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How to Increase the Value of Your Business

By Generational Equity

02/24/2020

The value of your business is based on a number of factors that fall under two major categories:

  • Tangible Items
  • Intangible Items

The first category essentially boils down to revenue and earnings. The more you can create of both, the better the valuation of your business!

However, the second category is where most of your company’s value will be found. In fact, according to our research, about 80% of the value of most businesses can be attributed to its intangible assets.

So with that intro, you might now ask “Ok, so how do I increase the value of my business?”

Increasing Your Business Value

Let’s start with the tangible side of the equation. Essentially the more you can grow your revenue while also growing your earnings, the better the impact on your business valuation. I don’t mean to oversimplify this because in some cases it is hard to do both simultaneously; the reality is if you focus on top-line growth and your profit margins suffer, you may actually detrimentally impact your business valuation.

Sadly we all too often see this: A business owner focusing on growing revenue by cutting prices to get more business. Unfortunately, when doing so, revenue may grow but profit margins decline, which is a red flag to many buyers. So be sure to grow your business, but do not do so at the expense (no pun intended) of your profit margins.

Remember – buyers are buying your future earnings, and more than anything else they would prefer to see consistent stable revenue growth with solid margins that improve over time.

As for intangibles (also known as off-balance sheet assets), these items are incredibly valuable and their perceived “value” will often vary from buyer to buyer. Here is a short list of some intangibles that buyers frequently look for in their acquisition targets:

  • Recurring revenue streams (from more than one customer of course)
  • Experienced employee base with low turnover
  • Solid and documented systems and procedures (not locked in the owner’s head)
  • Stable and large vendor base
  • Significant market size and growth potential
  • Dedicated and skilled sales/marketing team
  • Well-trained and mentored middle-management
  • Business plan in place and updated annually
  • Proprietary policies/procedures developed in-house
  • Defensible market share
  • Location, location, location (and not just for retailers)

As mentioned (and as you can now see), this short list of valuable intangibles will vary based on each buyer’s needs. Some buyers may be attracted to your blue-chip customer base, others may be after the talent and skilled team you have built, and for some, your proprietary in-house created systems could be important.

Building Business Value to Achieve an Optimal Offer

What is most important is this: When you market your business to prospective buyers, be sure to adequately and accurately document your intangible assets. If you do not articulate that which makes you unique, you will “undervalue” the business and most likely sell for far less of a premium than you would if you did highlight your intangibles.

Because it is the intangibles which will drive your value up above the economic value of the business based purely on future earnings.

What has made Generational Equity so successful over the years is our ability to master both the art and the science of selling businesses.

The science is carefully and accurately recasting earnings to reflect the true profitability of the business, and then documenting the future growth of our clients so that buyers can see where the revenue/earnings are truly heading.

The art is learning about each business, determining what makes it unique, and then finding buyers who are willing to pay a premium to obtain those intangible assets.

The really wise business owner hires us long before they are ready to exit, so we can work with him/her to build the intangible asset base. This means that when the owner is ready to move on, the business has a long list of intangibles that have been built into the company over the years. This is what buyers are looking for: Stable businesses where future risk is outweighed by solidly documented off-balance sheet assets.

To learn more about how to increase the value of your business, you should set aside some time and attend a Generational exit planning conference in your area. The investment of a few hours of your time will pay off handsomely down the road as you find a buyer willing to pay a premium for your company. To learn more, please use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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