Last week, we shared some methods you can use to set a resale value for your business. If you haven’t read the article yet, go check it out here. The other big question that clients will ask me when talking about business valuation is how to increase the business value before it comes time to sell.
All business owners and managers are working hard to increase profits, cash flow and productivity, but those don’t always exactly translate to overall long-term business value. Whether you are planning to sell your business in the near future or you have thoughts of selling someday further down the line, there are several steps you can take to increase the value of your business. You can boost its measurable resale value while also making it as attractive as possible for potential buyers. After all, some aspects of perceived “value” are a lot less tangible than others.
Here are some ways to improve the value of your business:
You’ll want to use one or more of the methods outlined in our previous blog article to perform a thorough business valuation and see where your value lies now. When doing this, try to look at things from a buyer’s perspective. It can be hard to do since you are so personally invested in your company. Work with an objective third-party advisor or do whatever you can to step outside your personal connection to the business. This will help you see your business as potential buyers may see it during an acquisition.
Smart buyers are looking for a diverse customer base. If you have one or a handful of customers that make up a high percentage of your revenue (especially if they are only customers because of you personally), it will be less attractive to a buyer. They will fear that losing one of those customers during a sale could be catastrophic. The more diverse and sustainable your customer base, the better.
A sustainable, recurring revenue stream will be very enticing to a potential business buyer because you can see where the profits come from month after month and year after year. They also want to see increased cash flow year over year. At the same time, buyers will also be looking for a company that provides products and/or services that are resistant to “commoditization.” A buyer won’t want to acquire anything that won’t continue to produce a consistent revenue stream or that will become more expensive to produce as time goes on.
Every buyer is looking for a scalable business—one in which profit margins will increase as revenues go up. If your profit margin is relative to how much you spend to make revenue, then the company isn’t as scalable. You have to spend more money to the same ratio of money in return. A buyer wants a company that can scale up with profits increasing at a higher rate than expenses.
What is your company’s competitive advantage? You want to have this well-defined long before you attempt to sell your business. You need to understand why customers buy from you and why they will continue to buy from you instead of your competitors. If your competitive advantage isn’t clear, it will make your business harder to sell.
You should be able to show a potential buyer reliable financial reports. If your company has weak bookkeeping and you can’t easily show your revenue against your expenses (how your profit is generated), it will be less appealing to a buyer. If you have a growth plan laid out, it should clearly demonstrate the cash flow cost in order to implement it. You have to spend money to make money, and buyers clearly want to see how these numbers all add up.
These are just a few of the steps you can take to increase the value of your business in the eyes of potential buyers. If you are planning to sell soon or just want to keep your company healthy for a possible future sale, you want to do everything you can to improve its perceived value.
For help with your business planning and valuation, turn to the financial advisors of Illumination Wealth. We work with many business owners and we can show you how to increase the value of your company. Contact us today to schedule a free 30-minute call.