How To Increase the Value of a Business
It is normal for a business owner when they plan to sell their business to get a value of their business or a business valuation. Often they leave the decision to get a valuation when they plan to sell. This means the opportunity has gone to make some changes or be proactive with strategies that will increase the value of the business.
Increase the value of a business
If you are thinking of selling your business and want to know some of the steps you can take to increase its value, here’s a few suggestions for you.
Where do I start to recognize the value drivers?
A good and important place to start is looking at the financial statements of the business. If the financial statements are not in good shape it’s even more important to start here as it means the owner is working from a handicap by not knowing the true current and historical performance of the business.
The next best and easiest place to start to determine the value drivers as they apply to your business in your industry is with a SWOT or Strength, Weaknesses, Opportunities and Strengths. Because adding value is all about your business, pulling out the value drivers with a SWOT analysis will give you a focus.
Determine your value drivers by comparison
Once the financial statements are in good shape, the next step is to do a comparison of your business against your peers or the same type of business in the same industry as there is a lot of relevant information in your financial statements. This is something you can do yourself but it does take time.
If you want to do it yourself and understand what’s involved, there is a website that can provide the data you need called Bizminer or www.bizminer.com.
Another suggestion is to have a conversation with your accountant to see if that’s a service they provide and they can help you identify where you need to focus and grow your business.
Is the management team a strength or weakness
A bad sign for a business is the owner not being able to be away from it. Many owners do not want to think their business can survive without them but the strength of a good business is when the business continues to operate as normal, whether or not the owner is there.
Additionally, a good business has a strong management or executive team in place so if a key manager is not available, another manager is able to answer questions or provide direction to keep the business heading in the right direction.
Other signs that show the strength of the management team includes cross training. That is, are other employees able to execute when the main employee is not available? What’s the average age of the management team? An average young age can suggest inexperience, an average older age can suggest a business culture that doesn’t like change or isn’t open to new ideas. An average older age throws up the concern that they may be approaching retirement and therefore need to be replaced.
Is the customer base diverse?
If one or two customers account for more than 25% of gross sales then the business is vulnerable. The vulnerability comes from not only the negative position it could place the business with cash flow if they leave, but also allows these primary customers to push back on price increases or changes that may be necessary to the products or services you are offering. What could be even worse than these two scenarios, is that you may lose one or two of these key customers when you are close to selling the business thereby reducing its value and attraction to a buyer. Making the customer base as diverse as possible adds value to the business.
What’s the primary role of the owner?
A well balanced business has a strong executive team that comes together, makes and reviews key decisions and then gets on with it. If the owner of the business is the executive team and all decisions revolve around their decision making it puts the business at risk if the owner no longer works be it for a positive reason that they won the lottery or a negative reason they become ill.
Put simply, the greater the dependence on the owner the lower the value of the business. Equally, the more diverse the executive team the greater its value as it means the business can react quickly and positively to new opportunities.
What about the competition?
One thing I enjoy doing is watching Shark Tank now on CNBC. Kevin O’Leary loves to ask a presenter of their product if it has any patents. If they don’t he says “you have nothing to offer and the market will crush you like the cockroach you are.” A business has a higher value when they own a clearly defined product or service without becoming a commodity that others can copy which makes it more difficult to defend.
Are the customers an asset or liability?
Different business models place different emphasis on the customers. For example, Amazon is all about providing the lowest price and as positive experience as possible. Are your business relationships about the best products and/or service or the lowest price? Does your business model require many customers and finding them each time or are they advocates of your business and therefore loyal? The value of a business is reflected in the customer base and whether it’s an asset or liability.
Just as the quality of customers are part of its value so too are the employees. Are they outsourced and therefore not rewarded for loyalty or are they direct hires where their performance is measured and managed and given incentives that directly contribute to the success of the company? Are there training programs in place to allow them to move to their next level, are they considered an asset or a liability? What is the average length of employment?
For a business buyer looking to make an acquisition, the answers to these and many more questions will make or break the final acquisition decision and the value they put on the business; especially the executive or key management that is currently in place. Critical items will include key employee contracts, non-compete agreements and the work culture and therefore the final business valuation.
What’s the role of technology?
How important or effective is technology in your business? Has your company developed a unique application, tool or technology? Does your technology provide competitive advantage?
If the answer is yes then it can be a key value driver in the performance of the business and provide a reason in its own right for a competitor to buy your business and the amount they are willing to pay.
At the end of the day, the intellectual property, human capital (the employees that move around inside your business) are critical assets and influence the value of the business. These assets should be protected through both good business strategies and legal protections.
Good business strategies include incentives and compensation plans to reward and retain high performing employees and legal protections with confidentiality clauses, non-compete agreements, Trademarks, and Copyrights.
In conclusion, if you don’t have the enthusiasm to try to grow and add value to your business, it’s a good indicator that its time you thought about selling.
If you would like more information about selling a business, buying a business, buying a franchise or a related service such as valuing a business, please visit my webpage Services and choose from the drop down menu the information you would like.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.