No matter the economic environment, it’s important for business owners to monitor their companies’ value up to three years before selling their business. Though most assume that business valuation is focused only on earnings, revenues, and discount rates, it’s far more qualitative than it seems.
While a valuation is a prediction of a company’s future earnings, discounted back to present, to reflect those numbers accurately, business sellers must identify things that enhance value beyond just the numbers. Those factors vary by industry, but we’ll hopefully offer some value-adding thoughts here.
Boosting Access to Capital
If a company is small, it generally has less access has to equity and debt capital. To increase a business’s value without a corresponding spike in earnings, a business owner needs to determine which type of capital will meet their goals. Ask yourself these questions:
- Is the company leveraged, meaning, does it have debt leverage? If so, how much?
- How is the business’ future affected by lack of access to bank debt or lines or credit?
- Are these loans personally guaranteed by the owner?
- Should the owner bring in outside investors and sell equity to meet future needs for growth?
With the answers to these questions, you’ll have the information needed to gain greater access to capital from your bank or outside investors.
Build a Larger Customer Base
A diverse and expansive customer base is not only crucial to the company’s ongoing viability, but also to potential buyers and lenders. When a business grows by focusing solely on their biggest clients, they grow to depend on those large clients. It’s not good to have customer concentration. Customer concentration is revenue with just a few customers. Companies must allocate revenues and reduce customer concentration so that this reduce the risks of revenue loss from those large clients. Ask yourself how much of the company’s top clientele contribute to its revenues and find out how much of that revenue reoccurs. If your top three customers are more than 50% of your revenue base, you likely need to diversify.
Exploit Economies of Scale
Any intro microeconomic course will teach you that as output increases, cost per unit goes down. Whether it’s done by spreading the costs over a higher volume or offering quantity discounts, large companies possess significant advantages in some industries. Consider the answers to these specific questions:
- Is the business leveraging its cost savings with their suppliers?
- Are there opportunities to realize additional economies of scale with volume discounts?
- Can I outsource production to reduce expenses and gain more buying power through another company’s volume?
With economies of scale, business owners increase their companies’ value by ramping up certain discounts and can do this without spending more money.
Move Towards External Financial Monitoring
Through a thorough financial analysis, trends are found, new insights about certain products or services are discovered, and a company’s performance can be compared to other, similar firms. When financial analysis is compiled and prepared by the owner, it may keep the managers or owner from seeing things in an unbiased fashion—and it may make potential buyers question the business as a whole.
Before taking this step, an owner must ask themselves how the company compares to other, similar companies in terms of profitability, liquidity, revenue exploitation, and solvency. Have financial controls been implemented internally, and are financial statements reviewed by an outside CPA or auditor? If the answer to any of these questions is “no”, it might be time to bring in some help from an external accounting source.
Invest in the Company’s Human Infrastructure
Employees are critical to keeping a successful company moving and a buyer will be keenly concerned about the human capital infrastructure. Crucial value-adds include the training, experience, knowledge, creativity, and skills that workers bring to a company, as well as its corporate culture.
When considering the value of human infrastructure, focus on quality controls and the effectiveness of the company’s recruiting and training. The depth of the management team is another vitally important factor. Does the company depend on a single person (likely you, the owner) for customer contacts, sales, production skills, or technical support? If so, it’s important to have a successful team in place.
Focus on Branding and Marketing Strategies
Marketing establishes a connection between the customer’s needs and their responses to the products or services they’ve been offered. With a memorable brand or experience, you’ll boost repeat sales through market recognition and possibly reduce those future marketing costs.
When forming a sales strategy, assess the company’s marketing shortcomings and strengths. How well-known is the company or brand? Does the company have a strong online presence and clean-looking website? Companies are more valuable when branding reflects their mission and, in-turn, produces higher levels of sales without increased marketing costs.
Diversify Your Product or Service Offerings
Niche companies often derive their strength from a narrow focus, but specificity may lead to a lack of diversification and a dependence on a small, fractured market. Owners of such businesses often find that their most important customers prefer to deal with a wide-range of suppliers, which leads them to expand their product or service offerings. With product or service diversification comes lower risk and increased value for that business.
Consider the breadth of the company’s offerings: Are they subject to seasonal fluctuations or economic cyclicality? Can you offer different products and services that use existing customer bases, production capabilities, and human capital to sell more, but market less? When businesses are horizontally and vertically integrated, they’re more valuable in the eyes of potential buyers.
Add Some Technology
Businesses with few resources often find R&D (research and development) a challenge, as they struggle to keep up with their industries’ technological changes. These types of companies typically spend most of their money and time on the development of just a few products or services. This strategy usually results in the outdated services and products, slower growth, and market share loss. Meanwhile, larger companies, with their technological prowess, find it easier to offer products or services that meet customers’ needs.
By improving a company’s technology, a business owner can focus on strategy, by automating mundane tasks. Do you have updated tech, and will upcoming changes to an industries’ changes adversely affect your service and product offerings? By solving these problems, you will help identify areas for technological improvement and make the company look better to potential buyers.
Continuous assessment of a business’ key performance indicators (KPI’s) and value drivers will increase the chances of success. Business valuations involve a thorough qualitative and quantitative assessment. These long, hard looks at itself should be a key part of a company’s reporting procedures. With a proper valuation assessment, a business owner will be left with meaningful and actionable information that maximizes returns and highlights the company’s intangible value. If you’re looking to sell your business, consult the experts at cgkbusinesssales.com for help, service, and advice on valuations.