When was the last time you got a business valuation done? You may do a business valuation to get loans, plan an exit, or just out of curiosity. Most small business owners feel disappointed when their business valuation doesn’t match their estimates, especially when considering selling their business.
How To Boost Business Value for a Potential Buyer
Your business is valuable to you, but it may not be for a third person. Hence, it is important to look at your business from the buyer’s perspective and work towards areas that are reducing the economic value of their business. Conducting a business valuation will tell you where you stand, your strengths and weaknesses.
Understand The Current Value of Your Business
A strong business can give you flexibility to choose your desired exit strategy. To enhance your business value, you should know where the value lies. A unique selling point that differentiates your business – niche offerings, loyal customers, employees’ skills, or growing revenue and profit. Companies buy other companies at a premium for growth, expansion or eliminating competition.
Business valuation companies value your company by looking at balance sheets, cash flow, profits and revenue, future financial prospects, and book value. You can use this valuation as the base to design business plans and strategies. You can track your growth to eliminate strategies that are not working and focus on those that are.
Work Towards Increasing Sales of the Business
Your business may have recurring and non-recurring revenue streams. Consider focusing on products or services that generate repeat sales and remove the offerings that are not selling well. Cross-selling your other offering to existing customers can enhance your sales. Also, consider acquiring new clients by offering attractive incentives to salespeople and spending on marketing and advertising.
Investing in branding and better customer experience can help you claim a premium price for your products or services. But this depends on the nature of your business. Some are volume-based (like groceries), and some are value-based (like boutiques). You can also consider increasing your prices if the inflation increases.
As small businesses have limited resources, instead of catering to multiple markets, you can focus on becoming the best in a single market and creating your niche. A unique selling proposition (USP) brings customer loyalty and word-of-mouth publicity. If your USP becomes stronger and attracts a larger customer base, it could enhance your brand value, and you can claim a premium when you sell the business.
Build a Diverse Customer Base
While working on offerings, you need to work on a diversified client base. If your revenue depends on a few clients from a particular industry, your business might not be attractive to a buyer. Clients tend to leave when business ownership changes hands. Hence, focus on catering to a diverse range of people or companies (big and small, across verticals). In a diversified customer base, even if some customers leave, the buyer of the business gets value from your client base.
Build a Long-Standing Customer Relationship
As we said before, it is better to have customers with repeat sales than one-off customers. That makes your sales predictable. You need to build a long-standing relationship with customers for repeat sales.
You can collect customer data, document their needs and choices, and offer relevant suggestions to cross-sell products. Such analytics can be shared with the new business owner, who can continue this trend, thereby reducing the churn rate. This data can be of significant value if the buyer is a competitor.
Work Towards Improving Cash Flows and Profits of the Business
Profits and cash flows are of importance in a business valuation. Considering a business sale is not wise if your business has negative cash flows and piling losses. There are few buyers for distressed companies, as it takes a lot of effort and time to turn around a company.
It is better to exit a profitable business that can generate increasing cash flows in the short and long term. The best way to make a profitable business is to start with a positive cash flow, be thrifty with spending, and keep low debt levels.
Instead of buying equipment, you can lease it unless the business starts generating enough volume to make it economical to own machinery. You could conduct thorough inventory checks to avoid wastage and periodic expense reviews to cut down on unnecessary expenses. As for cash flows, setting up a robust invoicing system with regular follow-up could ensure regular payment of all invoices and keep cash flowing through the business.
Building a Team of Highly Skilled and Motivated Employees
Some businesses, like software, are highly dependent on employees’ skills. Attracting and retaining employees who are smarter than you are signs of leadership. A company grows along with their employees. You can offer professional development plans to improve their skills, attractive perks, and incentives for their overall well-being.
If a buyer is acquiring your business for employees’ skills, the acquiring company might continue the incentives to retain the talent.
Build a Business That Can Grow Without You
The idea of improving business valuation before selling it is built on the foundation that business can grow without you. When designing your business strategy, ensure its success depends not on you but on the business process, offering, or model. When you sell your business, you must ensure a smooth business transition so the buyer can derive the most value with little fallback.
Showcase Your Historical Value and Growth Projections
Ensure you document every improvement to showcase how your business repeatedly drove value. Buyers like to see growing historical patterns and data that they can analyze. Also, focus on improving your business projections. A comparison of projected and actual numbers can build trust in your valuations.
Contact Glenn Graydon Wright LLP in Oakville to Help You With Business Valuation
A professional accountant can help you value your business and track its performance regularly. At Glenn Graydon Wright LLP, our accountants can provide business accounting and valuation services. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting services, connect with us online or by telephone at 905-845-6633.