Growth in the value of a business is a goal of most business owners. However, not all businesses increase in value and creating value can take time and hard work. A business owner could increase its revenue but not profitability and even if profitability increases, the new saleable value of your business may not increase along with that profitability.
Saleable value is the value a buyer is willing to pay for a business. Saleable value is based on the income a buyer can assume in the future, not what was generated in the past, as well as the inherent risk of that future income. Past income is only used to “predict” income, but future income may not be comparable to the past. Buyers may consider future economic conditions, anticipated changes in customers after a potential sale, changed in management, and other risk factors that may affect future income. Multiples paid can also change over time based on financing available, buyers and sellers in the market, and investor perceptions on the risks affecting the business.
So how can business owners increase the value of their business? One of the key ways is by decreasing the risk factors buyers will consider impactful to future results. So how can a business owner reduce the risk a buyer would consider impactful to future results?
Reduce Risk
Risk can stem from issues like customer concentration, industry conditions, labor issues, the condition of your equipment and a variety of other concerns.
Understanding where risk exists and creating a plan for how to address those risks is key to value creation in business. For example:
- Management: Think about how much of the business hinges on your involvement as an owner. Do you hold the customer relationships? Are you the only one who handles bidding? Will essential employees quit when you leave? Over-dependence on the owner jeopardizes the buyer’s ability to sustain business success.
- Staffing: How many of your employees are near retirement age? What are the turnover trends in your business? Is your labor force legally and properly employed? Buyers know the talent market is tight, and they’re looking for a stable workforce.
- Downtime: How often is your machinery breaking down? How long do you have to wait for essential parts or a repair technician? Consider whether new equipment, or a new in-house maintenance effort, would reduce downtime risk for a buyer.
- Customer Diversity: Imagine two companies with equal revenue, equal income and equal EBITDA. Now imagine one of those companies has 50 customers; the other has just two. Which business would you rather buy? Evaluate strategies to diversify your customer base and reduce customer concentration.
Increase Profitability
In addition to reducing risk, increasing profitability will have an impact on future sale value. Understanding what is driving your Company’s profitability is key to increasing that profitability. Again, that can often be harder than it sounds.
For example, our manufacturing group ran an analysis for a client that was working hard to serve their number one customer and keep that account happy. But by digging deeper, they found that margin on that work was practically zero.
At that point, the manufacturer might have been better off focusing on different, higher margin customers. By shifting their focus to other customers, the company may decrease revenue but grow profitability — and improve customer concentration issues at the same time.
Keep Building, Keep Dreaming
Part of selling a business is selling its growth story. You want to paint an exciting picture for the years ahead. Help buyers see a vision for what the company could be, versus what it is today. In other words, you need to keep that entrepreneur’s hat on — keep dreaming, planning and building toward that next level — even as you think about leaving your business.
Boost Business Value by Planning Ahead
A few years before you sell your business, it’s helpful to reframe how you think about growing value. Instead of evolving the business so it fits your goals, it’s time to start developing a business with your future buyer in mind.
With some advance planning, you can make reasonable, achievable shifts that not only improve your company’s salability but also can increase the price buyers are willing to pay.
Do you know the value of your business in today’s transaction market? Will it meet your retirement goals? Getting a business valuation from a qualified business appraiser can be helpful. In addition to the valuation, Wipfli could help a business owner understand how various deal structures could impact your net cash after a sale. Contact us to learn more.
