How to Increase the Value of Your Business

What makes the value of one business more appealing than another, and why do some businesses command greater premiums in a sale or merger than others in the same industry? When they say beauty is in the eye of the beholder, the only “eye” that matters is the critical eye of the buyer or investor. And for them, it comes down to the simple premise of Risk vs. Reward. What is the future potential of the acquisition, and are there potential risks that could derail the transaction. As a business owner, where do you need to look to determine what you can do to define future growth potential and be the differentiating factor that will help your business command a premium in a merger or acquisition?

Value Drivers.

The key to any successful transaction is enhancing the growth trajectory while mitigating any potential risk factors. Below are eight key value drivers that investors look for in an acquisition that helps differentiate a business and unlock the inherent value that lies beyond a simple profit or loss statement.

High-Quality Financials

Nothing instills confidence in potential acquirers like well documented financial information and records. “Quality of Earnings” is a reliable predictor of future earnings and provides a reliable assessment of consistent, repeatable earnings. Strong, recurring revenue, three years of tax returns, detailed sales data, and well-delineated costs and expenditures all provide a clear picture of a business’s health and greatly diminish the possibility of undermining a sale. Some smaller mom and pop businesses do not have the sophistication to be able to create solid financial statements like P&Ls, Balance Sheets, etc. However, with the recent growth in technology, there are many affordable solutions available in the market that can help track some key financial metrics, like Point-Of-Sale Systems and enhanced credit card processing terminals. These methods might not give a potential buyer the complete confidence in the business, but it will give them strong baseline sales numbers to work with and potentially make an unsaleable business saleable. You can consult one of our business brokers at Capital Business Brokerage for more details regarding solutions that might be right for you.

Stability 

Whether talking about the tenure of key employees or the consistency of sales and earnings, stability helps buyers sleep at night. A well run and established business could be a turn-key solution that is the missing piece in an acquirer’s stable. Evidence of growing revenues, increased margins, and normalized industry expenses are some of the more tangible evidence of a good merger or an acquisition. Existing management assistance in a smooth transition and deep relationships with clients and vendors are the “intangibles” that define a lower-risk investment.

Unique Market Position

It’s not always about being the new “It Thing” (think Pet Rock, or more recently, Fidget Spinners). Be the “It” thing that lasts! Having a strong and complementary market position as well as high barriers for entry for competitors may help the acquiring company increase their market share, or complement existing product lines. Intellectual property including patents, copyrights, proprietary codes and software, and unique distribution rights all make a company unique and attractive.

• Product diversity mitigates risk and prevents overlap while helping reduce operational risk.
• Customer diversity reduces reliance on one customer driving a disproportionate share of the sales.
• Sourcing diversity is crucial to long term stability in ensuring no supply chain delays making operations more reliable in the buyer’s eyes.
• Revenue diversity from multiple products and services reduces typically increases business stability and drive long-term value.

Future Growth Potential

Past performance is no guarantee of future success. Buyers are looking towards the future. A broad customer base and expanded supply chain backed by a three-year financial history that clearly shows consistent growth can indicate future product demand, possible expansion of product lines and operational synergies that will reduce expenses. Taken together, these value drivers will help the acquiring company or individual gain market share and allow you to unlock and maximize your business valuation.

Keeping the Team Intact

A business owner who has sold his company may not stick around as part of the new company. This is why retention of properly motivated and incentivized key employees is paramount to a smooth ownership transition, and it can also mitigate risks that could potentially derail transition or growth. Make sure any potential leadership gaps are plugged before it becomes a potential sticking point to closing a deal.

Systems and Processes

Documented and well-delineated systems and procedures in place create operating efficiencies which can reduce operational costs. Streamlined, consistent processes for production, sales, management, quality assurance, and communication all point to turn-key transactions. Strong credit standings with vendors and the absence of any pending litigation is an added bonus.

Equipment and Facilities

Have you ever noticed when a house goes on the market how fast the lawn is cut and rooms are painted? Well maintained facilities and equipment that are up to date add inherent value, reducing the amount of additional capital (deferred maintenance) by the buyer. The minimal cost to get things up to standards may be rewarded several times over when it comes to the sale.

Ease of Transaction

Tie up any loose ends and make the transaction as easy as possible for a potential acquirer. Don’t set any terms that are draconian or could infringe upon a reasonable deal structure. Make sure there is enough value to attract third-party financing, and have ample working capital remaining to ensure its business as usual.

Unlocking the key value drivers of your business will improve your valuation dramatically, and provide you with a more efficient and streamlined business entity in the process. Most importantly, if you decide to sell your business, maximizing these key value drivers will help you realize the greatest potential value. 

Our team at Capital Business Brokerage with over twenty years of transactional experience gives you the leading edge. If you are a business owner, we can be an invaluable partner you need to help realize your goals and dreams.