Many business owners leave their jobs with big dreams to start a successful business. They hope to build a valuable asset that is profitable and successful. And if they realize that one day they’ll have to exit their business (and, to be clear, a lot of entrepreneurs don’t grasp this), they hope that when it sells, it operates independently and provides them with the lifestyle they had dreamed of.

But unfortunately, the vast majority don’t achieve that. Why? Because they don’t get the valuation they expected or aren’t able to sell the business at all. In this article, I share some advice on increasing your company valuation.

The valuation process is as much an art as it is a science. Unlike your home, which is a fixed asset, a company is a living and breathing entity that comprises processes, procedures, staff, ever-changing market conditions and your responses to those changes. There are several technical approaches to value a business, but here’s the real truth: the value of your business is what the buyer is willing to pay for it. Businesses are valued on profit but are sold on the potential that’s achievable for the new owner.

What’s the science of valuation? Out of several valuation methodologies, the most commonly used in our industry is multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). Why do we need to take out those four numbers? Interest expenses are determined by the financial decisions of the company. Taxes are federal and state corporate income taxes (which vary from state to state). Depreciation and amortization are accounting decisions that are non-cash items. EBITDA shows the company’s earnings, which are hugely important to the buyer.

For a good apples-to-apples comparison for the buyer, EBITDA must be normalized or adjusted, adding back any discretionary and non-recurring expenses. Owner compensation must be added to this number because it could differ from the salary paid to the person replacing him or her. Other add-backs vary from business to business. Some such expenses are commercial rent, property maintenance, health insurance, inflated salaries to family members, special perks/benefits enjoyed by the owners and their families (memberships to health clubs and other entertainment avenues), personal expenses paid by the business (auto repair, gas, cell phones, insurance, travel, house cleaning service, etc.), legal bills and other expenses that the new owner would not incur.

And the art of valuation? Your broker/advisor helps you establish an initial valuation of your company. Value can also come down to timing. When I sold my company, we started the process in 2019 but put it on hold in 2020. Why? Because all the M&A activities came to a screeching halt due to COVID. Buyers were hesitant to enter into any new deals due to the uncertainty in the marketplace and the impending economic downturn.

As the seller, if you can unearth the buyer’s “real” motivation and cater your proposal to those motives, you can rake in some serious dough. I remember a transaction in which a minority- and woman-owned entrepreneur was interested in buying out a competitor. She wanted to use her diversity certifications to tap into the competitor’s government and corporate clients and grow it to the next level. The seller tailored his proposal accordingly and was able to fetch a higher multiple.

“As the seller, if you can unearth the buyer’s ‘real’ motivation and cater your proposal to those motives, you can rake in some serious dough.”

Of course, you’re interested in getting a higher valuation for your business. Improving your value enhancers and boosters means making changes to your business to add resiliency and show a clear path for future profitable growth, thus enhancing its value to the buyer. Every transaction is unique; however, here are some suggested value enhancers.

1. Solid first impression: Like in any business dealing, the first impression counts here as well. Consider how you and your broker come across in the initial verbal and written communications, how professionally prepared your proposal is, and how clean and organized your office is when the buyer and his team visit. They all send a certain message.
2. Turnkey operation: “Small-business owners and entrepreneurs worthy of the title need to build systems that replace themselves,” writes Michael E. Gerber, New York Times bestselling author and small-business guru. If you have taken the time to set up the systems and procedures, have manuals with instructions that can be easily followed/duplicated and the business operates independently, that is music to the buyer’s ears.
3. Competitive advantage: List the attributes, capabilities and characteristics that give your company an edge. Do you have IT superiority? Maybe you have proprietary software that can enhance the clients’ shopping experience. We had a team of experienced full-time graphic designers that very few competitors did. Second, our extensive showroom allowed our clients to see and inspect the products before placing orders.
4. Expertise in specific verticals: Does your company specialize in certain vertical markets, thus making you an expert? Buyers interested in these markets would have a much shorter learning curve, hence adding value.
5. Licenses & certifications: Approval for certifications and licenses can be long and arduous. This could be a tremendous value enhancer for a strategic buyer interested in entering this market.
6. Intriguing service/product line: Access to a particular product line or service not offered by the buyer could add value. In our case, graphic design service was a sizable profit center not offered by most in our industry.
7. Long-term contracts: Long-term contracts with clients mean a consistent revenue stream for the buyer. Similarly, favorable pricing or product availability contracts with suppliers can be quite appealing.
8. Market reputation: A positive reputation and respect in the marketplace can make it much easier for the buyer to continue operations without changing the company name or location.
9. Intellectual property: Do you have rights to any patents, trademarks, or software?

Think from the buyer’s point of view. Acquiring your business is an investment for them – and oftentimes nothing more. They don’t have any feelings or emotional attachment to the company, employees or clients like you do. The profitability of your company, its performance and its potential to grow post-acquisition are what they care about. You must provide them with a plan that addresses their concerns and shows a clear path to future growth and profitability through a seamless transition. Present a compelling and convincing proposal listing how your value enhancers can align with the business goals of the buyer. Rather than emotional stories, they’re more interested in projections and growth potential backed by solid numbers.

One last piece of advice: Make sure not to send any direct or indirect clues of being desperate to exit due to some business or personal challenges you might be facing. Also, don’t convey that you have a specific deadline. You’ve given most of your adult life to this business. The offer you receive might not be what you feel you deserve considering the countless hours, sweat and blood you’ve given to the company. However, if you make the necessary adjustments, you will dramatically increase your chances of receiving a deserving offer that can give you the successful and lucrative exit you hoped for.