5 ways to drive the value of your business

When it comes to selling a company, many owner-managers naturally focus on obvious financial metrics to try and work out how much their business might be worth – revenue generation, solid history of profits and strong cash flows will all have an impact on a company’s valuation.

However, there are several value drivers that could encourage prospective buyers to pay a higher price than a desk-top valuation would indicate.

Here are 5 ways to positively impact the value of your business, that won’t necessarily be recorded in the company’s annual financial statements.

1. Growth Opportunities

Business owners need to think strategically in order to capitalise on growth opportunities in their markets. Businesses that have well developed growth strategies and an openness to new revenue streams can quickly develop a competitive edge. Diversified revenue streams carry their own intrinsic value for the right strategic buyer and can be a useful negotiating tool for increasing the eventual price paid for the company.

2. Demonstrable financial controls

Many owner-managed businesses lack robust financial reporting to such an extent that prospective purchasers cannot accurately determine the company’s ongoing levels of profitability or revenue generation. An absence of internal financial reporting can indicate to buyers that the owner and/or management team lack a clear understanding of their own company’s financial performance – this naturally erodes confidence and increases the risk attached to the acquisition, potentially reducing the price. Solid financial controls (regular budgeting, monthly management accounts, reliable and detailed cash flow forecasts) mitigate this risk and add intrinsic value.

3. Lack of Owner Dependence

Owner-dependence can be problematic for businesses, particularly when it comes to price – the amount paid for a business may be tied to the owner sticking around post-completion. A strong second tier management team is not only key for the ongoing sustainability of a business but also helps to separate the business from the owner.  Being able to demonstrate that you are not “the business” will reassure a buyer that there are autonomous operating systems in place, thus reducing transactional risk.

4. Diverse Client Base

If a large proportion of your company’s sales are generated from a single source, then a potential buyer will almost certainly be concerned about the impact of losing this major customer. And this may be an even greater cause for concern if this customer is loyal to you the owner, rather than to the company or other employees – a change of ownership could fundamentally change the dynamic of the business.  Having a well diversified customer base, with no material reliance on any single customer, will reduce operational risk and protect the business.

5. Scalability

Businesses that are scalable attract high prices as they experience increased profit margins as revenues grows. Simply put, margins increase because costs do not grow in line with revenue.  Efficient operating systems and processes, significant competitive advantages and a well developed business model can help to improve profit margins as revenue increases.  If these value drivers can be replicated in different locations, thus demonstrating that your business is scalable, buyers may be prepared to pay a strategic price for your company.

Our team has over 50 years of collective experience advising owner-managed businesses. We’ve worked on plenty of sale mandates and understand business value drivers. If you’re thinking of selling your company, why not start by speaking to one of us.