What would increase your company’s value?
You might answer, "Generate more sales.” Makes sense. While it is certainly true that increasing revenues is generally a sign of growth and vitality in a business, it may surprise you that increasing sales alone does not necessarily improve business value.
During the last economic recession, many businesses did experience plummeting sales and this certainly had a negative impact on a company’s overall value. The companies that weathered the crisis with the least impact usually had other qualities which sustained them through the tough times and helped them into a quicker recovery.
In Cashing Out of Your Business, we included a chapter entitled “Building a Better Box,” where we explore what drives value in privately held businesses. Here are five important ways you can increase your company value regardless of the economic times:1. Develop a strong management team.
If your business is too dependent on you, it can have diminished value regardless of the economic times, due to greater perceived risk. To improve value, have an empowered, effective management team that can operate the business without you.2. Create well-written processes and procedures.
This increases value by creating a business that is more transferable and sustainable. If your systems, customer lists, procedures and intellectual property are not well documented and protected, this can negatively affect value.3. Diversify your customer base.
Increase your business value by avoiding dependence on a limited number of customers. If any one customer is responsible for more than twenty percent of your revenue, that can be detrimental to value. The broader your customer base, the less the perceived risk of economic loss due to the departure of one large customer.4. Keep well documented, clean financial records.
This is one of the most important value enhancers. Business owners tend to focus on minimizing taxes rather than increasing the bottom line. This can decrease the business value significantly, as value is a function of profits more than gross revenue.5. Have an effective sales and marketing plan.
Value is enhanced by demonstrating a continuous, effective pursuit of new customers and markets through a written plan with measurable results.
These are just some of the key areas that a prospective buyer may evaluate when considering your company. As you can see, these “value drivers” (or “value enhancers”) improve the overall quality of your business while reducing risk, no matter which transfer option is selected.