9 important tips before you sell your business

To get an idea of what measures you can take to increase the value of a company, you should take the buyer’s perspective and consider how a company is valued in theory and practice. The following list is not exhaustive, but should give you an idea of the measures you can take to increase the value of your company. In the following, we will focus in particular on measures that can be implemented in the short term or within two to three years.

Measure 1 – Put everything about your company on paper

Many medium-sized companies have grown over the years, sometimes following a strategic plan and sometimes opportunistically. Along with this, everything else has also grown, such as the number of employees, the customer and supplier portfolio, the markets, the processes, the IT used, etc.. As in the beginning, the entrepreneur continues to run his company after many years on the basis of his entrepreneurial intuition and many years of experience. This approach is perfectly understandable, especially as it has been successful to date and has therefore proven itself from the seller’s perspective. A potential buyer naturally takes a completely different view, as he sees the risk of a monopoly of knowledge which, in the worst case scenario, could be lost after the departure of the former company owner. He therefore wants to be sure that the company will continue to operate after the takeover without any loss of business processes or business figures. It is therefore essential that the knowledge that was previously only in the entrepreneur’s head is put down on paper in a detailed and comprehensible manner. This is not about writing a 200-page manual, but about presenting the most important parts of the business model transparently. Below you will find a list of possible components:

• Presentation of the corporate strategy
  1. Definition of the market and identification of the competitive situation, including market volume and sales of the individual competitors. Strengths and weaknesses of competitors
  2. Positioning of your own company within the market
  3. SWOT analysis and identification of the company’s unique selling point
  4. Presentation of the product and/or service portfolio
  5. What is the sales structure in the company? Which sales are one-off and which are recurring? Are the sales contractually underpinned and for how long?
• Presentation of the customer portfolio
  1. Percentage share of the largest 10 – 15 customers in total sales
  2. The greater the customer mix and the lower the dependency, the higher the enterprise value
• Presentation of the supplier structure
  1. How important are the suppliers for the business model?
  2. What is the supplier dependency for individual products and/or services?
  3. How are suppliers selected?
• Documentation of the most important business processes:
  1. This regularly includes the purchasing, processing, controlling, marketing and sales processes
  2. Create clarity and transparency regarding the processes here

• Presentation of the IT, EDP and software used
  1. Which systems are used for which processes?
  2. Is it self-developed or purchased software
  3. Make the IT infrastructure transparent and show how it helps your company to increase efficiency and quality
• Presentation of the organization and employees
  1. Make the organizational structure and responsibilities visible within an organizational chart
  2. In the best case, you can show that the responsibilities within the company are distributed among different people
• Darstellung der Steuerungs- und Kontrollinstrumente
  1. Presentation of the management and control instruments

Measure 2 – Reduce existing dependencies in your company

A company can be dependent on various components. Small and medium-sized companies in particular are typically dependent on various factors, which are often historically based. These may be dependencies on individuals such as the company boss, individual major customers, suppliers or products and services.

A low dependency on these factors is always interpreted by potential buyers as a sign of a company’s sustainability and future viability and increases the value of a company in their eyes. However, such things cannot be changed overnight. As the owner of a company, you should therefore start early to build up a second management level, for example. In this way, you can show a potential buyer that your company is not a “one-man show”, but that knowledge is spread across various capable minds and can be transferred into the future. You should also work towards ensuring that your company has a broad customer and product portfolio. To achieve this, you need to actively change established sales and marketing strategies. The same applies to the supplier base. An active change in purchasing strategy can help you here

Measure 3 – Start reporting your profits in the annual financial statements

In their annual financial statements, owner-managed companies regularly do not report the actual earning power of the company, but rather calculate themselves poorly for tax reasons. This is more than understandable and there are sufficient instruments in accounting to show the net profit for the year in a tax-optimized manner, i.e. particularly low.

The situation changes when a company is sold, as the calculated company value depends to a large extent on the achievable profits.

As the last two annual financial statements are primarily audited during due diligence, we recommend changing the accounting policy at least two years before the actual sale with the aim of reporting the company’s true earning power.

Measure 4 – Clean up your company before the sale

Check your company for unprofitable assets such as contaminated land or loss-making factories and dispose of or reorganize them. There are often assets that can be sold separately before the actual sale of the company, such as unused valuable land. Fixed assets can be liquidated here without impairing the value of the company.

Measure 5 – Dispose of non-essential assets before selling the company

In small and medium-sized companies, it is not uncommon for business and private matters to intermingle. This manifests itself, for example, in entrepreneurs acquiring private assets such as works of art, vacation homes, wine collections and cars through the company over the years and capitalizing them on the balance sheet. Such non-essential assets are characterized by the fact that they can be removed from the company without affecting the actual business activity. At the same time, the expenses for these assets reduce the reported company income. In addition, from the perspective of the prospective buyer, these non-operating assets would inflate the purchase price by the expected proceeds from their sale without being required for the future continuation of the company. Such circumstances can become an actual obstacle to the purchase or lead to lengthy discussions during negotiations.