How to Increase the Value of Your Business Before Listing It

LCT Staff
Posted on December 1, 2000

For over a century, West Texas feed lots have honed the science of preparing cattle for market. Serving cattle ranchers, these feed lots have the experience to provide cattle buyers what they want ? whether that?s fat cattle, corn-fed cattle or cattle whose meat will meet certain government inspection grades. The rancher knows in advance what his options are to market his cattle.

But there is no such time-tested science for selling a limousine company. Usually, the sale of the business is the single largest transaction in a limousine owner?s lifetime. Yet many limousine business owners do not know how to prepare their business for sale.

Fortunately, there a number of steps limousine owners can take to increase the value of their business before it goes on the market.

One of the first steps is to contract with an experienced industry professional to have an independent business valuation prepared. This will reveal your company?s fair market value ? the amount at which the property would change hands between the seller and buyer. This assumes that neither party is under any compulsion to buy, and that both have reasonable knowledge of facts concerning the business.

The independent valuation will give the seller a benchmark from which to make improvements. The valuation, along with the normal question-and-answer dialogue that is included, will point out opportunities for value improvements. Our firm and others offer up to two follow-up annual valuations at no charge to allow the business owner to track progress in value improvement.

Tap a Consultant?s Expertise The next step is to consider hiring a professional consultant to assist you in preparing your business for sale. An experienced broker, adviser, or specialist in mergers and acquisitions can recommend a number of ways you can put more money in your account at closing.

For example, establishing standard accounting practices will enable non-industry buyers to better understand your business from a financial perspective. Proper policy and procedure manuals and business practice documentation will give potential buyers confidence and assurance that they will not have to spend the time and energy to establish these after the sale.

You can also fix accounts receivable and short-term cash flow issues. Moreover, there are ways to improve efficiency and to cosmetically enhance the business in the short term to add value to the business.

Contract with a professional adviser to assist you in increasing the value of your business over the longer term, a six- to 24-month interval. The primary focus may not be growth. Often, there?s greater value in improving the business at its current revenue volume.

The additional time enables coaching, disciplining, team development, restructuring, improved financial performance and other major value enhancements.

We have worked with companies that have sold to Carey, Precept and others. For these sales, we have spent up to five years focused on creating value to maximize the sale. Hire someone who knows what potential buyers want and can make recommendations and coach you. The goal is to reconfigure your company to meet prospective buyers? expectations at the greatest value to you.

Buyers usually focus on earnings ? cash flow; earnings before interest and taxes; earnings before interest taxes, depreciation and amortization; or discretionary earnings ? to establish the basic value of your business. Over time, you can influence these values, regardless of which method a particular buyer may use to value your company. The treatment of depreciation, the use of leases, the staff you employ, the average age of receivables, your customer mix and the revenue concentration by account, for example, can all be improved to increase the value of your business.

A couple of years ago, a client had a single customer that generated 60 percent of his company?s entire revenue. We determined that this situation would be a serious detriment to not only selling the business, but to selling it at a premium dollar for the client. We spent 18 months working to reduce the relative size of this one account. When the company sold, the account produced the same annual volume but was only 20 percent of the total revenue. Buyers often consider a dominating account as a reduction to the value of the business ? and rightfully so.

The Business Owner Must Be Motivated to Sell First, a business owner must be motivated to sell the business. Being motivated to increase the value of the business is a completely different and separate activity. Often, it is all a limousine operator can do to stay motivated during the sales process.

How can you create the required motivation and determination to carry you through the process? Consider the potential. Would you be willing to make the necessary effort if you could increase the value of your business by $200,000, $400,000 or maybe a half million dollars? Try to understand the relationship of the years you have invested to grow your business. Most sellers have been in business more than 10 years. Another six to 12 months might mean more additional net proceeds than you earned during the entire previous 10 years.

Become profitable. It sounds almost ridiculous to say, but most businesses are not profitable. Most business owners are satisfied to earn a living. Buyers usually are not looking for a job; they are looking for a business that earns enough profit that can justify a reasonable return on their investment.

Develop an exit plan. An exit plan is a specific window of time with specific agendas a seller must complete before selling the business. We have found that a seller who has an exit plan will create more value quicker. Establish ?need values.? A need value is what a seller wants and needs to complete a transaction. A seller who determines what is needed to retire, or what is needed to take her to the next adventure, will work harder to accomplish those goals and thus create value faster. This is also the motivation to sell and the motivation to hang in there to achieve the need value.

The limousine industry is an industry filled with technicians ? people who can provide a satisfactory service to the customer. Most of the industry?s operators do not have rounded experience in growing and developing a successful business that can run without the owner?s active daily participation.

A significant shortfall area in many businesses is proper financial reporting. Operators can get by without it. Buyers must have financials to justify paying a premium for the business. A seller must have a timely, accurate, standard accounting method of reporting what the business has accomplished over the past three years. In fact, the seller should even be able to project what will happen in the next year or two. Otherwise, the owner will not receive the best value for the business at the closing table. We suggest using a third-party independent accounting firm as soon as size permits.

A good management team is essential. In October 2000, our mergers and acquisitions department had found a target company for a client buyer. Everything met the buyer?s profile for the ideal acquisition transaction, except the proper management team. The owner was indispensable. To save a few dollars, the seller and his wife had assumed the workload of four people. Yes, this provided money for the short haul, but cost the seller a great retirement package.

If the seller had taken the time and expense to make himself dispensable, the transaction would have completed.

Develop Consistent Methodologies Develop methodologies that let your company minimize swings in revenues and profits and cash flow. Inconsistency scares buyers. If you have summer lulls, do what you can to even out sales and thus profitability.

For example, Alan Melton, president of East Coast Transportation in Jacksonville, FL, has a major challenge with off-peak revenue drops because of North Florida weather and the service demands of a major segment of his customer base. Melton used to lose a large portion of the profits he had accumulated during the good months.

Melton, his partner Greg Franks and I developed what became known as the ?off-peak strategy.? Over time, the business compensated for this drop-off by seeking out revenue opportunities not normally considered, adjusting vacation schedules, adjusting fleet inventory to line up with off- peaks, and other actions.

Melton and Franks were able to reduce the dramatic cycles. I?m sure Carey considered this seriously when it evaluated East Coast as a possible acquisition target. Carey eventually purchased the company in the fall of 1998.

Unreported Cash Revenue Is Unproven Revenue A recent client case involved buying a New Jersey company. The seller claimed he had $75,000 in annual cash revenue. He explained that he refused to give up 30 percent of this money for taxes, so he didn?t report the revenue and saved $22, 500 in taxes. The buyer was paying two-and-one-half times earnings for the business, but would not pay for cash that could not be proven. The buyer would have paid the seller 2.5 times the $75,000 or $187,500 in additional sales price.

Many business owners spend a significant amount of time and effort eliminating profits to reduce taxes. But often in this effort, they actually decrease the value of the company to a prospective buyer.

These are only a few of many ways a limousine operator can increase the value of the business before putting it on the market. It?s worth the time and energy. The seller will increase the chances of a successful transaction and increase the money received at the closing table. In addition, more buyers will want to buy a business of greater value. Then, your intermediary or transaction adviser will be able to market your improved business more effectively and aggressively.

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