There are many ways to increase the value of your business, but most take time to implement before the benefits are evident. If you’re looking to sell or transition your business in the near future, you may not have the time to wait for long-term plans to bear fruit.
In some ways, business transactions are similar to selling a personal residence. For instance, there are ways to “dress up” your house so it sells more easily and yields a higher price. Removing wallpaper and applying a fresh coat of paint are quick and easy ways to help increase your home’s value, but renovating a kitchen – while undoubtedly adding to the value – is often too costly and time consuming.
Below are six ways to quickly increase the valuation of a business enterprise in the marketplace:
1. Strengthen Your Management Team
One of the biggest risks with privately-held or family-owned businesses is that the management team is often dominated by one individual, who in many cases is the selling owner. This typically leads to apprehension with the buyer and can result in a lower offer. As counterintuitive as it may seem, hiring a replacement CEO and displaying that the business can operate without the owner can increase the multiple a buyer is willing pay.
2. Devise a Strategic Plan
Typically a strategic plan lays out the next five years of earnings and how the company expects to achieve those results. Whether you use it or not, this can provide useful information to a buyer and can help increase the value of the business because it addresses the company’s future growth potential, as opposed to past earnings being the sole source of financial information.
3. Clean Up Your Financial Records
When a potential suitor is evaluating a business, one item they are always interested in is timely and accurate financial information. Financial records are the cornerstone of all transactions, and unreliable financial information can create doubt regarding cash flows, customer base, and expenses. Strong financial records, or even audited financial statements, on the other hand, have been known to increase the price a buyer is willing to pay.
4. Cut Out The Fat
Every business has unnecessary expenses, whether they are family-related expenses or simply discretionary expenses. Limiting these types of expenditures in the year (or years) leading up to a transaction will show a potential suitor that these expenses are not essential to running the business. This is much easier to demonstrate than treating these expenses as “add-backs” when sharing financial information.
5. Prune Low Margin Business
In some industries, value is derived from top-line revenues and in others it is derived from profits. Low margin customers, product lines, and divisions can actually hamper value, and in some cases become the first thing buyers eliminate to provide them with an immediate increase in value on the business they just purchased. Take this opportunity to trim off segments of the business which are not profitable and reap the benefits of an increase in valuation.
6. Assess Tax Uncertainties
Tax uncertainties are the “gorilla in the room” with transactions, and they tend to turn up in the eleventh hour to damage the seller’s potential proceeds. Tax uncertainties are the pesky tax assessments that come as a result of doing business in jurisdictions where the company has never filed. Rightfully so, buyers are unwilling to assume the risk of past sins. A good way to quell this potential risk is to have a state and local tax professional address the company’s tax risks and prepare a written document that discusses the tax exposure, or lack thereof.
The six action items mentioned above are a few simple ways help increase the value of a business in a relatively short amount of time. However, these may not be fitting for all types of businesses. If you’re interested in implementing any of these options or if you’d like to explore other opportunities, please contact us.
Brian J. Sharkey is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at bsharkey@kmco.com.