No matter the economic climate, it’s important for business owners to start monitoring their companies’ value up to five years before making an exit. Though most assume that business valuation is focused only on multiples, forecasts, and return rates, it’s more qualitative than it seems.
A valuation is a prediction of a company’s prospects, and to reflect those goals accurately, business owners must identify things that enhance value. Those factors, of course, vary by industry, but we’ll offer some value-adding tips here.
Increase Access to Capital
The smaller a company is, the less access it has to equity and debt capital. To increase your business’ value without a corresponding spike in profits, you’ll need to determine which type of capital will meet your goals. Ask these questions:
- Is the company leveraged? If so, how?
- How is the business’ future affected by bank covenant restrictions?
- Are loans personally guaranteed by shareholders?
- Is it possible to bring in outside investors to meet future capital needs for growth?
With the answers to these and other questions, you’ll have the information needed to gain greater access to capital.
Building a Bigger Customer Base
A diverse, yet solid customer base is crucial to a company’s ongoing viability. When businesses profit by focusing solely on big clients, they grow to depend on them. It’s not good to concentrate revenue with just a few customers; companies must allocate customer concentration in ways that reduce the risk of revenue loss. Ask how much the company’s top clients contribute to its revenues and find out how much of that revenue recurs. By determining the useful economic life of the customer base and the company’s biggest clients, it’s possible to position yourself in a way that reaches more people.
Use Economies of Scale
As output increases, the cost per unit goes down. Whether it’s done by spreading the capacity cost over a higher volume or offering quantity discounts, large companies possess significant advantages in some markets. Consider the answers to these questions:
- Is the business leveraging its cost savings effectively?
- Are there any opportunities to realize larger or additional economies of scale?
- Can I enter a joint venture or outsource production to reduce expenses and gain more buying power?
With an economy of scale, owners can increase their companies’ value by ramping up output without spending more money.
Engage in External Financial Monitoring
Through financial analysis, trends are measured, assets and liabilities are identified, and a company’s performance is compared to that of similar firms. When financial statements are compiled and prepared in-house, it may keep managers from seeing things with an unbiased eye—and it may make potential buyers question the accuracy of the data.
Before taking this step, ask yourself how the company compares to others in terms of profitability, solvency, activity, and liquidity. Have financial controls been implemented, and are finances reviewed by an outside accountant? If the answer to any of these questions is “no,” it’s time to bring in some help from an external source.
Invest in the Company’s Human Resources
Employees are the engine that keeps a successful company moving. Crucial value-adders include the skills, experience, knowledge, creativity, and training workers bring to a company, as well as the corporate culture.
When considering the value of human capital, focus on quality controls and the effectiveness of the company’s service and production capabilities. The depth of the management team is another thing to think about. Does the company depend on a single person for customer contacts, production skills, or technical support? If so, it’s important to have a succession plan in place.
Work on Branding and Marketing Strategies
Marketing establishes a connection between the customer’s requirements and their responses to the services and products they’ve been offered. With a memorable brand, you’ll boost sales through market recognition and you’ll also improve the company’s operational efficiency.
When forming a sales strategy, assess the company’s marketing shortcomings and capabilities. How well-known is the brand, and does the company have a strong online presence? Companies are more valuable when branding reflects their mission.
Diversify Your Offerings
Niche companies often derive their strength from a narrow focus, but specificity may lead to a lack of diversity and a dependence on a small market. Owners of such businesses often find that their most important clients prefer to deal with wide-range suppliers, which leads them to expand offerings or sell to a larger competitor. With diversification comes lower risk and increased value.
Consider the breadth of the company’s offerings. Are any of them subject to market fluctuations? Can you offer different products and services that use existing customer bases, production capabilities, and human capital? When businesses are horizontally and vertically integrated, they’re more valuable in the eyes of buyers.
Become More Tech-Savvy
Businesses with few resources often find research and development a challenge, as they struggle to keep up with the market’s technological changes. These companies typically spend most of their money and time on the development of just a few products. This strategy usually results in the obsolescence of services and products, slow growth, and market share losses. Meanwhile, bigger companies, with their technological expertise, find it easier to offer products that meet customers’ needs.
Before improving the company’s technology, focus on the allocation of resources to research and development. Do you use updated tech, and will upcoming changes adversely affect your service and product offerings? Answering these questions will help you identify areas for technological improvement and make the company look better to buyers.
In Closing
Continuous assessment of a business’ value drivers will increase the chances of success. Valuation involves a thorough qualitative and quantitative assessment that should be a key part of a company’s operating procedure. With a proper valuation assessment, you’ll be left with meaningful and actionable information that maximizes returns and highlights the company’s intrinsic value. If you’re looking to sell a business in the area, consult the experts at businessbrokersaustin.com for help, service, and advice.