If you are contemplating a sale or other transaction or, in general, just want to increase the value of your business, there are many things you can do to get the increased value you want. Some are obvious; others not as much.
Adding value to your business will likely require changes. For the changes to be successful, you need to develop a plan and have time to execute that plan.
Starting your planning process with a business valuation is a good first step. A business valuation is the process of determining a value for a company under certain assumptions and conditions.
The two most common valuation approaches are fair market value and investment value. Fair market value is the price at which a business would change hands between a willing buyer and seller, both having reasonable knowledge of the facts of the transaction and neither one being under compulsion to buy or sell.
Investment value is the value to a particular investor based on individual investment requirements.
When you think about adding value, it’s a good idea to think about all the different areas of your business that may need adjustments. Do you have the best company structure for your situation? If you are a sole proprietor, would you be better off incorporating? Should you consider becoming an S corporation?
After determining the best structure, make sure your records are being well kept. Value can be added by having good accounting records, using software to keep you organized. Keeping an appropriate number of years’ history is important.
Having good accounting records doesn’t just mean being organized. Can you keep your books on the tax basis, or do you need GAAP statements? Avoid having personal expenses in the business. Check to see whether you are paying yourself a reasonable salary compared to others in your industry. Over or under paying yourself can change the value of your company.
Do you have good employee records? This is another area that can affect your company’s value if it is disorganized or incomplete.
A growing business adds value. Most growth comes from investment. Reinvest your profits into your business. Keep your assets in good shape. Make sure you are updating your software, your machinery and your property.
Out of date or poorly maintained assets will reduce what a buyer will pay for your business. Make sure you are maintaining good relationships with your customers and your vendors. Keep your receivables and payables current. If either of these categories is extended beyond a reasonable time, it will impact your company in a negative way.
If you can get contracts from your customers and with your vendors, this can reduce the risk associated with these two categories. If you have a customer or vendor concentration, try to mitigate it by having more growth in other areas of your business.
Concentration of customers or vendors is a perceived risk to a potential investor and will usually reduce the value of your business.
Make sure you are not your business. Invest in the people around you. Train them and keep them current on any licensure or accreditation they may need. Make sure you have incentives in place for your key employees to encourage them to stay with your business.
Have several other people be the face of your business. If something happens to you, your business should be able to continue without many issues.
Position yourself well in your market. Understand your competition and keep up with changes in your industry. This is especially important if your business is in an industry that is regulated.
Review your company’s strengths and weaknesses compared to your competition. When you know what your weaknesses are, make sure to address them.
Finally, the best way to add value to your business is to plan for success. Then you can decide what you will need to do to get your business to the level you would like.
Look at the various aspects of your business to understand what needs work and make a plan to address any concerns. Make sure you give yourself time to make changes and then adjust to them. Usually a three- to five-year time horizon is best for determining the value of your business and making the changes needed to add value.
Be sure to talk about your plans for change with your tax accountant and business lawyer so they can advise you regarding the best way to make your changes.
Whether you plan to sell or keep the business in your family, it’s always a good idea to get a business valuation and go through the previously mentioned analysis to help you understand how to add value.
Mary Roberts is a Business Valuation & Transactions Advisor at Hancock Askew Valuations, LLC. She can be reached at mroberts@hancockasket.com or 912-234-8243.