How To Increase The Value Of Your Business: Your Readiness Guide

As a business owner exploring your exit strategy, the main question on your mind is: what is my business worth?

For most, getting as much as they can for what has become their life’s effort is the end goal. Naturally, if ways to drive this value up exist, you’re going to explore what it takes.

In order to identify the possible ways to increase your business’ value, let’s identify the key factors that help to determine the value.

One of the most important overarching metrics to determine the value of a business is its cash flow. A business with a dependable cash flow will be valued higher than a business with inconsistent cash flow.

To help give you a starting point, we have created a checklist to identify the strengths and opportunities for your business to drive its value up.

Increasing Business Value Checklist

1. Customer Concentration
   Is the company revenue overwhelmingly generated by one customer, or are there more revenue sources?
   
   The more dependent upon single customers your business is, the lower the value will be. Just like you want to spread out, or diversify, your financial investments to de-risk your portfolio, you want to de-risk your revenue stream by spreading your revenue across many clients. That way, if one client decides to leave it isn’t a cataclysmic event.

2. Industry Cyclicality
   Does the business have consistent growth year after year, or is revenue cycle-dependent? 
   
   The more cyclical your business, the harder it is to grow because it is hard to plan for down periods in the cycle.

3. Revenue Types
   Is revenue generated from projects, or is it recurring or based on repeat transactions?
   
   There’s a reason that SaaS (Software-as-a-Service) companies tend to carry high valuations: they charge a recurring monthly fee for a product that was created once, so-to-speak. It’s highly scalable, meaning selling more doesn’t depend on inputting significant incremental resources or capital.
   
   Project-based revenues are less attractive because there is less certainty. Just because customer A completed a big project with your firm one year, does not mean that next year will be the same. Perhaps the service will never need to be performed again. Regardless, project-based businesses need to keep a full backlog that is filled by a pipeline that is constantly growing and shrinking. 
   
   The more ‘repeatable’ your offering is, the more valuable it is to a buyer. 

4. Customer Switching Costs
   Is it possible to switch customers from other vendors to your business?
   
   There is some inherent protection for your business built into your offering if switching is a pain in the a** (driving the value of it, up). However, if switching is a breeze, there’s more volatility in the relationship and as “customer stickiness” weakens, so can your value.

5. Management Strength
   Is the management team here to stay, or are they curious about new opportunities with other companies?
   
   The last thing any buyer wants is for the team, with all the tribal knowledge of what makes your business function, to bail on them. If there’s a flight risk for your valuable members of the team, that will lower the value because the work (and money) required to replace them goes up. 

6. EBITDA Margin
   Is the margin less than 15% and, if so, can the business implement the right action plan to increase it?
   
   It’s pretty easy to do the math on your EBITDA numbers to determine a rough valuation. The real question becomes what opportunity areas can you exploit to drive this number up? These are typically found within inefficiencies in operations processes, smarter financial or cash flow/accounting management strategies, or excesses in spending and/or overhead.
   
   Each business carries so many variables, though, so searching for the right opportunities requires some analysis.

7. Growth Potential
   This is the wild card. While some industries or businesses have plateaued (lowers your value – not a whole lot of future growth potential in the oil industry, for instance), others are in stronger positions for growth (sticking with the oil example, renewable energy sources are a burgeoning market).
   Businesses can expand by:

• Selling more of their current products to the markets they serve

• Selling current products to new markets

• Creating new products to sell to the market they serve

• Creating new products to sell to new markets

But a large factor in your growth potential (to take full advantage of either the four avenues above) is the quickly-evolving sales and marketing landscape. Methods that used to work so well 5-10 years ago, are fast-becoming more expensive and less effective. 

How your company plans to acquire new customers can be a major lever to drive an increased valuation.

The industrial buyer journey has been going through critical changes that can slow down your growth and lead to lower valuations.

Much of this has been sped up by the current pandemic:

• Rising Competition - The number of competitors for a business has grown from 2.6 to 9.7 in the last five years (The Hustle)

• Changing Buyer Preferences - 75% of B2B buyers prefer to remove sales interactions (McKinsey & Company)

• Changes to How Buying Decisions Are Made - 70% of B2B buyers decide to buy before they contact a sales representative, in the research stage (IMPACT+)

• Lower Trust in Sales - Only 33% of salespeople are seen as trustworthy (McKinsey & Compan

• Wasteful Spending on Traditional Media - 40% of media ad spend goes into ineffective strategies (Commerce Signals) and 27% of leads from marketing will e qualified (IMPACT+)

If you have started to notice your once-effective strategies are losing their effectiveness, it’s worth exploring the right ways to evolve your approach.

Contact us and tell us to “Send me the 2022 customer acquisition guide.”

Apart from your valuation, what other factors should business owners consider when selling?

Most companies tend to rely on Porter’s Five Forces for industry evaluation, on the principle that the more attractive the industry structure, the more favorable a business can be viewed.

It is a good starting point, especially coupled with the items previously mentioned in the checklist, to determine how much your business is worth.

But in the context of a sale, dollars may not be the only factor in your decision. This is an incredibly emotional decision for most.

Below are some additional questions to consider as you evaluate potential buyers and the next chapter for yourself and your business:

• What happens to the business after it's sold?

• What happens to current employees post-close?

• How will the company culture change?

• How will the business reputation change?

• Do you still want your legacy to remain attached to the sold business?

We make such recommendations so that owners can avoid transactional buyers that may just strip their life’s work down to the bones, taking little care for the customers and employees involved.

Let’s have an exploratory call.

Most private equity firms are focused on exploiting your company for as much monetary gain as possible. That’s not us. We want to ensure this is a mutually beneficial agreement for you, your employees, and our firm.

On our first call we would want to hear about:

• Your values, why you started this business, and what you love about it

• Your goals and hesitations in finding a potential partner for growth

• We’ll share more about our approach and the process

We will not get into financials unless you absolutely want to