3 Ways to Increase Business Value and Owner Equity Before It’s Time to Sell

You’re not thinking about retirement yet, or maybe you are, but either way you want to make sure your business is ready when it’s time to sell or hand the reins down to another generation.

“The day you should start thinking about selling your business is the day you start your business.”

Barry Goldin, president of Unified AV Systems, gave a fully-packed room pause today at NSCA‘s Business & Leadership Conference when he uttered this statement to a group of integrators and consultants. The prospect of leaving your business in the hands of another person can be a bit unnerving, which is probably why a session called “The Investors’ Workshop, Roadmap to Higher Profits” was packed to the brim.

Panelists Chris Younger, managing director of Capital Value Advisors; John Laughlin, CEO and president of Conference Technologies; and Goldin were joined by moderator Michael Hester, who recently handed over the reins of his own business, Beacon Communications, and retired with no regrets.

An investment banker focused specifically on entrepreneurs, two presidents of integration firms and a man with a plan—that worked—had a lot of good advice for a room of people eager to learn what steps they should take to prepare their businesses for acquisition, sale or their own retirement.

Look to Your People

“Culture is absolutely everything,” said Laughlin. “You can’t be there every day. You can’t watch [your employees] like a hawk. You have to know you have people who believe in what you’re doing … in what they’re doing.”

That’s one of the main things investment firms like Capital Value Advisors look for when considering the value of a business for sale, said Younger. “It adds tremendous value to a company if the culture is there,” he explained.

If you know your people believe in the company’s mission and growth, it will certainly be easier to entrust your firm to them when you retire. Easier, but not easy.

“Mike did one of the hardest things to do … giving up control,” said Younger of Hester when he left Beacon Communications in his management team’s hands, led by Brooks Wood, CIO and VP of sales; Brad Walsh, president, COO; and Robin Wurst, CFO.

That’s just one of the many reasons to start giving your employees control a little earlier, according to Goldin, whose company, Unified AV Systems, is wholly owned by an employee stock ownership plan (ESOP).

Related: Empowering Employees With an Ownership Stake

Goldin says there are many reasons that others in the industry might be slow to adopt an ESOP, but that it has paid off greatly for Unified AV Sytems. It could be “fear of the unknown, lack of acquisition planning or that some might not be in a position to go down that road, but I think it might just be a lack of education [in ESOP],” said Goldin.

Whatever the reason, Goldin thinks it’s worth considering. “When you’re a 100 percent ESOP company, you don’t pay federal income taxes.” The room let out a collective gasp. “Those savings offset the cost of having an accountant and a lawyer many, many, many times over,” he said.

Earn Recurring Revenue

“One of the reasons I wasn’t ready [to sell] is because we had low RMR,” said Hester, speaking of recurring monthly revenue, which all three panelists agreed is a great advantage if not a necessity to selling your business in today’s market.

“Project revenue is like a one night stand; it seems risky these days,” Younger said, garnering applause. “Recurring revenue is like a relationship. It’s an investment, it’s predictable, you can depend on it in the long term.”

Younger said that’s one of the first considerations his firm makes when it looks at the value of a business for sale. He couldn’t hammer the point home enough.

“You’ve heard of SaaS – software as a service? SaaS companies are selling for three to six times their revenue,” Younger said.

“Value is the opposite of perceived risk,” added Goldin. “You can judge the value of a business based on how dependable the cash flows are.”

In that equation, the value of recurring revenue speaks for itself.

Plan Far, Far Ahead

“You should run your business as if you’re going to own it forever, but you can sell it anytime,” said Younger.

Of course, that’s easier said than done. Sometimes even if you have a succession plan it doesn’t play out the way you thought it would, like in Hester’s case.

“I was going to leave [the business] to my son, but that didn’t work out. Then I was back to square one,” said Hester. “The reason I got in touch with [Younger] was because someone saw our vans on the road and said, I want to buy you. It turned out not to be a good offer, but Chris gave me the guidelines and parameters to think about in the next deal. Once we found the right folks, the next step was to get them up to speed. After that, all I had to do was step away.”

Related: How to Retire with (Almost) No Regrets

That brings us back to that last step – the step you should be planning for from the very beginning.

“Start running the business as if you aren’t in it,” said Goldin. “That will demonstrate to you that your team can run the business on their own, or that they can’t.”

Either way, it’s important to make sure your people are taken care of when you sell or retire, said Hester. Many people overlook this, he said, and when they do they regret it.

“I call it the grocery store test,” said Younger. “If you see one of your prior customers or prior employees in the grocery store a few months after the sale or acquisition, do you want to switch aisles and hide or do you want to go talk to them? If you’d switch aisles, it wasn’t a good deal.”

“This is my baby and I wanted to take care of it,” said Hester. “I didn’t want to just abandon it; I wanted to move it to the next level. I wanted to take care of people. And it’s been one of the best things I’ve ever done.”