value creation

Value Creation is a strategy that business owners use to maximize the value of their company. Often, business owners are out to create value to sell their company at a high price. A sound transition plan helps business owners realize their exit goals and the tentative time-in-hand for getting their company ready for a sale. They can utilize this time before taking the company to market to maximize the value of their company.

Ten ways to maximize the value of your business:

  1. Identify Areas for Improvement
  2. Get assistance from professionals
  3. Develop a stable management team
  4. Clean up finanical records
  5. Ensure a stable business location
  6. Provide clairity of future growth in earnings and cash flows
  7. Develop strong operating systems
  8. Ensure clear bifurcation of personal and business expenses
  9. Develop solid vendor relationships
  10. Reduce customer concentration issues

Identify Areas for Improvement

A great place to start when deciding on a value creation strategy is to identify the areas you and your company need to improve. This usually takes work from those inside the business and outside of the business.

Get Assistance from Professionals

Business owners should hire the services of an accredited valuation firm and obtain an independent professional valuation of their business. They can also seek guidance from an objective business advisor, who can reveal the strengths and weaknesses of their business by conducting appropriate assessments and audits of systems and procedures.

By identifying the value drivers for their business, owners can increase the value of their companies and ultimately their sale price dramatically.

Business owners should prioritize the weak value drivers of their company as revealed by those assessments and work towards improving them.

Develop a Stable Management Team

Buyers and investors alike seek businesses with management teams to effectively carry out sales, marketing, and product or service delivery.

When owners are involved heavily in daily operations that are key to the business’s health, buyers see it as a substantial risk that will negatively affect value during a valuation of the company. On the contrary, a strong management team that can handle critical matters independently will value a potential buyer highly.

Also, business owners should ensure that the workforce is skilled, efficient, and loyal. Key employees can positively impact the value of a company, especially when buyers are interested in sourcing specific skill sets to enhance their existing business.

Clean Up Financial Records

Companies usually fail due diligence when prospective buyers or lenders find that their financial statements appear sloppy or unreliable. Business owners need to take extra care that their book of accounts is error-free, accurate, and reliable.

For instance, if a business’s revenue exceeds $10 million, owners should consider obtaining audited financials. Audited financials are done in accordance with GAAP, which ensures quality, accurateness, and professionalism. Business owners can also opt for externally reviewed financials, providing a higher degree of quality than internal financials.

Download the Definitive Guide to Business Valuation

Ensure a Stable Business Location

In some businesses (like retail), location plays a pivotal factor in their market value. A change of location after the acquisition or merger could adversely impact the revenue and profits of the organization.

Even when the companies are in the manufacturing or wholesale business, likely, the key employees reside nearby, and changing locations may push loyal employees to look elsewhere — leading to potential risk or losses for investors.

Acquiring companies consider firms with unstable facilities for operations to be risky. Business owners seeking to maximize the value of their business should ensure the stability of the business location for at least three to five years after the sale.

They can explore extended lease options to remove uncertainty without reducing the value of their business. Such arrangements give the business owners the flexibility and not the obligation to extend the lease beyond the current term.

Provide Clarity of Future Growth in Earnings and Cash Flows

Investors are not just interested in a company’s records of earnings, cash flow, and growth. Still, they also seek to purchase a promising business showing clear indications of progress in the future. Business owners looking to maximize the value of their organization need to have a written plan describing how their company can achieve future growth.

The document should have clear indications of which factors will drive future earnings. They could include new product lines, expanding the augmented territory, increasing manufacturing capacity, industry dynamics, etc.

Develop Strong Operating Systems

The strength of a company’s systems, processes, and procedures plays a vital role in improving the value of a business. By planning for the sale early, owners can work on their systems and make them robust enough to pass the assessment that prospective investors will conduct.

Business owners must detach from the procedures and develop them so that their long absence does not impact the efficiency of the systems. Also, owners should empower the management team to handle difficult situations and obstacles without their input.

Business owners can leverage their strong operating systems in potentially negotiating a higher asking price during the sale of their business.

Ensure Clear Bifurcation of Personal and Business Expenses

It is not uncommon for private company owners to include their expenses in the books of the business. However, during the due diligence process, investors consider an abundance of add-backs to earnings a risk.

Uncertainties in financial records can bring the value of a company down during negotiations. To avoid such situations, business owners should proactively minimize personal expenses on their book of accounts to build credibility for their financials.

Develop Solid Vendor Relationships

If the pandemic has taught us anything, it’s that a business dependent on one supplier is vulnerable to significant raw material shortages and disruptions in supply. As such, investors consider having a high reliance on a sole supplier risky, which detracts from value.

On the contrary, a company with a diversified supply chain is seen as a positive factor from an investor’s point of view. Having multiple sources of suppliers of essential inventory and raw materials stabilizes a business’s supply chain.

Reduce Customer Concentration Issues

When investors value a business, they factor in the risk associated with customer concentration. Having high customer concentration (several large clients that drive a preponderance of revenue) can lead to severe dips in revenue if a customer goes in a different direction.

Potential investors see large revenue concentration (20% to 25% or higher) as a red flag. Business owners should actively work to diversify their customer base to combat this risk as much as possible.

How Quantive Can Help

Contact Quantive to see how we fit into your value creation initiatives.