goal?” You’ll realize just how big of a bite increasing value and finishing a sale is to chew, and that’s common. There are performance documents to pull together (usually based on trailing 12 months), appraisals to get, marketing, negotiations and other jobs involved. That’s a big reason why 54% of brokers say you should allow anywhere from six to 11 months to complete a sale.
You’ll also need to find your valuation range, which usually requires leaning on a financial measure, such as earnings before interest, tax, depreciation and amortization (EBITDA). Hire professionals to look at dynamics around your business, such as size and industry. They then can find some “comparables” or “comps,” which are companies similar to yours and find out what they sold for. Each comp value is expressed as a multiple of your financial measure, such as five times EBITDA. By looking at the low and high end of your comp values, you’ll discover a range for where your company could likely sell. This scenario is like your real estate agent letting you know what similar homes in your neighborhood sold for.
As you develop this profile for your industry, pinpoint what each company has that is contributing to their price point. In a home sale, you might see factors like finished basements, proximity to transit or energy-efficient appliances provide an edge. For companies, competitive factors that elevate value could be dedicated personnel, intellectual property or the number of strong brands within the business. Can you bring any of those drivers into your own business? If so, you might be able to push your company to the higher end of the valuation range.
Keep in mind as you look at value drivers that not everyone will see them the same way. A pool might be a negative if you’re buying a home and have young kids running around the backyard. If you envision your family relaxing in that pool every summer, though, suddenly it’s an asset. So it’s important in your company sale to know what kind of buyer is attracted to specific factors and to highlight or build the factors that attract the type of buyer you want to sell to.
Related: How to Maximize Your Company’s Value Through Marketing
Prepare to grow
In many cases, when a company goes through the process above, they realize that to sell in the timeframe they want, at the price point they want, they have to change some of their plans or ways of operating. The latter often means opting to grow faster at a faster rate. How you grow will depend on your culture and resources but can include options like investing in sales and marketing.
In the social media age, improving your online presence can be a great way to add value and grow. Your website and social media channels provide avenues for you to offer a higher “wow factor” that leaves people impressed and willing to engage with you. Statistics support the idea that social success matters. 77% of consumers will choose a brand over a competitor if they have a positive experience with that brand on social media, and 91% of executives anticipate that their company’s social media marketing budget will go up over the next three years. So make sure your online channels reflect the same experience people get with you face-to-face.
When setting a growth target, remember that small percentages can fool you into thinking there’s not much difference — 5% might not feel all that far from 8%. But when you apply a higher percentage for a few years in a row, comparatively, it can translate to millions of dollars more in added value.
When you’re preparing to sell, reducing your tolerance of things that don’t add to the company becomes more important, so you end up with the highest growth and final valuation possible. Ultimately, that reduced tolerance should translate into improvements in the way you manage the company.
Related: 5 Ways To Create Value From Your Intellectual Property
Creating enterprise value supports everyone
Many homeowners who don’t plan well before selling their home end up scrambling to make improvements they should have implemented much further in advance. They never end up being able to truly enjoy any of those improvements and instead go through the sale frazzled and stressed.
Don’t make their mistake. By striving to create additional enterprise value well before you exit your business, you’ll keep more control of your choices and have the chance to feel the satisfaction of everything coming together. Most importantly, it will help you think more critically about the way you manage and, subsequently, improve your leadership. Because that grows both you and the business, it’s a win for everybody.
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