Add Value to Your Business
Increasing the value of a company requires years of planning and execution. Most valuators look at the last five years of operating results to substantiate their conclusions. So, let’s look at maximizing the value of your business today for a potential sale or transfer tomorrow.
After all, the more valuable the company, the more you will get out of it – either in compensation, profit-sharing, or proceeds from a sale. Here are seven factors that can impact the value of your business:
1. Operating History, Earnings Growth
The ability to grow and generate profit is one of the driving factors for an increased valuation. Nothing is more valuable than a well-conceived and executed operating plan with demonstrated results.
2. Reliance on Key Personnel
The overall valuation of a business will decrease if the business is overly reliant on the owner, founder or any other individual. If the future viability of the business can potentially walk out the door, buyers will be less willing to pay a premium for the company.
3. Diversification
A healthy business is not overly reliant on any one customer, supplier, product, or geographic area. If the revenue or earnings of the company are dependent upon the relationship of a few customers or suppliers, then a potential buyer will perceive this as increased risk and will not be willing to pay a premium. Same is true for a single product line company or one confined by geography.
4. Competitive Position
Financial buyers want a return on their investment and will pay more for companies with a strong competitive advantage (and attractive future growth opportunities). On the other hand, strategic buyers may be interested in companies with weak competitive positions if they believe they can enhance the market position of the company – and hence the value, once purchased. But, they won’t necessary be willing to pay for it!
5. Work Force
It is generally presumed that the workforce will stay with the company if sold. There is great value to a potential buyer if employees are well tenured, experienced and reliable. A strong middle management team that can weather the transition and continue to forge the business ahead can be invaluable to a potential suitor and will increase the value of your company.
6. Financial Risk / Contingent Liabilities
Not surprisingly, buyers are looking for a reasonably strong balance sheet with good liquidity and working capital. Contingent liabilities – such as outstanding litigation or a environmental issue – would be assessed and a discount taken for a presumed outcome of the pending issue.
7. Size
Yes, size matters. The larger the company, the less perceived risk and the higher the market value. It is a straight-forward and time-tested correlation.
As most of these factors require years to improve, it is a good idea to keep them in mind as you grow and manage your business today.
If you would like help understanding how you can increase the value of your business, please give us a call. We would be happy to help.