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10 Keys to Increasing the Value of Your Business

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Naturally, every business owner spends considerable time trying to increase their business sales and net income. While these are two of the most important factors in determining business value, they are by no means the only factors that are critical to increasing the value of a business. Anything that reduces business or financial risk increases the certainty of future income and therefore increases the value of a business. Before deciding to sell a business, every business owner should evaluate their business to determine if they have maximized the value of their business.

 

This article highlights ten key factors that every business owner should consider and address to increase the value of their business.

 

1.                  Stability of Earnings – This factor takes into consideration the age of a business, how volatile or stable the earnings have been historically and how the profitability of a business compares with industry peers. Developing sales strategies to maintain stable or growing sales and operational strategies to improve profitability through expense reduction will definitely improve your bottom line and increase value.

 

2.                  Business Growth – Business development strategies and capital investments that help your business grow faster than the overall industry growth rate will increase the value of your business. The key here is to find ways to have managed growth exceeding your industry peers.

 

3.                  Industry Growth – Providing products or services to customers in high growth industries is an excellent means of increasing the value of your business. Every business owner should explore sales strategies to target high growth industries.

 

4.                  Customer Base & Concentration – A key risk consideration that significantly affects business value is the degree of reliance on a small number of customers for a large percentage of revenue. While taking on a large customer can be very positive, a disproportionate reliance on one customer is generally viewed as high risk. To the degree practical, it is important to develop a diverse customer base over time and reduce reliance on any one or small number of customers.

 

5.                  Depth of Management – Many businesses are far too reliant on the owner for the specific knowledge and/or relationships that are critical to the success of the business. In these situations, when the owner leaves, the necessary knowledge and customer relationships critical to the business leave with the owner. The value of a business can be dramatically increased by developing and mentoring key employees.

 

6.                  Have a Plan – Most businesses don’t have a business plan but would benefit greatly from the exercise of developing an annual operating plan and long-term strategic plan. The planning process usually results in the identification of beneficial changes and improvements that increase the value of your business.

 

7.                  Long Term Contracts – The development of long term contracts is a very effective means of increasing business value, not to mention peace of mind. Help your customers understand the win-win that results with long term contracts. It is usually possible to offer reduced pricing without compromising profits when you can count on annual sales from a customer and more effeciently plan for the delivery of your products or services. In turn, the value of your business will increase because future income streams become less risky.

 

8.                  Diversity of Products, Services & Markets – Similar to the benefits of a diverse customer base, revenue that is derived from a diverse base of products, services or geographic markets is also an effective means of reducing business risk and increasing the value of a business.

 

9.                  Financial Records – The importance of high quality financial records is often overlooked. Increasing the accuracy and transparency of financial records not only helps you better understand opportunities for improvement, it improves the confidence of lenders and investors, both of which increase the value of your business.

 

10.              Strong Balance Sheet – A strong balance sheet with good assets, healthy inventory levels, adequate working capital and low debt-to-equity are very important indicators of the strength and management of a business. Owners should strive to achieve balance sheet targets in line with or better than industry averages.

 

There are many other factors that affect business value, such as location for a retail or restaurant business, but the factors discussed above are intended to identify the ten key factors that business owners can actively address to increase value of an existing business.