Do you ever wonder what makes your competitor’s company price out at a higher value than your company – even though their business model is exactly the same?
This situation is nowhere more evident than it is when it’s time to sell. You want to make your exit as valuable as possible, but what really drives value? And, perhaps more importantly, what tanks it?
Here are ten things that have a direct effect on business valuation:
1. Second-Tier Management
If your business is wholly dependent on you, no matter how brilliant you are, it loses value. Having a reliable second-tier is essential for maximum return. For smaller companies, second-tier management might not be a viable option, but if you do plan to sell, consider scaling up to a level that will support this approach. If you are the business, it’s unlikely that you’ll be able to find a buyer.
2. Repeat Business
Long-term contracts and recurring revenue streams are the lifeblood of any business – as long as those contracts are profitable. Contracts and recurring charges show that your customers need you, have faith in what you offer, and are committed to a long-term relationship.
3. A Diverse Customer Base
Putting all your eggs in one basket is never a good idea. If most of your business centers on one organization, it can all disappear very quickly if anything changes.
While it’s tempting to sit back and enjoy how easy it is to deal with less paperwork, fewer sales, and so on, don’t concentrate all your efforts there. It’s not right for you now, and it won’t do anything for your business valuation. Think of it this way – if the contracts with your best customer suddenly become less profitable, you’ll be left holding the bag. Buyers recognize this; so, even if your margins are good overall, your value dwindles.
A good rule of thumb for business valuation is that no one customer should represent more than ten percent of your total revenue.
4. A Unique Product or Service
The more similar you are to your competitors, the bigger an uphill battle you’ll have in terms of proving value. The more diluted you are in your niche, the bigger the challenge. You need a unique selling point (USP) to give you a competitive advantage.
Setting yourself apart, even in an over-saturated industry, requires some determination. One of the ways that can elevate your value in this situation is to optimize the customer experience. Make it about how you do things rather than what you do.
5. A Great Location
Many businesses sell strictly on the merits of their location. If it’s easy for your core audience to come to you, it will bring in buyers who understand that. In other words, if your location provides value for your customers, suppliers, and vendors, that’s a value in itself.
Any company with a good reputation in their niche will attract attention from buyers, essentially for the same reasons it draws customers in the first place. You may have built your reputation over years or even decades in business, but even so, it takes about a minute to ruin it. Managing your reputation is essential, no matter what stage of growth your company is in.
7. Expansion Opportunities
Any buyer who is looking at your company will be attracted by growth and expansion opportunities. The more you have, the better. If you are outperforming your peers, growing fast, and turning a good profit, your business will stand out.
8. Strong Potential for Mergers or Acquisitions
If there is a trend in your industry to consolidate and conquer, you have a good chance of selling. In this situation, you will deliver top value if your books are in excellent shape, you have a stable workforce that includes second-tier management, long-term contracts, a good location, and a stellar reputation.
9. Your House Is In Order
If your books are clean, if you have no outstanding debt, if you are cash-generative, and if you manage your debtors with an iron fist, you are several steps ahead of the game. Be sure to analyze your overheads regularly so you can make adjustments as needed to protect your margins. Audited statements show potential buyers that you are on the up-and-up.
10. Your Customers Love You
Customer satisfaction goes a long way to demonstrating value to a prospective buyer. If your clientele can’t get enough of you and keep coming back for more, it will show. Collecting and soliciting testimonials and good reviews will serve you well when it’s time to cash out.
Encourage your happy customers to share the love on as many platforms and channels as you can manage. From Yelp to Google to Facebook, leverage everything you’ve got. It’s all good.
Things That Lower Your Business Value
The other side of the coin—awareness of what detracts from your business value—is just as critical. Here are a few things to consider:
High Expenditures Needed to Get Current With Today’s Demands
If you have not yet digitized or modernized your operations, this can be a significant barrier, especially for larger companies. While it might be overwhelming to think about the necessary changes, you’ll be out of the market soon enough if you do nothing.
High Fixed Costs
If your overhead is climbing, be it your rent, labor, licensing, or cost of the commodities you need to operate, your business won’t be attractive to a potential buyer. Find ways to create efficiencies and trim the fat where you can.
Dealing with a single supplier is like depending on one client for the bulk of your revenue. If that supplier goes out of business, raises their prices, or decides they don’t want to do business with you anymore, where does that leave you? Contracts are helpful, but they’re not bullet-proof. Your business value shrinks in line with risk, and this is a big one.
Do you know the value of your business? Get an estimate of value of your business and learn how to build value in your business and find the freedom you deserve.