6 Ways to Increase Business Value
Posted by Tom Gledhill on Fri, Sep 04, 2009 @ 09:32 AM
When a strategic or financial buyer invests in a company, they are in essence investing in a stream of future cash flows. At the end of that stream of cash flows comes the "terminal value" - the last big cash flow from their eventual exit event. Naturally buyers will want to minimize the risk that they won't receive those future cash flows. The more you can reduce a potential buyer's risk, the greater your company will be worth. So what can you do in your company to reduce that risk? What could potentially happen that could negatively impact profitability and what can you do to mitigate that risk? Here are a few things you can do:
1) Diversify your customer base. Having more than 25% or so of revenue coming from a single customer is a big risk.
2) Separate yourself from the company as much as possible. Easier said than done especially for small companies - but the less integral the owner is to the operations of the company the lower the risk to a new owner.
3) Groom management and offer key employees "stay bonuses" so they are incentivized to stay with the new ownership.
4) Contracts with key suppliers and customers can ensure that those relationships transfer to successor ownership.
5) Manage your assets. Make those necessary ongoing "maintenance" capital expenditures so that your equipment isn't out of date and in need of replacement ahead of schedule.
6) Financial statement accuracy. Ensure that your accounting system is up to date and have financial statements prepared annually by your accountant. Reviewed statements are better than compiled - and some buyers may even require audited statements. They may cost more but the perceived reduction to risk in the eyes of the buyer will almost certainly increase the value of your business enough to more than cover the cost of the audit.
These are just a few of the many ways you can reduce risk in your business. The more you can focus on risk reduction the more your business will be worth.