What is Your Business Really Worth? And How Can You Increase The Value of Your Business?
Many Australian business owners have engaged in little to no exit planning. This is true even for owners with most of their assets tied up in the business. Unfortunately, this is a recipe for disaster when it comes time for you to leave the company – whether that’s due to retirement, an accident or illness, or you want to hand it down to your children.
If you want to maximise your business’ value when it comes time to sell, you need to start planning now to make it attractive to potential buyers.
The Market Valuation of your Business
The logical starting point is to determine how much your business is worth today.
There are a variety of methods to do this. However, small and medium-sized business owners can usually rely on quick and uncomplicated estimates of their business worth at this point.
Here are three common methods used to determine the value of your business.
Asset Method
The asset method has the most straightforward formula for valuation. To calculate the value based on this method, you deduct your liabilities from your assets.
For example, if you have assets worth $1,000,000 and liabilities totalling $300,000, the fair market value of your business is $700,000.
While fairly straightforward, the asset method ignores non-tangible assets in your business. It doesn’t consider goodwill or the value of your ‘brand’. This method also fails to account for your company’s prospective earnings or your competitive advantage. For instance, if you use newer technologies or are more innovative than your competitors, your company may be worth more – and the asset method won’t account for that.
Income Method
This method calculates a company’s likely future profits using financial projections, including revenue forecasts, working capital, taxes and the like. These are then discounted to a present value.
This method is more complicated and should typically be handled by a professional with experience valuing businesses.
Market Method
The market method looks at companies similar to yours in terms of size, revenue, customers, and other factors. With these factors in mind, you can estimate the value of your business.
Strategies to Increase Business Worth
With the value of your business in mind, you can devise a Now, Where, How plan that reflects how you’re going to get from where you are now to where you want to be when you finally sell your business. Your plan should include details about what needs to change and which strategies you will employ to make those changes.
Diversify your customer base
A diversified customer base is an asset for any business, but it’s especially important when selling your business.
Much like a diversified investment portfolio – a diversified customer base reduces the risk for potential buyers that they would lose a significant portion of the current income if a customer leaves. It’s not uncommon for customers to leave if they find out that the business is up for sale, and there is always a risk for a buyer that the customer’s loyalty is with its owner – not the company.
To achieve this, you can work on adding more customers to your base and reducing revenue reliance on major customers. How you will do this depends on your market and industry, but common strategies are increasing marketing, taking advantage of gaps in the market, or product and service development. You can also ask long-time customers to give testimonials explaining why they chose your business and continue to do so to spark new interest.
Improve margins and cash flow
When it comes time to attract buyers, it is not enough to show profitability on an income statement. Good profit margins need to be accompanied by healthy cash reserves. A strong history of a steadily growing cash flow is also seen as a positive by many prospective buyers.
To improve your margins and cash flow, consider:
- Increase the volume of your sales
- Reduce your operating expenses – a waste and profit review can be helpful here.
- Improve inventory management.
- Devise systems that increase the lifetime value of customers.
- Increase the perceived value of your product or service.
Show consistent revenue growth
An interested buyer would generally look at the financial reports for your business for the last 3 to 5 years. Steady and consistent growth is more reassuring to potential buyers than occasional spikes in earnings. Flat or negative earnings in some years can cool interest too.
The strategies you might consider to increase your revenue steadily include honing your pricing strategy, reducing your annual write-offs, and expanding your geographic reach.
Empower your people
Many buyers understand the value that a company’s human resources bring. As a result, leaving behind a professional and competent management team and pool of employees can be beneficial when you sell your business.
If your workforce is engaged, productive, well-paid and well-trained, you will likely have lower employee turnover than others in your industry. However, if your turnover is high, you should take steps to decrease your staff turnover.
If you’re considering selling or otherwise exiting your business in the next five to ten years, now is the time to start planning.
Reach out for assistance.
