How to Increase the Value of Your Business

Commonly neglected by small businesses, increasing the market value of a company should be a priority for every management team. Even larger businesses with great management and a long-range plan often fail to focus on value accretion. Prioritizing market value growth impacts the management team’s focus.

Investors often seek two complementary characteristics: current income and capital gains. Business leaders ought to pursue an increase in market value in conjunction with current income. How? Here are two important areas of focus.

Build a Successful Team

Market value is significantly impacted by the quality of the management team. Small companies are often built around a single founder or family. When management is passed from the founding leadership, a successful transfer involves a qualified, professional team. Emphasis should be placed on forming a skilled, talented, and innovative group of staff. Reliance on a single leader is a risk to the company and a red flag to potential buyers. Both strategic and financial buyers look for depth of management when considering an acquisition.

Good succession planning is of vital importance. A potential buyer has to be assured that the current owner/management can be adequately replaced. A sure way to accomplish that is to replace yourself before selling or alternatively develop a sound succession plan.

Molding a capable team that will be ready to run the business is a necessary component of succession planning. Team-building involves recruiting and retaining top talent. High performing teams add to the sale value of a company. When evaluating the strength of your talent pool, consider the question: “Does my management team have the leadership skills to develop a thriving company without me?” If your team portrays this image, potential buyers can be confident that the company will not stumble without the owner at the helm.

Develop & Follow Operating Procedures

High-performance organizations are institutionalized. What does this mean? Institutionalized businesses develop and consistently follow standard operating procedures (SOP). When incoming staff members are always trained according to the SOP, the success of the management team shifts from one or two members to the holistic team. Of course, successful management then depends on the proper development of SOPs.

Standard procedures remain constant through the ebb-and-flow of staff. Thus, acute, efficient, understandable processes and procedures ensure that outside and inside interactions with the organization are consistent. Furthermore, organizations built on the firm foundation of cutting-edge technology, systems, and processes have a competitive advantage. Once more, evaluate the competency of your management team to develop and implement the SOPs.

Management teams are busy. Complex, unforeseen issues arise daily, demanding time, resources, and energy. Long-term goals and strategy also play into everyday business. However, equally as important as current income and daily functions, is formalized planning designed to increase the market value of the business.

Below, we explore three areas of where focused management teams can bolster market value and provide future capital gains for investors.

Diversify Your Customer Base

Businesses often make the mistake of chasing high volume, marginally profitable customers or even becoming dependent on a single customer relationship. Customer concentrations result in stunted profit margins, ultimately reducing the company’s marketability and market value.

Concentrating on one or two large customers or a single market produces unnecessary risk, warning potential buyers of long-term financial instability. Buyers seek companies with a diversified customer base, with no single client representing more than 8-10% of total revenue. Single end markets or a few large customers are red flags, ultimately resulting in reduced market value.

Management teams must proactively diversify the customer base by size, industry, number, and geographic location.

Develop Recurring Revenue

A continuous source of revenue is an obvious indicator of market value. Starting every month, quarter, or year with a high percentage of targeted revenue already in the pipeline is a great business model.

In pursuit of top line growth, businesses can overlook the existing customer base. Acquiring new customers is important for a growing company; however, maintaining current relationships with a client base accelerates growth and enhances profitability.

Pursue and enhance techniques to increase recurring revenue and prevent competitors from undermining your customer base. We’ve listed a few key strategies below:

• Prioritize customer retention
• Provide persuasive customer value propositions
• Exceed delivery dates
• Continuously innovate
• Exceed quality expectations
• Be the most convenient option
• Exceed customer service expectations
• Provide creative offers

Multiple streams of recurring revenue reduces risk, increases the predictability of earnings, and generates a premium valuation for the company.

Demonstrate Growth Potential

Demonstrating a growth story with realistic potential is attractive to prospective buyers. Both a recent track record of growth with explainable cause and future growth opportunity are crucial for investors to understand about your company. Potential buyers look for scalability along with revenue growth potential. The ability to support revenue growth without significant capital expenditures is a value driver.

Flynn & Company: CPAs and Business Consultants

Flynn & Company is a full service accounting firm, dedicated to helping our clients achieve greater bottom line profits with innovative & practical solutions. Our business valuations provide businesses with an insightful tool, applicable to many situations throughout the life of a company, including purchase or sale, financing, divorce, gifting or discounts, equity infusion, and many more.

Knowing the value of your business at any given time is valuable insight. A business valuation is an extremely useful tool that can be applied throughout the life of a business to understand current value and identify techniques to increase future value.

Is your business considering purchase or sale, financing, divorce, partnership buyout, merger or acquisition? These situations are but a few examples of situations when a business valuation is necessary.

Flynn & Company is dedicated to creating innovative and practical solutions to help you achieve greater monetary gain. We understand that a crucial component to future success is market value. Our business valuation services are designed to guide your company into efficiently increasing value. We are big enough to provide expert services – but not too big to give you individual attention. Contact us today to begin a conversation at (513) 530-9200 or via our online form!