Business value is a touchy subject with owners these days. In general, corporate values are down because of the economy, but as baby boomer business owners age, many are looking for a lucrative exit plan.
How can owners build more value in their companies? Valuation experts always come back to the basics — identifying and focusing on the things that drive value for the organization. Here are a few common value drivers to consider:
Diversified customer base. Most businesses are better off with a wide base of customers so they’re not vulnerable if a few customers experience financial difficulties or switch vendors. Examine the percentage of revenues coming from each of your largest customers. The larger the percentage, the higher your risk if the relationship changes.
Talented workforce. Lots of CEOs say that their company’s most important asset is its people. If this is true, and often it is, then the workforce should be well cared for in terms of training, salary, benefits and possibilities for advancement. In addition, they should be led by a strong management team that can continue to lead the business after the owner is gone. Use incentive plans to make sure key employees stay in place.
A plan for growth. A realistic growth strategy forms the foundation of a company’s future. The most valuable businesses have strategic plans that accommodate industry and customer demand trends, new products or services, research and development, and expansion, whether through additional territory, capacity or other factors.
In the short term, be prepared to communicate this plan to your employees so that everyone is working toward a specific goal. In the longer term, be prepared to share the plan with potential buyers. They will certainly be impressed by a progressive vision backed by realistic numbers.
Proven systems. Valuable companies are able to replicate their success, which often requires proven systems and processes. These systems are scalable to support the company’s growth, and they are documented so that new employees — or new owners — can quickly figure out how they work most effectively.
Is your company running smoothly and efficiently or are you reinventing the wheel every day? If you can’t point to your systems documentation, it’s time to start taking notes. Spend time examining your core processes — those that generate revenues and control expenses.
Good cash flow. Cash is indeed king. This is what buyers want, and all the other value drivers contribute to it. There are several ways to improve cash flow, including improving collections and reducing expenses. One quick way to cut expenses is to discontinue the practice of putting personal expenses, such as vehicles, vacations or club memberships, on the books.
Look at ways to improve the performance of your business so potential buyers can see that it is on an upward trend.
Keep in mind that specific value drivers are different for each company and each industry. Uncovering and nurturing your company’s value drivers is important both for today and tomorrow. Paying close attention to them will reduce risk, increase return and eventually attract buyers.
Curious about the value drivers in your business? The Business Transition & Family Enterprise Advisory Services team can help you recognize them and identify ways to increase the value of your business.
Article by Paul G. Stringer, CPA, CA, FEA, Partner
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