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Cracking the Business Value Secret: Five Ways to Manage Your Business Better

By Renita Wolf

Kick-off 2020 with confidence! Make it your year to crack the business value secret and manage your business to increase value.

Why is it crucial to increase the value of your business?

The primary reason is you may eventually want to sell your company. Selling your company may not be something you’re looking at in your immediate future. Still, it’s best if you start preparing today to maximize the value of your business and possibly your most significant financial asset. Retirement is the number one reason why business owners sell, followed by burnout. Unfortunately, the majority of owners fail to plan for the sale of their business.

Starting now, everything you do should be focused on driving enterprise value. Thinking with the end in mind, owners manage their businesses better, and that helps prepare them to eventually sell.

What can you do to increase company value?

The highest valuation occurs when sales and earnings are good and trending upward. A robust earnings trend will enable an investor to pay a higher price and still meet his or her return on investment criteria. A history of excellent performance also gives the investor confidence in projected future earnings. Internal factors such as the company growth cycle, profit history and your level of enthusiasm affect value.

What are the main drivers of value?

Value drivers, which access a company’s strengths, fall into five principal areas: financial value, organizational value, customer value, employee value and strategic value. Take a close look at each area and identify ways you can manage your business to improve business value.

#1 Financial Value

Financial value elements are based primarily on the discounted value of the company’s future earnings. Qualitative factors can also add to or detract from a company’s perceived risk. These elements include: whether a company follows fundamental and industry-accepted accounting practices; the extent to which external accountants review a company’s financial statements; and the level of organization and discipline within a company’s financial team and processes.

#2 Organizational Value

The second driver of value is the level of organization and discipline within a company. This can apply not only to internal records, policies and procedures but also to the general appearance of a company and its environment.

#3 Customer Value

The third value driver is customer value. It’s best to avoid “high customer concentration,” similar to having all or most of your eggs in one basket. If your company is dependent on only a few customers for the majority of its revenues, develop your marketing and sales plans to increase customer diversity, and drive the value of your business. 

#4 Employee Value

In many cases, business owners manage their companies themselves and do not spend enough time building their teams. While they believe they are saving time and money on staffing and training and think they are ensuring that things get done right, they are also devaluating their companies. Why? Because investors will see that, once the sale is done and the owner has left the company, there is no one left who has the necessary knowledge base and skills to properly run the company.

For many business owners, grooming talent and developing future leaders can be challenging. They are accustomed to being in control and refuse to allow employees to make decisions, as they believe that can lead to mistakes. Employee value is critical to investors. They want to know that you have an experienced, talented team that will continue to profitably operate your company after your departure.

#5 Strategic Value

The fifth and final area is strategic value, which may include: the nature and predictability of a company’s revenue stream, brand value and position in the market. Companies with predictable payments are far more attractive to investors, especially those that have recurring or residual revenue streams (such as a membership fee that requires monthly or annual payments).

Make 2020 your best year yet! Start today to get your business in order and increase company value.

 

What’s It Worth?

Four business valuation approaches to determine your selling and investing potential include:

#1 The Market Approach

Estimate the value of your business based on other sales and purchases of other businesses of the same sector, region and performance. This will give you an idea of how much potential buyers are willing to spend on your company.

#2 The Price Multiples Approach

The price multiples method gives you a quick estimate of your company’s worth based on figures from the past year. You can use revenue and cash flow stats to determine your company’s value.

#3 The Income Approach

The income approach, or discounted cash flow method, helps you estimate the future free cash flow of your business. Using the discounted cash flow rate, you can value your business accurately.

#4 The Asset Approach

The asset approach establishes a baseline value of a company based on their tangible and intangible assets. The value of these assets, discounted for liabilities, determines your business’ estimated worth.

 

Renita Wolf is founder and CEO of Poe Wolf Partners, a boutique-consulting firm serving business owners, from startup entrepreneurs to CEOs to define and implement business growth and operational improvement strategies, specializing in exit planning, financial management, corporate strategy, operations, mergers and acquisitions, organization restructuring and technology implementation. With over 25 years’ senior financial management experience with Fortune 50 and entrepreneurial companies, Renita knows what it takes to improve company value and profitability. Learn more at www.PoeWolfPartners.com.

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