How to boost the value of your business
By reviewing all these different methods of business valuation, you’ve likely picked out some things you can do to improve the value of your own business before putting it up for sale. Likewise, if you’re considering buying a business, you can probably identify some fairly inexpensive improvements you could make to the company you’re investigating in order to improve the return on your investment and/or negotiate a better deal.
Following are some pro tips that can help you accomplish that:
Stay with the company
If you or your colleagues are clearly a key ingredient of the company's success, buyers may well offer a higher price if you are prepared to commit to staying on as an employee or consultant for a fixed period of time. This reduces disruption and smooths the transition to new owners. Alternately, buyers may offer to pay a second sum at the end of that period, but this is a risky route if they already own companies that are not entirely solvent.
Whatever the sector, buyers tend to regard bigger businesses as more secure. Larger organizations are perceived as having greater resources with which to weather any unforeseen economic storms. Buyers will pay more for such reliability.
If you’re planning to sell, look at the current situation and see if it may be possible (and profitable) to merge with or acquire one or more companies before putting the business on the market.
Patents, trademarks, and copyrights
Businesses can have other advantages that will increase the security of their profits. For example, a business might have intellectual property rights over a particular manufacturing process, recipe or marketing logo.
Just consider if the famous Coca-Cola Co. went up for sale. Without a doubt, its value on the market would be far more than the combined value of all their physical assets because the secret recipe of their iconic soft drink and the unequaled brand recognition they’ve created are worth more than all their factories and bottling plants combined.
Different buyer types
Finally, the value of a business will also depend on the nature of the buyer. Buyers will generally fall into two categories: financial and strategic.
A financial buyer, such as a venture capitalist, will typically look at your business in isolation, analyze the viability of its profits, and examine whether he could increase them streamlining the company.
A strategic buyer, on the other hand, will likely be in the same or a related sector: a direct competitor, a supplier or vendor, or the owner of a tangentially related business. Combining your business with his might enable him to cut costs in a way not possible for the financial buyer. He could centralize the sales and marketing function, for example. This type of buyer is also likely to have a greater understanding of — and faith in — the sector, and, consequently, your business model.
While strategic buyers tend to be able to offer higher sums, they are necessarily few and far between.
Approaches from competitors can also be dangerous. Do you really want to divulge the mechanics of your business to a potential buyer, only for him to abort the sale and remain a competitor? Then, he would be equipped with knowledge of your weak points, which he could then exploit, and your strengths, which he could then replicate?
Clearly, the best option for a motivated business owner looking to sell their business is to get professional help arriving at a reasonable valuation. Business valuation pros will be able to look at the big picture of each unique company’s situation to determine which valuation method is going to be best and carry it out effectively.
One of the great advantages of knowing about valuation techniques is that it allows you to see what steps you can take to increase the value of your business.
Here are four areas to consider once you have a legitimate valuation in your hand. With the right actions and investments, you can likely boost the value of your company in preparation for putting it on the market.
Financial factors are likely to be key to the value of your business. They include your past, current and projected profits and cash flow, and whether or not there is need to capital investment in the business in the future.
Tip: Review all your current holdings, including equipment, supplies, facilities, licenses, and anything else you can reasonably predict, then ask yourself whether you will need to upgrade or replace them anytime. If so, would it boost your valuation to do so prior to trying to sell?
2. Intangible factors
These are harder to measure than concrete factors, but they’re still capable of influencing your profitability. For example, do you hold key patents that can prevent competition? Have a key process or methodology that’s able to be trademarked?
Tip: Ask yourself tough questions and concentrate on improving the answers before selling. Some examples are: how strong are my relationships with my customers? Is my company’s unique selling proposition obvious to an outsider? Can I rely on my staff to run things flawlessly without me here?
3. Assets and liabilities
Obviously your company’s assets and liabilities play a huge role in determining its value. Anything you can do to increase the value of your assets and/or lessen your liabilities can have a positive impact on business value.
Tip: Focus on debt reduction prior to putting your company on the market. Undertake “low hanging fruit” investments to boost the value of your assets as well, such as inexpensive facility repairs and upgrades, renew equipment warranties or service contracts, software upgrades, and the like.
The people your business employs (especially their achievements and experience) are important to the value of your business. This includes your contribution - you should make clear to potential buyers whether the business depends on you, and if it will require your input in future.
Tip: In most cases, it’s best for the seller to arrange affairs so you are not integral to the running of the business. Psychologically, this makes it far easier for prospective buyers to envision themselves successfully filling your shoes. However, the business value can increase even more if you’re willing to stay on in a consultative role through an initial transition period (unsalaried, of course.)
5. The Market
Finally, no matter how well your business is doing, the state of the wider market will affect its value and how likely it is to sell. If there are a lot of similar businesses for sale at the same time, this could negatively impact your business value. Likewise, if there is high demand from potential purchasers, your business could be worth a lot more. Market factors include the state of the economy, inflation and interest rates.
Tip: If you’re not being forced to sell due to circumstances outside your control and have the luxury of choosing when you put your company up for sale, spend at least two years investigating the market with your sale in mind. Discuss the situation with local professionals who can advise you. Then, pull the trigger when market conditions appear optimal.
After reading this in-depth guide to business valuation, you’re in an excellent position to determine a realistic value for the company you currently own or you’re currently interested in purchasing. Be sure to rely on valuation professionals to help you, especially when handling the more complex valuation methods.
And if you’re ready to buy a business or sell a business, let BusinessesForSale help too!