How to increase your company's value

Maximizing profits isn’t the only way; you can build value through methods that have little to do with your bottom line

As the owner of a successful business, you should anticipate that some day you’re going to be an acquisition target. Someone — a supplier, a competitor, a customer or a large company with which you have no connection – will want to give you the once-over.

Whether or not you can envision selling out today, you should recognize that circumstances change, and you should have a plan in the back of your mind for reacting to change. Begin your evaluation and planning process now, so that you’ll have an informed idea of what price your company could bring and, equally important, what you can do in the meantime to drive up its value.

Launching this process casts all of your strategic decisions in a different light from this point forward, for you will be aware that every decision affects not only your profitability, but also your future market value.

Even with professional assistance, valuation is a complex process (without the help of a valuation professional, it can be not only complex but disastrous).

Valuation factors include future operating results and such other critical components as tangible assets (inventory, notes and accounts receivable and fixed assets) and intangible assets (brand name, reputation, customer base, the extent of your distribution network, etc.).

Look at your company from the buyer’s point of view, with no emotional attachment and assuming little initial familiarity with its inner workings. Analyze its historical and projected financial results; compare its performance with its peer group; and scrutinize the valuations of similar transactions within the industry.

Because many buyers believe that cash flow is more important than revenue, your company's projections have to be achievable. And it's crucial to find each buyer's hot buttons: whether they want you to stay, whether they want the entire company, whether your brand name will be enhanced by their distribution, and whether tax considerations help.

Different buyers, different value

How the above-mentioned valuation components and other factors affect your business’s overall value will depend on the valuation method used (e.g., value based on discounting future cash flows, book value, adjusted book value, capitalization of earnings, price-earnings ratio) and the goals and motivation of your prospective buyer.

As you undertake your "outsider" analysis, bear in mind three distinct principles of valuation:

• First, your company is valued according to how it compares with others.
• Second, the valuation is of your company in the future, not the past.
• Third, your company has decidedly different value to different buyers.

Strategic buyers, for example, usually seek to increase market share and gain access to new types of customers, market areas and products. They also may want to increase capacity, acquire management expertise (though they often bring in their own teams) and diversify sources of revenue. They often look for opportunities to increase efficiency and reduce costs in ways that you might consider excessive or inhumane.

Financial buyers most often seek sustained growth from the acquired company. Cash flow is critical, since financial buyers generally rely on new borrowings for their transactions. They also tend to want current management to stay on the job, rewarding managers with shares in the newly acquired company. It's a cliché that strategic buyers tend to pay more than financial buyers, but, like many clichés, that one is often true.

Maximizing your company’s value

If this valuation procedure sounds complicated, that’s because it is. Few business owners can do without sophisticated professional assistance to arrive at their company’s highest marketable value.

In addition, a professional advisor who combines valuation expertise with business management know-how can be invaluable in pointing out operational strategies that maximize both profits and value. Those strategies may include any or all of the following:

Develop proprietary products. Technology, design and even packaging can make your products proprietary, lead to higher profits, and increase your desirability to a buyer. Proprietary products offer protection from competition and allow you to sell on more than just price, provided that your customers perceive the unique nature of your products.

Develop consumable products. Buyers of businesses look for companies that attract repeat customers because such firms have predictable sales. With consumable products, your first sale marks the beginning of a stream of sales. Reorders may become automatic, and you don't have a high customer turnover each year.

Build an organization. Buyers don't like one-man bands. A business that depends on only one or two people is riskier in the buyer's mind and, therefore, is of less value. Building a deeper management team means you must relinquish some control. It's also more expensive and involves risk. But the payoff comes in the form of better operating results and a higher sales price.

Beware of the size issue. Larger businesses are often stronger than smaller ones. They may offer better market share, broader product lines, multiple locations, more assets, deeper management and greater capabilities. Recognizing this, buyers often set minimum sales sizes for acquisitions and, everything else being equal, tend to pay higher dollars for companies with higher sales. But size can hurt. Larger businesses are often more complex and harder to manage. When the goal is market share, or simply size, profits are often sacrificed. The resulting high working capital needs can lead to strained finances, more debt and higher risk.

Maintain credible financial statements. A buyer loses faith in a company's credibility if he can't understand and have a high degree of confidence in its reports. Your financial statements must provide a clear, unambiguous record of your company's operations, assets and liabilities.

Develop a broad customer base. A business with many independent customers is generally more predictable and represents a lower risk than a similar business that depends heavily on one or a handful of major customers.

Steadily increase sales and profits. When purchasing a company, the buyer estimates what he can earn on his investment. It is difficult to project results for a company whose sales and profit history appears as jagged peaks and valleys on a line graph. Accordingly, buyers will devalue such a company s results.

Get out of debt. Debt outstanding at the closing is often deducted from the gross purchase price to determine the amount the sellers actually receive. Many businesses are nearly impossible to sell for any net price that is reasonable to the owner because debt exceeds the apparent gross value of the business.

Serve niche markets. Trying to be everything to everyone in a major market can blur your company’s image and needlessly expose it to harsh competition. Instead, position your company as a leader.

Finally, increase employee incentives. Your compensation plan should reinforce both strategic and short-term operating goals so that employees have incentive to improve performance in the areas that enhance value.

Back to Article Index