Top 5 Ways to Increase Business Value
According to industry studies, only 25 to 33 percent of middle market businesses offered for sale actually end up selling. There are a number of reasons for that sobering statistic. For starters, many owners have unrealistic expectations about their company’s value. Also, most businesses rely heavily on their owners, and buyers generally don’t like to buy companies that can’t operate without the existing owners.
Business owners are great at doing busy work and putting out fires, but they need to focus on key areas which are important to building intrinsic value, which is easier said than done. Just as Rome wasn’t built in a day, value cannot generally be increased overnight. The best way to build or maintain business value is to focus on key drivers that determine the current and future value of the business and will dramatically affect how your business is perceived by potential buyers.
Here are five top ways to increase business value:
1. Improve margins and cash flow. Cash is still king so being profitable on paper is not nearly as appealing as being profitable with cash reserves in hand. You cannot maximize the value of your company without focusing on margins and free cash flow. Buyers want to see free cash flow because it provides the means to grow the business. However, don’t make the mistake of equating free cash flow with revenues. You can have revenues in the millions but you can also have millions in expenses leaving you with minimal free cash flow. Cash represents stability to a buyer, which is extremely valuable.
2. Systems and procedures. Buyers look for companies that have effective operations in place because it helps a business gain—and maintain—a competitive advantage. By developing systems, operational problems can be recognized, identified, and addressed as soon as they happen. Such efficiencies increase the company’s value. In my experience, an efficient systemized operations strategy means less energy is expended putting out fires and more is devoted to improving the business and its value. Providing a buyer with a proven operations strategy assures them the business is well positioned to sustain and increase profits and value.
3. Show consistent revenue growth. Buyers generally inspect the prior three years’ financial data, as well as the trailing 12 months of financial statements. Showing steady and consistent growth is more valuable than sharp spikes in earnings, interspersed by flat or negative earnings. Feast-and-famine revenue makes it impossible to know where the business will be in a year, thereby dropping its value. Steady growth, even if it’s a little slower, will generally be more valuable.
4. Reducing Concentrations. The less dependent a company is on the entrepreneur, the more value it will have to a potential buyer. While it is common for an owner to be indispensable when establishing a business, as soon as possible, they need to turn over the company’s day-to-day operations to established systems and a strong management team. But be careful, relying heavily on a star key employee will be viewed as risky by prospective buyers as well. The same applies to a significant portion of your revenues coming from a few customers or heavy reliance on key suppliers that cannot be easily replaced.
5. Have formal agreements with customers, suppliers, and key employees. While working on a handshake is great in theory, it is imperative to have formal agreements in place with your customers, suppliers, and with any key employees. Protecting the company on the supply side and on the revenue and operations front, by contractually securing relationships, adds stability which adds value.
We work with companies to increase business value so you can sell your business for the maximum valuation.
Are you maximizing your company's growth and valuation potential?
Get your free score + 5 custom scorecards to see a point by point analysis of your company.