Building The Value Of Your Company

August 2016       Download PDF      Print

As you develop a strategic plan for your company, you should consider not only how to drive growth, but also how your plan can help you achieve long-term financial gain. Because most of your personal financial wealth is likely tied up in your business, understanding how to increase your company’s value is essential in order to maximize the return on your investment and ensure you can meet personal financial objectives.

There are many ways to increase the value of your company. Start by considering the following tips:

Focus on the bottom line

If you sell your company, buyers will focus more on your earnings—and specifically, your cash flow— than on your revenue. A company with $5 million in revenue and $1 million in earnings is more valuable than a company with $10 million in revenue and $500,000 in earnings.

Products and services that generate revenue but are not profitable will likely hurt the value of your company. The additional revenue simply reduces your profit margins and increases overhead costs.

Delegate daily responsibilities

The success of a small business often depends too heavily on its owner being personally involved in every aspect of its operations. If you personally handle many of your company’s key responsibilities, a buyer may have a difficult time finding a qualified replacement. To the contrary, a company that can operate in its owner’s absence is more valuable than a company that requires constant supervision from its owner.

Private equity and strategic buyers value experienced management teams; therefore, one way to increase the value of your company is to find and mentor key employees to handle some of your daily responsibilities. Furthermore, try to identify one key employee who is capable of one day running the company. This will make your company more marketable when it is time to sell.

Focus on your quality of earnings

The value of your company depends on the cash flows it generates and its potential to generate cash flows into the future. When selling your company, a buyer will scrutinize the quality of your cash flows by investigating how consistent they have been in the past.

In other words, a buyer will value your company based on the predictability of its revenues and profit margins. You can increase your company’s value by adding recurring revenue components to your business. Recurring revenue streams can be generated through long-term sales or maintenance contracts or by working with customers with a continual need for your products or services.

Reduce owner perks

Many business owners pay for personal expenses using company funds as a way to reduce taxable income. While this may provide short-term benefits, these perks can create problems when you decide to sell your company. Buyers will need to determine which expenses were personal and which were business-related in order to have a realistic understanding of your company’s earnings. This process can be both difficult and time consuming.

Often, banks will not add back personal expenses when determining the value of a company, which can make it more difficult for buyers to secure financing to complete a transaction. To avoid this type of situation, minimize your perks for at least two years prior to selling your company. You may have to pay more taxes during that period, but overall it will help you receive a higher value for your company.

Leverage your strengths to create a niche

Companies with strong brand identities serving niche industries tend to be more valuable than companies trying to serve a broad target market. Try to strengthen your competitive advantage by identifying what you do better than your competitors and developing that area of your company. Over time, this will help you improve your brand and financial performance.

Diversify to reduce risk

Many types of risk can threaten a company’s bottom line. The most common risks business owners face involve being overly reliant on an individual customer, product line, or vendor. The best way to overcome these risks is through diversification.

Products can become obsolete, vendors can go out of business, and customers can switch to a competitor. You can diversify by expanding your product offering, or by implementing a strategy geared toward growing your customer base. You can also search for multiple vendors of the same product as a way to increase your bargaining power.

Start planning now

Building the value of your company starts with a plan. If you hope to one day sell your business for maximum value, start building your company’s value today by considering the advice above. Preparing several years in advance will help you achieve maximum proceeds from a sale.