How to Increase the Value of Your Business
Is selling your business a future consideration? If you are like many business owners, you know you will one day sell your business. Too often owners take time for granted. They always believe they have more time to consider how best to prepare their businesses for sale. The flaw in their thinking is that they really do not know whether the best time to sell is this year, next year, or 50 years from now. I have heard so many stories from people who were offered a lot of money to sell their businesses and turned down the offer, only to find five years later that they could only attract fractions of that offer. It is important to understand how to increase the value of your business before you sell, and it’s equally as important to determine the right time to sell.
3 Primary Reasons For Buying A Business
The primary reason for buying a business is return on investment. They will pay what they consider is a fair price based on 3 primary factors:
- Does the purchase remove a business barrier?
- Does the purchase eliminate competition?
- Is the purchase a strategic fit in terms of :
- Tangible and/or intangible assets
7 Ways to Increase Valuation
You should build your business as if it might sell tomorrow. By continuing to improve and monitor the following valuation levers you can increase the value of your business and possibly identify when it is time to sell:
1. Profit Growth Rate
Profit Growth Rate – how predictable and consistent is your profit and revenue growth rate? The higher, more predictable, and consistent the pattern, the better. These are two crucial measurements that determine the health of your business. Great businesses are able to reliably predict their profit growth rate, and are rewarded handsomely when they are ready to sell. Understanding, monitoring, and improving the predictability and consistency in your profit growth rate will help increase business value for the right sale.
2. Industry or Market Segment
Industry or Market Segment Attractiveness – What does the future look like? What do experts say about it? How is your company uniquely positioned to get its fair share? Positioning your business in a growth industry and targeting the right market segment will be an important factor in the continued success of your company. Being in a growth market will improve the valuation for your business as buyers will pay more for companies in growth markets.
3. Low (Relative) Market Share
You want to be seen as a business leader, but you don’t want to be seen as a risk because you have saturated your portion of the market. As a business effectively continues to grow and increase its market share, the more profit potential they have.
4. Customer Concentration
Customer Concentration – a company must not be overly dependent upon a single customer or customer group. Customer (or revenue) concentration can be one of the biggest risks to your company’s profit. No customer should make up 10% or more of your revenue. With the right business strategy and tactics, you’ll be able to bring that number down to 2%. Having a low concentration risk will increase your business valuation, making buyers more likely to pay more.
5. Recurring Revenue
Recurring Revenue – this is one of the most favorable ways to increase business valuation because it supports consistency and predictability. It also allows for focus on decreasing delivery costs to customers over time – thus increasing profitability through time. The higher the level of recurring revenue, the more you will increase the value of your business before you are even ready to sell.
6. Company Size and Location
In terms of revenue, employees and geographic locations play a role in salability. Buyers see smaller companies as more of a risk than larger companies. The same goes for geographic location. If the business is in an area with a dwindling economy or even a lower population than one with a larger / steadily increasing economy, they automatically see this as a risk to potential profit that they more than likely won’t be willing to take.
7. Management and Executive Team
Management – seasoned and experienced managers in the industry with a track record of success are very important. It is hard to find great management talent. Skilled employees and executives often times will know exactly what it takes for the business to see growth in profit, making them key aspects to a new business owner. Buyers want to see a team of employees who are willing to work hard and are dedicated the overall success of the business. Hold on to your top-performing players and offer them incentives to want to be with the company long-term.
Need help with increasing the value of your business before your sell?
An executive business coach can help increase profit margins, improve predictability, and increase valuation to properly prepare your business for sale. Call Howard Shore, one of the top business coaches in the United States, for a FREE consultation at (305) 722-7213 to see how an executive business coach can help you run a more effective business and become a more effective leader.