Most business owners assume a business valuation is only done when you are ready to sell your business. This is definitely not the case. To get the most value out of a business valuation it should be well and truly before you decide to sell. When you are ready to sell it’s already too late! A business valuation can be a vital tool in increasing sustainable profit and reducing business risk. All positive outcomes that will insist on getting a better price when you do consider selling your business in the future.
Majority of business owners are often surprised by the lower than anticipated results from a business valuation as they tend to overvalue personal assets. The point to remember is the actual value of a business has nothing to do with the owners’ personal goals. It is an economic concept that relies on the business financial and operational outlook. Even historic performance is of little value except as a guide for estimation of the business future prospects.
A lot of business owners believe that because the business is profitable the value of the business is going to be high. A lot of the time when a business valuation is done the value is substantially different to what the business owner was picturing. Rarely the value is higher, but more often than not it’s lower than expected. Each business is unique and influenced by a variety of different factors.
If the business valuation isn’t what you were expecting then there is work to be done before the business goes on the market. You would need to review the key business value drivers and see what you can do to increase the valuation in order to meet your exit strategy objectives.
Don’t wait to get a business valuation done just before you want to sell, in reality, you want to get a business valuation done several years before you are ready to sell. Why? Because a business valuation may not come back with the value you were expecting. You can then use the business valuation report to develop a long term plan to increase the business’ market value. Once a business owner is able to understand what drives a business valuation they can plan around these drivers.
Tools to increase your business’ value:
Increase sustainable profit – sustainable profit is referring to continuously improving your profit on a product or service that is achievable for a long period of time. The best ways to do this is to increase sales (but the right kind of sales). Sales are not king. Trying to increase your sales can sometimes have a negative impact on your business. Where you should be focussing your time and energy is building strong margins on the products or services you provide. There is no point in generating sales that don’t help contribute to the bottom line.
Look at your current sales mix is there one product or service that generates better gross margins? What are you doing to build sales in this area? Who are your target customers? What are you doing to attract more of these customers?
Reduce risk in the business – understanding how the multiplier is determined in your business valuation provides a business owner with insight on what areas they need to focus on to bring up the multiplier. A business that is reliant on one or two major customers will never be as attractive as a business that has a broad customer base. A business tends to be valued higher when there is no single customer that accounts for more than 10% of the total sale. This can send alarm bells that the business will suffer if they lose that customer. Focus on building a diverse and loyal customer base. When was the last time you reviewed your customer base reliance? Have you looked to expand in other markets to diversify your risk and be more appealing?
Document – procedures start looking at all your standard procedures and ensure there is consistency across the business and any divisions. A potential buyer will find your business attractive if you have well-documented processes and procedures.
Innovation – always be on the lookout for a way of doing things better and more efficiently. It is easy to do things the same way, it’s hard to accept change but it will be better for the business in the long run. Stay at the forefront of technological advances and encourage staff to look at different ways of doing those repetitive tasks.
Business valuations are a fundamental tool to build your business. Identifying drivers that will help improve your bottom line and cash flow can then help you to develop a plan on how to do this. Business owners must work to make their value drivers strong or businesses both small and large will stagnate.
For any assistance with getting a business valuation please contact your local Accru office. Our team of highly skilled Business Advisory Specialists want to help you value your business today!