How to Increase Company Valuation Prior to Business Sale
Dec 16, 2022
How much is your business worth? Many business owners today are asking that as they examine their company and consider how it could fund their retirement or next venture. The process of properly valuing a business is complicated, and it is not easy to ascertain what a business is truly worth on the market. But as you begin to consider selling your business, it can be prudent to work to increase its value. Let’s discuss both how to increase company valuation and how to add value to a company.
Common Issues with Company Valuations
Whether you use a broker’s valuation of your business or attempt to calculate it yourself, valuing a business can be a complicated task. The process of valuing a business is a subjective one, so different people will value the same business differently. Additionally, there are several different valuation techniques, each of which will result in distinct valuations for the same company. Here are the most common ways to value your startup or business:
- Asset-based valuation – With this valuation formula, you add the value of all the assets owned by your business (inventory, equipment, supplies, real estate, and all other property in the company name) and subtract business liabilities, such as debts and unpaid expenses, from the total assets. This approach can be adjusted to calculate a company’s net asset value based on the market value of its assets and liabilities.
- Cash flow approach – This estimates the value of a business based on its current and projected earnings. One of the most utilized methods of this approach is the discounted cash flow analysis, which uses a projection of the company’s future cash flow and then discounts the value of those future cash flows back to today. The resulting value is the company’s net present value.
- Market value – This method estimates the company’s fair value on the open market based on recent sales prices of comparable companies in the same sector and geographic region using benchmarks such as ratios or multiples from market comparables to extrapolate an estimated value. Commonly used benchmarks include price/EBITDA, price/net income, price/revenue, and price/earnings. Similarly, real estate agents use sales prices of homes in the neighborhood to guide pricing. However, when selling a business, finding recent and relevant comparables can be difficult.
It’s human nature for business owners to rate their company as having a higher value than what a buyer would realistically pay for it. This is partly because, typically, the value of the owner’s unique contributions is not included in the sale of the business. If you find that the market valuation you calculate is less than you imagined, there are steps you can take to boost your business’s value before you place it on the market.
Proven Ways to Add Value to Your Company
In order to get the most for your business, it may be worth the effort to make some changes that can increase its value to buyers. Making those changes too close to when you intend to sell is probably a wasted effort. Changes of any value require preparation and planning and deserve adequate time for them to take root and effect change. So, if you want to maximize the value of your business, here are some steps you can take to improve your bottom line and even grow your business before you move into the selling stage.
Boost profits
Buyers generally seek a business that is profitable and growing. You cannot expect to field high offers if your profit is downward trending or you’re just breaking even. So, what can you do in the short term to help boost profits? Many operators find success by focusing on three central aspects to help them create value:
- Focus on repeat business. Too many businesses chase new customers, leaving existing customers feeling forgotten and unappreciated. It’s more efficient to find ways to delight your proven customers and encourage them to do more business with you more often.
- Leverage the supply side. Your vendors want to keep and expand their business with you, too. Review your agreements with them and negotiate better pricing. That alone can boost profits almost instantly.
- Promote your knowledge and expertise in the industry. Use all your communication tools to show you know the market and the customer. Get your voice heard and your face recognized as an expert.
Uniquely differentiate your business
One of the surest ways to grow your business is to make at least some element of it unique. That is a clear path to a strong identity. What sets you apart from your competitors? Do you understand why your best clients keep coming back to you time after time? Reach out to them to find out. Ask potential customers what it is they want from your business and judge if you are delivering it. Your goal is to understand the market and your competition, and using that knowledge creates an offering that cannot be easily copied.
Drive sales and cut costs
Beyond tweaking your profit margins as mentioned above, there are plenty of ways to help your business improve its sales and modify its expenses. Any or all of the following could be beneficial to your situation and help you add value to a company:
- Cut waste and reduce spending. This is good advice for any business at any time, but it’s particularly important when you are cleaning up your balance sheet. Sometimes, this is looking for ways to spend less in certain areas; other times, it is eliminating unnecessary or duplicate expenses entirely.
- Improve efficiency. Reconsider your existing processes and business habits to find ways to make your business more productive and streamlined.
- Expand. Are there new locations, customers, or product extensions to consider that could add to your revenue? Consider focusing on engaging and growing your audience beyond your existing market.
- Invest in your business. Yes, spending money can increase profits, such as when you replace antiquated technology. Are you spending enough to market your business? Marketing budgets have rebounded back to pre-pandemic rates. And finally, invest in making your company the kind of place people want to work, and you’ll find you’re attracting better, harder-working employees and reducing turnover, which also saves costs.
Reduce risks
While it may be impossible to eliminate all risks in your business, it is to your advantage to mitigate the existing risks you know of to protect your business. You’ve learned through experience that internal and external threats exist, and you need to be prepared for them as best you can.
One obvious opportunity to reduce risk is by purchasing insurance to protect your business if an accident or natural disaster happens. Beyond that, consider gathering your team to discuss planning for technology failure and hacking, data loss, key employee losses, economic downturns, and supply chain disruptions.
Even though certain problems are unpredictable, there are still steps you can take to minimize the disruption to your business when they occur.
Get advice
Business owners often don’t know where to start or who to ask when determining what their business is worth. Seeking professional advice will bring you an informed yet unbiased look at how your business is performing and how it could improve. An experienced advisor can provide reasonable, business-driven approaches and best practices that can deliver measurable results and add value to your company. Seek out those who are qualified to do this specific task, have demonstrated results in your industry, and boast solid references.
Create a strategy plan
A company is made more valuable and resilient by having a direction to follow. You add value to a business by having a plan. If you have not already done so, create and enforce a formal strategic plan that will enable you to track measurable goals and chart your progress over time. Whether your organization is large or small, those results will add credibility that your business is growing and has long-term potential. There are a number of essential steps to consider in the process of creating your own strategy that will allow you to reap great benefits, including increased sales and improved customer satisfaction, both of which will add to your company’s valuation.
Running a small business brings a constant stream of challenges begging for attention. It is understandable that the planning and implementation of much of the above may seem daunting, and the urge to put them off until tomorrow is a common one. But when the opportunity or desire to sell your business arises, it is often on a much shorter horizon than you wish, and taking steps to increase your company’s valuation today will pay off in the long run—perhaps sooner than you realize.