Ask three people what a business is worth and there’s a good chance that you will find three different figures as business valuations are definitely more of an artform than a science. However, there is a common understanding that certain aspects increase value, and, as the goal of all commercial business owners is to build value, whether for investors or ultimately for purchasers to secure an exit, focusing on these will provide a sensible strategic direction.
If you want to increase the value of your business, here are some key areas to concentrate on:
Profitability & cashflow
As much as amazingly exciting forecasts look impressive, if you can show a potential purchaser or investor that you’ve already proven your potential by delivering some great historical results, they are much more likely to positively impact upon your valuation.
Strong gross and net profit margins, plus strong cashflow and working capital management are all important to demonstrate.
Ensure your quotation system is accurate, your costs are well controlled and you have systems in place to ensure credit control over your debtors. Show that your assets are well managed and that there is a strategic plan for your renewals and new asset investments.
Taking a regular look at the business’ own credit score will ensure that suppliers and potential customers feel comfortable working with you and will result in more cashflow for you. If your credit score needs improving, talk to us as we can support you to do achieve this.
Systemising the business
By systemising the business, you reduce the reliance on any individual and demonstrate that the business can operate independently of a single person – which is important for continuity if the founders are planning to exit the business.
To achieve a higher valuation, founders need to effectively make themselves redundant from the day to day operations of the business and ensure that others are responsible for selling the products and delivering the service.
Whilst early stage businesses may struggle to cover the overheads for these additional costs, there are ways to mitigate the risk by using commission remuneration structures, especially for sales staff. The strategy should include the planned recruitment of a wider management and leadership team as soon as financially viable and the business owner can then begin to delegate to leverage the resources in the business and bring in processes to manage the growth.
Securing certainty for the future
If you can remove or mitigate the future risk within a business, investors or purchasers will feel more confident when predicting the financial projections of the company and their valuation will reflect that.
Aim to build recurring revenue streams with customers, have various routes to market and spread your sector exposure.
Having predictable, even constant, costs if possible and a wide choice of suppliers will also ensure margins are able to be maintained.
And finally, the most important aspect will be to ensure your management information is reliable and you can measure your financial results on a timely basis. The ability to use these to predict future cashflows and profit trends are essential if you want to provide a potential investor or purchaser with sufficient comfort to value your business highly.
Increase your profile
Businesses with a known brand and strong reputation will be valued substantially higher than little-known businesses as they often attract competitive offers when the opportunity arises for an investor or a purchaser to capitalise on that profile.
Ensure that any overseas buyer or investor sees a positive view of your business online, considering all the possible points of exposure including third party content such as social media, press coverage and review sites.
The full value of a business includes the intangible, as well as the tangible financial assets in a company.
These aren’t always included in the business’ balance sheet, so to support a higher valuation you should focus on being able to communicate this additional value to an investor or purchaser.
The first step is to identify and document all your IP and then protect it. We can assist with this process so get in touch if you want more information about this.
In addition, if any particular element of your IP can directly support an income stream, and this is clear in your financial results, then this can be very persuasive to demonstrate your full value.
These steps rarely happen of their own accord and the most successful business owners have taken particular care to create a business which maximises all these areas. We have market-leading exit planning processes to assist you in identifying what steps your business needs to take. Contact us for more information.