If you are ever planning on selling your company or seeking investments from third parties, you want to ensure that you’ll receive the highest valuation for your company as possible. To do that, here are a few tips to ensure your company has the highest perceived value possible:

  1. Organized
  2. A messy company is an undesirable company. Just like how a house will be clean and organized when it is offered for sale, a company should be clean and organized. People will believe that there are hidden issues or problems that have resulted from a disorganized management and therefore either will not want to buy your company or will place a lower value on it.

    To be more organized, you should focus on the following items:

    • Books and Records
    • This is the first thing a potential buyer will want to look at, and if it isn’t clear, they’ll have an incredibly hard time trying to place a value on your company.

    • Company Legal Structure
    • You’d be surprised how many times I’ve encountered a business that can’t tell me what its EIN is or where that information is located.

    • Human Resources
    • If you have employees, you should have performance reviews, improvement plans and discipline reports. Your potential buyer is going to need these things for a smoother transition.

    • Standard Operating Procedure
    • Even with training periods built into a purchase agreement, there still needs to be some mechanism to ensure that the new owner(s) can pick up where the old owner(s) left off. Things like customer complaints should continue to be handled uniformly, so there’s no turmoil or customers getting upset and leaving. An SOP helps keep things consistent and the transition smooth.

  3. Reoccurring Revenue
  4. Those who buy companies and those who determine the value of companies like predictability. Because of the need for predictability, reoccurring revenue of $10,000 per month is worth more than months with irregular revenue that averages $10,000.

    If it is possible to create subscription based businesses or contracts that include guaranteed payments over time, you should strongly consider making these a part of your company. Obviously, don’t delay payment just to set up payments over time as you can use the up front cash to further advance your business or purchase assets.

  5. Tangible Assets
  6. Things such as capital assets, vehicles, machinery and inventory all add value to your company, but generally only the value that they would have at resale. Certain assets maintain their value more than others. For example, a new car loses a lot of its value in a relatively short time after it is purchased.

    One way to ensure you maximize your company’s asset value is to keep great books and records regarding them. Your balance sheet will have each asset listed or asset categories, such as inventory, so be sure to keep this up-to-date and accurate.

  7. Intellectual Property
  8. Your intellectual property is composed of your copyrights, trademarks, patents, and trade secrets. These are harder to value, but you should keep an inventory of all the intellectual property (IP) that your company owns.

    Patents are generally your most valuable IP assets, as it gives you exclusive right to use a piece of technology or invention for a period of years. Sometimes, these are incredibly valuable and would be listed individually on a company’s balance sheet. Their value, however, is harder to ascertain than tangible assets or reoccurring revenue.

    Copyrights can be a valuable asset, depending on what your business looks like. Artists, authors, singers and other creative companies all typically have copyrights as their largest assets. As with any other type of intellectual property, the value is hard to ascertain with each of these assets. If, however, you have licenses that have ongoing predictable revenue, it would be easier to assign value to those copyrights.

    Trademarks are your goodwill in the community. Arguably the hardest asset to assign value to, the best thing you can do is keep track of what trademarks you have an doing your best to keep them protected.

  9. Multiple Streams of Revenue
  10. If all of your revenue is from one product or one client, your company’s value will take a huge hit because potential buyers will see that the revenue can be lost with very short notice. Buyers like things to be more predictable and diversification of revenue is one way to provide more certainty in the company’s future.

  11. Clean Due Diligence
  12. When there’s a purchase of your company, there will be due diligence done on your company and on the owners of the company. This process can add or subtract a significant amount of money from your company’s value. To preserve this value, and ensure that the sale goes through, you should do what you can to make sure that your due diligence is in order as much as it can be.

    Some things to have prepared ahead of time:

    • Certificate of Good Standing from Department of Revenue
    • Profits and Loss Statement
    • Inventory
    • Balance Sheet
    • All Past and Current Litigation
    • Employee Discipline/Termination/Complaints
    • Current Contracts and Liabilities
    • Last Seven Years Tax Returns

  13. Revenue Separate from Owner
  14. One of the biggest items a potential buyer will look for is whether the business can continue successfully without the current owner running it. If it cannot, such as a professional service provider, the company would be significantly devalued, if not worthless to a potential buyer. Also, from a management standpoint, the potential buyer needs to be able to have new management be as successful as the departing owner.

  15. Litigation Resolution
  16. Pending litigation or threatened litigation can severely hurt the valuation of a company. To keep your valuation strong, be sure to resolve any of these proceedings prior to selling a company. Even if they aren’t resolved, have a description for every litigation or threatened litigation that includes who the opposing party is, what was alleged, what your arguments are against the allegations and what resolution was made, if any.

For more information on maximizing the value of your company, contact us at richard@lawplusplus.com or by calling 919-912-9640.

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About the Firm: Law Plus Plus focuses on making the legal system easier for businesses and business owners. The firm offers many flat rate prices, reasonable retainer packages, and easy to understand policies and procedures. Law++ has a history of strong pro bono services, benevolent networking and creating everlasting relationships with the goal of building a stronger community. The firm offers formations, contract drafting and reviewing, mergers and acquisitions, estate planning documents and more, all of which is focused around protecting the business and the business owner’s legacy.

Disclaimer: The Information found in our blog is for educational purposes only, and is not meant as legal advice. If you need legal advice, please contact an attorney. Nothing in this blog is intended to create an attorney-client relationship.

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