Business Sale Readiness Factor #2: Profit maximisation
Wednesday, 31 March 2021
The value of a trading business is usually derived from a multiple of its maintainable profits. So, it stands to reason that if you maximise the profits of your business, not only will you benefit from the wealth this generates but you will also maximise its value when selling it. What’s not to like?
I set out below three differentiators of businesses that maximise their profits from those that don’t. It’s far from an exhaustive list, but it hopefully gives some helpful pointers:
1. Regularly review costs and process waste
It’s pretty straightforward to work through your profit and loss account and strip out any unnecessary or avoidable costs. For every £1 saved and added to profit, the value of your business will go up by a multiple of this amount. It’s hardly revolutionary business advice, simply good working practice, but it’s surprising how many businesses don’t get around to doing it.
Of course, it’s important not to take the cost cutting too far, you don’t want to damage the longer-term capability of the business. But sometimes simply getting back to basics and obtaining multiple quotes for some of your core supplies is enough to make a noticeable impact.
What isn’t overlooked by those businesses that really maximise their profits is the less obvious costs arising from process waste. A review of your profit and loss (P&L) account won’t highlight these costs. You need to undertake a ‘waste audit’ to review your operational processes and identify things like over-production, delays and defects.
We have facilitated waste audits with a number of our clients and we usually find the greatest successes are those that involve a cross-section of the operational teams; those that really know where the waste is but may not have felt they had the platform to highlight this before.
2. Knowing your profit margin by product/service and aligning strategy to this
Plenty of businesses grow their top-line turnover without this translating to a proportionate increase in their bottom-line profit. Why is that? It’s often a sign that the business owners don’t understand the profit margins on their products or services. Without this knowledge, they’re drawn to selling the easiest products/services to sell rather than the ones which deliver the greatest profits.
A buyer of your business will need to know your profit margins by products/services so they can devise a strategy to maximise the return on their investment. In turn, it also gives them the ammunition they may need to justify paying you a higher price for your business.
3. Having financial forecasts prepared for at least the next 12 months with supporting assumptions
If you’re confident your profitability is going to grow in the next few years, don’t leave it to chance that a buyer will pick up on this; quantify it and then factor it into the business sale price. You’ve got to do the work yourself. Document it with financial forecasts broken down on a monthly basis and using an integrated P&L, cashflow and balance sheet. Then back this up with robust written assumptions.
In a business sale last year, we added more than a million pounds to the sale price by doing this. It’s hard work, but the investment is well worth it.
The above key factor is taken from our free and insightful ‘Sale Readiness’ diagnostic tool which aims to give business owners a score on the nine key factors determining:
How attractive your business is for sale;
Whether you will maximise the final business sale value; and
The efficiency and smoothness of your business sale process.
The online tool takes only five minutes to complete and your results will highlight the top three factors which are working well and the top three factors which require the most attention before you consider a business sale process. You will also be able to see how you compare to the global benchmark (average scores of all completed diagnostics) on each of the nine factors.
Of course, if it would be helpful, my team and I would be pleased to discuss your results and guide you on your next steps. In addition, each month I will be releasing a blog, just like this one, on each of the nine business sale readiness factors to help bring them to life.
So, if you’re interested in selling your business, why not get in touch with me directly and start bringing your dreams to reality.
Next month’s blog: Business Sale Readiness Factor #3: Sale Process Preparation