Building your business equity all the time

Whether you expect to sell your business in the short term or somewhere down the road, it is important that you maintain the equity of your company by doing the right things … for the right reasons.

Ira Nottonson

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The amount of money that can be realized on the sale of a business is often referred to as the equity of the business. A business valuation creates the dollar amount involved. This valuation will vary depending on the person who does the computations and will also vary to a great degree depending on the method of valuation used. It is, however, the conversion of the owner’s business to a dollar figure on sale.

You must keep in mind that the valuation will be affected by many external things as well as the computation of the internal aspects of the business itself. This includes competition, the national economy, the availability of personnel, raw materials, component parts and the particular niche that the business occupies within the parameters of its trade or industry. It is not an exact science; in fact, if anything, it is a combination of art and science.

In many cases, the race for profit each year may actually be a negative in terms of protecting the equity in your business. After all, cutting costs may be a simple way of improving the bottom line. But cutting costs create an unfortunate counterforce in terms of building the equity of the business. Buying new equipment, hiring additional sales staff and increasing advertising expenses will be some of the items that will presumably increase your customer base and your ability to service them; however, it will hardly be a positive in the short term.

It is clear that these expenditures are cost factors that will take weeks, months and even years to recoup. Yet, without these expenditures in anticipation of growth, you may never be able to achieve this future potential. You will always be behind the curve. New customers will force you to make these expenditures, but without the equipment or inventory already in the shop, you might not be able to service the customer requirements on an immediate basis.

The best presentation you can make is to ensure that you are working at full efficiency. This doesn’t necessarily mean 100 percent. It means that the people and equipment you have working at the business are working at 70 to 80 percent efficiency. It means that this same people/equipment combination can handle additional business without adding costs for a bigger operation; that the same facility can handle additional customer requirements at least in the short term. This gives the buyer an optimistic look at the future and gives the seller a maximum return on the equity of the business.

The timing involved in expenditures as well as the selling of the business itself is very important. Optimism is a key word in presenting a business for sale. Selling a business when it is doing well is the best selling position to have. It is always explainable why the business isn’t doing as well as it should. It is easy enough to show how the business could be doing better. But there is no better presentation for the future than to show how successful the business is doing NOW. After all, if there are things that can be done to make the business better, why hasn’t the seller already done them?

Optimism for the future is catching when the business is doing well at the time of sale. Excuses abound when the business is not doing well. And any buyer’s skepticism will be well fed when the business is having problems … whatever the real or perceived reason might be.

In your selling presentation, it is always appropriate, if not mandatory, to explain how the business has achieved its current success and how you have positioned the business in terms of equipment, personnel, timing and the like to achieve the growth potential so important to the buyer. Remember, the seller is entitled to convert his or her existing equity to dollars. The future of the business, its new equity position, and its profit are the buyer’s entitlements.

Ira Nottonson is a business/legal consultant for small businesses and a business valuation expert. He lives in Boulder and can be reached at (303) 447-9672 or e-mailed at [email protected]. Nottonson will be teaching "Secrets of a Successful Business Plan" at the Boulder Chamber of Commerce. Call the chamber at (303) 442-1044 for information.