How to Build Your Company’s Value

As you build your company’s strategic plan, consider not only how to drive growth, but also how to reap long-term financial rewards. Most of your personal wealth is likely tied to your business. This means that maximizing your business’s value ensures an optimal return on your investment, helping you meet your financial goals.

There are many ways to increase your company’s value.

Focus on the Bottom Line

Buyers are more interested in earnings and cash flow than revenue. A company with $5 million in revenues and $1 million in earnings is more valuable than one with twice the revenues and half the earnings. Unprofitable services and products that generate revenue will hurt the value of the business. Additional revenue, in this case, slashes profit margins and pumps up overhead.

Focus on Earning Quality

A company’s value depends both on cash flow and on its ability to generate cash in the future. When you sell your company, a buyer will scrutinize cash flow value by looking at how consistent cash flow has previously been. This means a buyer is interested in predictable profit margins and revenues. Increase value by adding recurring revenue. Long-term sales and maintenance contracts and customers with a continual need for your services or products are excellent strategies for generating revenue.

Delegate Daily Duties

A small business’s success is heavily tied to its owner’s’ daily involvement in its operations. If you handle much of the daily duties, a buyer might struggle to find a qualified replacement. Conversely, a company that can operate without its owner is more valuable.

Strategic and private equity buyers value experienced management. One way to increase a company’s value, then, is to delegate daily responsibilities to key employees. Try to identify one key employee capable of running the company one day. This makes your company more marketable when it is time to sell.

Cut Owner Perks

Many business owners use company funds to pay for personal expenses as a way to reduce their taxable income. This offers many short-term benefits, but these perks can prove problematic when it’s time to sell. Buyers must determine which expenses are personal and which are business-related to better understand your company’s earnings. This can be a difficult and time-consuming process.

Banks often refuse to add back personal expenses when assessing the value of a company. This can make it more difficult for buyers to secure financing for a transaction. Prevent this frustration by minimizing your perks for at least two years prior to an anticipated sale. You may pay more in taxes, but your company will sell for more.

Leverage Your Strengths Into a Niche

Companies boasting strong brand identities in niche industries are more valuable than those attempting to serve a broad market. Strengthen your competitive edge by determining what you do better than your competition, and cultivating that area. This will help you hone your brand and improve your financial performance.

Reduce Risk Through Diversification

Risk can threaten a company’s bottom line. The most common risks include dependence on an individual customer, vendor, or product line. Overcome these risks by diversifying. Products may become obsolete. Vendors go out of business. Customers seek a better deal with a competitor. Diversification options include expanding your product line, growing your customer base, or working with multiple vendors to increase bargaining power.

Plan Now

Increasing value requires starting with a plan. If you hope to sell for maximum value, begin building value today, by considering the above advice. Years of advance preparation can pay off with maximum deal proceeds.

By Scott Bushkie