OVERVIEW

After a few years of operation, the small business owner or startup founder should expect to have built a valuable business to the point where it has significant value and has reached its brand potential. It can influence how others perceive your company and have a significant impact on your perceived value. The time taken to get value out of your business may vary according to your business type. It may also differ depending on the size of the company.

In fact, in some cases, it can reach the point where buyers or investors approach you. This can result in a successful exit for the company’s owners. In other cases, even without the need to sell, a valuable business generates constant returns for its owners and can be a source of goodwill.

This guide aims to highlight some of the most crucial factors to consider when increasing the value of your small business. Here are a few strategies for increasing the value of your company to the point where others can see it and pay top dollar for it.

Caution: This applies to businesses that have been in operation for a length of time. The suggestions below might be impracticable for new businesses struggling to gain footing. Regardless, new businesses can incorporate some of these into their long-term strategy. We’ll go into detail about how to approach this for new and existing businesses below.

Tips to Boost the Financial Value of Your Small Business

1. ISOLATE THE BUSINESS FROM THE OWNER

One of the most fundamental things to do when assessing the worth of a business is to take the owners out of the equation. Without the owners, valuers need to know what a business is worth because a company is supposed to be a cash-generating machine, not an extension of the owners.

Value is a function of the money you can get for a business. It is not an individual’s perception of their company, but an objective, quantifiable measure of how the market perceives the company. By removing the owners from the equation, valuers can start to see the business for what it is, which is critical to improving the value of your small business.

It is uncommon for a small business to be independent of its owner, especially in the case of one-man or founder-led companies. However, if a company cannot function properly without the owner’s daily involvement after a few years of operation, its value will suffer.

The company should operate independently and generate income on its own.

Hiring trustworthy and skilled employees, developing beneficial products, establishing healthy internal policies and procedures, and developing a strong independent brand are just a few of the activities that must be carried out to separate the business from the owner.

Would you buy a business that can make money on its own or one that requires the owner to be involved in day-to-day activities?

2. BE UP TO DATE WITH LEGAL AND REGULATORY COMPLIANCE

Business owners may want to pay as little tax, levies, and fees as possible to keep a large cash reserve but attempting to undermine the system may make a company appear less profitable because there will be serious issues with the government and its agencies. Some businesses, whether on purpose or unintentionally, also breach the rules and norms to stay in operation.

This could take the form of failing to pay taxes, breaking labour laws, or failing to follow the rules of regulatory bodies. When the government finds out about this, the business is made to pay a penalty or fine. This can significantly reduce the profitability of the business. The most common example is a tax evasion case, but the same can be applied to any other rule or norm that is violated.

It would be unwise for any investor or consumer to acquire a firm with significant regulatory issues. In fact, the value of a business would decrease dramatically if there was a chance that the government would act against it.

With a focus on business taxes, any action that appears to result in tax underpayment inadvertently reduces the value of their business. For example, by minimizing profits to minimize taxes, they end up minimizing the value of their company, which in turn decreases the value of their business.

Would you rather buy a company that follows all its legal and statutory obligations or one that constantly breaks the law?

3. HAVE CONSISTENT REVENUE

Many entrepreneurs survive off the infrequent one-off moments of big returns when a “deal” finally clicks. These moments are inconsistent and may be dependent on variables that are beyond the business’s control.

By generating a reduced but consistent revenue stream, you can optimize your business value. This implies finding ways to acquire a wider variety of smaller yet recurring revenues from consumers. There are many revenue models that may assist with this. It is critical to think about the revenue model you will use.

Consistent revenue will optimize the value of your business. This means that you should be able to acquire a more diverse set of new revenue opportunities, including smaller amounts of recurring services and transactions. This is commonly referred to as revenue scaling. It’s important to think about the revenue model you will use for your business. This is because the model you choose will have a significant impact on your ability to grow your business. You may not be able to achieve your full growth potential with a certain revenue model. In other words, some revenue models may limit your ability to grow your business. In this case, you should consider a different model that will allow you to grow your business to the maximum extent possible.

The stability of continuous cash flow and a company that is less vulnerable to uncertainty are common results that arise from establishing recurring revenue. This means you’re more likely to have predictable cash flow, allowing you to plan, create, and execute your business strategy, as well as take on new clients. Over time, you will grow your revenue and be able to capitalize on opportunities to expand your business. The more you can do this, the more valuable your business becomes.

To make your business more attractive and increase your chances of selling it and receiving a good return on investment, you should establish a system that enables you to meet the needs of your target market. This should result in increased cash flow that a buyer may want to acquire. Your business needs to have sufficient stability. In fact, this should be your number one consideration when setting up your business model. If your business model is unstable, you will be unable to operate it for an extended period, lowering the value of the company.

Would you prefer to invest in a company that generates consistent revenue rather than one that relies on sporadic income?

4. DIVERSIFY THE CUSTOMER BASE

It is widely acknowledged that a few businesses depend entirely on a few consumers for a considerable chunk of their income, but it is seen as a risky business bet.

A business that depends on a handful of consumers has a significant risk because if these consumers suffer from any unforeseen consequences, the business may go bankrupt. A business that relies on a handful of customers can be highly dependent on these customers and is more likely to suffer from their whims. When these whims are not in line with the rest of the company’s strategy, they can be detrimental to the business.

Because they know that you cannot do without them, these customers might be able to demand resources and time on unfavourable terms for your small business. They might go bankrupt. They might change management. The conclusion is that losing customers is normal in any business, and valuable businesses can deal with it.

Strategic business owners expand their client base to reduce risk, stabilize operations, and increase the value of their company to a buyer/investor. They seek to acquire a diverse set of customers who generate revenue on a consistent basis. As a result, the company’s risk is reduced. By diversifying your revenue sources, you reduce your reliance on a few customers. Because of this, clients may be less likely to cut ties with you.

Create a reserve from profits by putting money into attracting new consumers and strengthening your hold on the market. This will allow you to pay for things like advertising, marketing, and customer retention, which are often costly. It will also allow you to invest in future technologies and development, which may be crucial to your continued success. It will also allow you to strengthen your business model and make it more valuable to a potential purchaser.

If you have a single or a few large clients, it is critical to seek long-term supply agreements that will make it difficult for your clients to switch from using your company. This enables you to protect your business from any negative impact that may result from any change in your customer base. It will also allow you to generate a consistent income, which is essential for a successful business.

Would you rather buy a business with a large customer base on its own or one with only one or two customers?

5. GET NON-COMPETE AND CONFIDENTIALITY AGREEMENTS FOR KEY EMPLOYEES

Because of their position in the organization, some employees are privy to a lot of information that is not commonly available or understood, such as trade secrets or other matters. They can then take this to competitors or become competitors themselves.

A confidential employee agreement is a contractual agreement that lays out the obligations of an employee, employer, and the information to which each is entitled. This agreement can help keep all this information confidential. A confidential employee agreement should clearly define who is covered by the agreement and what the terms are. This will help prevent the employee from abusing the agreement and exploiting the information for competitive advantage. It can also help reduce the chance of the employer not being able to enforce the agreement. It can also help prevent your employee from disclosing any confidential information to you. It is critical to have such agreements in place in the event of a disagreement over what information belongs to you and what information belongs to your employee.

A few businesses’ values have fallen because of an important employee leaving and joining the competition, or becoming the competition themselves with freely shared information. Because of this, a confidentiality agreement is important. It may prevent the employee from using this information for competitive advantage. It may prevent the employee from becoming the competition. It may prevent the employee from taking a job with the competition and disclosing any confidential information. It may prevent the employee from walking away with your customers.

To ensure the value of a company, it is important to ensure that key workers who have access to critical data sign non-compete and confidentiality contracts. Consultants are also subject to the same rules.

Would you buy a business where key employees can easily move to the competition or one where the trade information is kept secret?

6. MAINTAINING GOOD RECORDS

The importance of maintaining excellent records is discussed in a recent blog article. The documents and reports that your team, the prospective buyer’s team, and potentially a third-party independent appraiser will need to establish an accurate valuation of the company will only come from the available records.

These records will become the foundation of your business and will determine its success, value, and ability to generate recurring income. Having a detailed set of these records is a fundamental part of the due diligence process. If you do not have a detailed set of records, you will be unable to obtain the information that you need for an accurate valuation. Keep in mind that these records will continue to need to be updated, so it is important to have the appropriate records in place now to streamline the process in the future.

The records should include, but not be limited to, the following: the company’s mission statement, value proposition, company history, and financials. The records can be in any format, but they are most effective if they are easily searchable. They should be accessible to all pertinent parties.

Your firm will be able to maximize earnings, cash flows, and the worth of your corporation if you keep decent records. A well-documented business is a solid investment. A business that is well documented will help you understand the success of the business, will help you understand the company’s growth, and will help you understand the value of the company. Keep good records and you’ll be able to get a better idea of what the company is worth.

If you think about it, there is no way to evaluate accurately and objectively the worth of a company without having the data to support it. A company’s worth will certainly be undervalued. It does not necessarily mean that the company is worth less. It is just that without accurate data, a company’s worth cannot be accurately and objectively evaluated. Most importantly, the data must be available. This is a basic premise of the valuation process. As such, having a fully documented company is a basic requirement of the valuation process. Otherwise, the valuation process is meaningless.

If there are supporting documents, external parties will have more faith in the verbal representations offered. Without supporting documents, a company’s value will be lower than it could be. This is because if there are no supporting documents, the information provided by the company is not supported by anything concrete. This lowers the perceived reliability of the source offering the information. The valuation will be unreliable without the data. Therefore, it is so critical to have well-documented information in place, especially in today’s business climate. It is critical that these records are in place, especially if the company is for sale.

Good records also help give your entire package of company credibility. Your potential customers will see that your company is well-organized and that it provides the data necessary for a value-based opinion. It will strengthen your company’s credibility because you will be able to back up your assertions with data. This will also give your company an advantage over other companies that do not have the data to prove their assertions. It will give your company an advantage in negotiations, and it will give you the ability to make wise financial decisions going forward.

Would you buy a business that has good records or not?

7. REGULAR FINANCIAL PERFORMANCE MANAGEMENT

As a small business owner, regular financial performance should be done to ascertain, maintain, and increase the quality and value of your company’s performance. These steps will help you understand patterns, functions, and the relationship of a part of your company to its overall success.

It will assist you in understanding the company’s strengths and weaknesses, as well as in making decisions. It will also help you make informed decisions regarding the future of your company. You should conduct regular financial performance audits on your company because the more you know, the better decisions you can make.

To properly value a company, it is important to understand and evaluate the right performance tools and ratios needed. Among other things, performance management should assess a company’s financial stability, productivity, profitability, return on investment, and employee performance.

Use performance management to analyze financial statements, identify trends, and identify areas of growth or weakness; it will assist you in measuring the overall state of your finances and determining the value of your company.

Valuation specialists and potential purchasers of your business also use these tools to compare your performance to others in the industry. As a result, it is critical to use the correct tools and to fully understand their significance.

Even if you are not planning to sell, it is important for you to begin calculating these figures to determine the performance and value of your company. This will help you learn the true value of your company and its performance. It will also help you understand where your business stands in relation to other businesses. You will learn how your company performs financially and what improvements you could make to take your business to the next level. This will help you make informed decisions going forward. This is essential if you are to make the right decisions for your company, as it will help you determine if the time is right to buy, sell, invest, or even go into another business.

Would you buy a business that has a track record of performance management or not?

8. INVESTORS’ VIEWPOINT

While entrepreneurs are careful planners who have built their small businesses with calculated and examined steps, they are constantly faced with tough decisions that they must negotiate to make the best decisions for the business. These decisions can be difficult to make because they usually boil down to balancing risk and reward. They also depend on an entrepreneur’s or investor’s ability to see the big picture and understand how their decisions affect the success of the business.

There is bound to be an emotional attachment from the business owner due to the personal time and resources spent in running the business. This emotional attachment can cause the owner to be prone to making rash decisions. If you are not emotionally attached to your business, you will be more apt to see the big picture and make better decisions for your business. If you are emotionally attached to your business, remember that business owners, like everyone else, are human beings with emotions.

When considering valuation, however, the entrepreneur must evaluate their business from the perspective of an outside party and remove emotional attachments to consider the valuation as objectively as possible. In other words, the entrepreneur should keep in mind that they are not only trading their business for a monetary reward, but also for its value. Therefore, they must think hard about how they would feel if the business were given to another person. A valuation is not based on emotion; rather, it is based on logic, facts, and figures.

A business owner should understand that the perception of risk will always be amplified in the eyes of the valuer. If the business owner carries out business with this mindset, activities that improve business value will get more consideration. Therefore, business owners should be careful to avoid activities that can weaken their business.

9. OPTIMAL USE OF AVAILABLE RESOURCES

Depending on their risk tolerance, small business owners may over- or under-utilize available resources to manage their businesses. While this is not a negative thing, being able to strike the optimum balance will be more beneficial to the value of the business.

Too careful might lead to the business not taking advantage of growth opportunities that increase value. Too risky may recklessly endanger a company’s assets and reduce its value. As a result, the best way to maximize value is to be aware of risks while also being willing to accept them when the time comes. The business owner should weigh up the value of the business against the level of risk that they are willing to take to gain value. As a result, you must decide how much risk you are willing to take for the business’s value to rise.

A situation in which you have no debt and tons of cash, for example, may appear to be a good situation, but it may be a sign of overcapitalization, in which there are a lot of idle funds that are not being used to grow your business. Optimize the capital to grow the value of the business. Keep in mind that your business is not just for you, it is for your employees and your shareholders. Therefore, think of the value of the business as an investment, and think about how much you want to return on your investment.

Businesses that are undercapitalized, on the other hand, are unable to invest in new equipment, processes, or talent, which may be a sign of mismanagement that affects value. Therefore, it is important to be able to strike the right balance between capital and risk, so that you get the best return on your investment. In other words, be careful not to over-utilise the available resources.

Effective use of capital should help with profitability and boost the value as soon as possible. Therefore, the best businesses are those that utilize their resources to make the business stronger, faster, and more sustainable. All businesses will face many challenges. Businesses that do not use the available resources prudently will be left behind, even when they are ahead in terms of market success.

CONCLUSION

In conclusion, there are many factors that impact the value and marketability of a business. Some sound simple, but most can be extremely challenging to implement or change. The important thing to remember is that businesses are not static, and the competitive environment is constantly changing. There are many ways in which to improve the value and marketability of companies. The trick is to find the best ways to manage your business effectively. While the key to value is to find ways to improve all aspects of your business, it is most effective to do this in a way that suits your business and your risk appetite.

We hope that you enjoyed the article and believe that you have learned the importance of the time and detail that it takes to develop a strategy to enhance business value. We hope that the article encouraged you to find ways to increase the value and marketability of your small business and that you have taken away some useful tips and tricks for making your business more profitable.

Regardless of whether you decide to sell your business or not, it is important to keep working to maximize your business’ value. With the right mindset, this can be easier than you may think.

Our team at myCFOng would love to hear more about your challenges and what you have learned from your experience, so we can keep providing you with the best tools to help you optimize the value of your business. We are available to help with developing strategies to maximize your business value. Consult for free today!!