Over the next 10 – 15 years, it’s estimated that 12 million small businesses will be sold. Owners may be:
- Sick
- Ready to retire
- Pursuing new business ventures
You might not plan to sell your business right now, but you should always try to increase your business value now.
Why?
Many of the best practices that we’re going to list below will improve your business’ value and set it up for success if you need to take extended time off or exit for any number of reasons.
First, Determine the True Value of Your Business
A successful business may be worth more, or less, than you assume. Owners may have bias toward the value, so you might want to consider working with a professional to help you properly value your business.
Business appraisers who have a pulse on your industry are invaluable when determining the value of your business.
If you don’t want to work with a professional to value your business, consider the following two methods as a starting point:
Asset Method
The asset method of valuation involves calculating the difference between your:
- Business assets
- Business liabilities
For example, let’s assume you have $1 million in assets and $200,000 in liabilities. Your business’s value would be 1,000,000 – 200,000, or $800,000. But if you have a highly profitable business, the asset method of valuation is not the best option.
The income method would be the logical way to value highly profitable businesses.
Income Method
While a great way to understand true business value, the income method considers:
- Forecasting future financials
- Adjusting your current earnings for future growth
- Projecting costs and working capital
- So much more
If you plan to use the income method, it’s best to work with an appraiser or accountant who can help you with accurate forecasts and projections.
Of course, you should also consider the market method, which involves analyzing what other businesses in the same niche and with similar income and years in business are selling for right now. For example, SaaS businesses are often based on a multiple of annual recurring revenue.
Need help determining your business’ value?
Click here and we would be happy to help you calculate your business’s value.
Once you know the true value of the business, you can then work on increasing it by following the three step process below:
1. Reduce Reliance on the Owner
If your business is reliant on you to run smoothly, it’s time to reduce this reliance. Buyers want to be able to step into your shoes and replicate your success, and if you start reducing reliance on just you, it will improve the value of your business.
How can you begin reducing the business’s reliance on the owner?
- Create processes that others can follow
- Build a strong management team
- Delegate tasks
- Automate tasks
Implementing standardized processes for each step in your operations will help reduce your business’s reliance on you and allow you to step away with confidence.
2. Review and Optimize Every Aspect of the Business
Reviewing and optimizing your business will naturally increase its perceived value. Businesses that run efficiently and focus on the most profitable products/services will attract a higher price tag.
But where do you begin? Start with the core of your business: your offerings.
Products and Services
Depending on the nature of your business, you might offer a variety of products or services. But are all of your offerings worth it?
If your goal is to increase the value of your business, then you should be focused on the most profitable products/services and your ideal clients/customers.
To optimize this core area of your business:
- Offload low-profit products/services or difficult clients
- Start exploring ancillary products/services that can increase perceived value
For example, is there something small you can add to boost value? Is there something extra you can do or can you provide better support to increase their lifetime value?
Optimizing your products and services is a great first step, but don’t stop here.
Processes
You’ve reviewed and optimized your products and services, but what about your processes? Inefficient processes can hinder productivity and, in some cases, increase the risk of missed deadlines or customer expectations.
Inefficiencies can have a negative impact on the value of your business.
Take a close look at your processes to identify bottlenecks and areas that could be improved efficiency-wise.
Ask yourself:
- What can be done today to improve efficiency?
- If I were to start over today from scratch, how would I design this process?
Taking steps to eliminate bottlenecks will not only improve the value of your business but also allow you to reap the rewards of increased productivity until your business is sold.
Talent
When reviewing and optimizing your business, you cannot overlook your team. After all, your employees are the backbone of your company.
But what does it mean to evaluate your team?
Start by considering what may happen post-sale. Will your key players stay, or head in a new direction?
Make sure that your team is full of key players who will stick around. Stable and skilled talent will always add value to a business.
3. Start Improving Your Cash Flow
When businesses fail, poor cash flow management is often a contributing cause. So, it should come as no surprise that cash flow is one of the many factors used to determine the value of a business.
Revenue and profit are important, but cash flow tells the real story of your business’s performance. Healthy, successful and valuable businesses know how to manage their cash flow to ensure that outgoing cash never exceeds incoming cash.
Taking steps to improve your cash flow can naturally increase the value of your business. Where do you start?
- Look at where you’re at today. What is your current cash flow? You can find this information on your financial statement.
- Where can you make improvements? Take an in-depth look at your expenses and identify ones that you can knock out.
While you’re reviewing your cash flow, look at your billing practices. Are you sending out invoices in a timely manner and getting paid on time? If not, it may be time to implement more robust collection processes.
In Summary
A business’s value is based on a wide range of factors, but focusing on the areas above can go a long way in increasing the value of your company. Optimizing your processes, ensuring your business can run without you and increasing your cash flow will make your business more valuable in the eyes of potential buyers.
To learn more about growing your business or to schedule an appointment, click here.