12 Ways To Increase Company Value
have combined what I personally consider to be the top 12 ways a business owner can increase the value of their most valuable asset—their business. A wide array of tips are outlined, so choose one or employ them all. No matter what your reasons for desiring the increase, application of these tips is not only great for your company’s value…its just good business sense.
Diversify Your Revenue and Profits: Maintain multiple profit centers and keep a diversified product/service base to diversify your profits. This is also known as analyzing your company’s revenue sources for risk. A concentration of revenue in a single product or service is a recipe for disaster. The same goes for customers. For example, if losing one or two key customers dramatically impacts the company’s revenue and earnings capacity, this may substantially decrease the company’s value. In some industries, revenue concentration is understandable; however, as a general rule you don’t want all your “eggs in one basket.”
Reduce or Eliminate Shareholder Loans: If you must infuse your own capital into the business, do it the right way. Document the transaction and have terms that resemble market rates. The terms spelled out in the agreement must be enforced to equate to a bona fide business transaction. If you have loaned money to the company and don’t anticipate a repayment anytime in the near future, document the infusion as contributed capital. Certainly, avoid borrowing money personally from the business at all costs. The company should not be your personal lending institution.
Manage Your Financial Ratios: Conduct a routine financial health exam of your company monthly, quarterly, annually. Putting financial metrics together can be a daunting task the first time around; however, once you’ve got the formulas memorialized, you will be able to track like a pro. Monitor target profit margins for the company vs. the company’s actual anticipated profits, watch the rate and health of net cash flow, and return on investment (ROI), and compare these to the industry. Perform a breakeven analysis and job costing for each product or service. Monitor productivity and profits per employee. Classify accounts according to standard industry reporting so that profit margins and financial ratio performance is as accurate as possible. If applicable, examine key turnover ratios such as fixed asset turnover, accounts receivable turnover and inventory turnover. Maintain a sufficient ratio of sales to working capital. Sufficient working capital implies effective operations management and an adequate turnover of receivables and inventory. Positive inventory turns will be reflective of inventory that is managed at a level of profitability and consumer/seasonal demand and is free from obsolescence.
Don’t rely on Tax Returns as a Measure of Financial Performance: Utilize the services of a compliance firm to obtain annual reviewed statements with the accompanying notes. It costs a little extra, but the message you put out to others in the business lending community is “this company is the real deal.” Further, typically an owner takes advantage of all allowable tax deductions and credits thereby minimizing the company’s profits and tax burden. However, when analyzing financial performance, recordkeeping should be changed to illustrate the company’s maximum potential.
Pay Yourself a Fair Market Value of Officers’ Compensation: Pay yourself a reasonable compensation with benefits. If you can’t afford this now, work toward this goal. If you work for “free” or below the minimal market rate, that decreases your company’s value from a buyer’s perspective. A business’ value is based on ROI not ROL (Return on Labor). A buyer will often look at the owner’s salary plus pre-tax profits and non-cash charges as a starting point for a purchase price.
Eliminate Non-Business Related Accounts: Keep the business financially separated from personal and unnecessary business expenses. Eliminate non-business related expenses, including family employees on payroll. Further, the balance sheet and income statement should be free of nonoperating assets such as vacation homes, automobiles used by non-employees or for non-work related purposes and other nonbusiness related assets, as well as discontinued operations.
Maintain a Business Plan: Always have a business plan, and keep it current. Even if you’re not thinking of exiting the business anytime soon be sure to ask yourself, “What’s my next move toward more or continued success?” The further one plans ahead, the more time remains to enhance the value of the business. In these troubling economic times with volatile stock market swings, an owner should have a plan to maximize his or her return on the business investment, execute that plan and monitor the results. Likewise, owners should adhere to the business plan regimen to accomplish long-term goals. If and when goals change, the business plan should be updated accordingly.
Grow Your Human Capital: Eliminate key person dependence and develop an experienced management team. Certify employees and conduct and maintain formal processes for employee training to grow skilled workers.. One or two people should not possess all the technical knowledge, licenses, certifications or other industry skills necessary to run the business. Favorable working conditions, employee benefits and salaries can be utilized to retain skilled employees. As owner, if you are the key person, your business’ value is likely to reflect that risk. To increase the value, you must have a strategic plan for removing your business’ dependence on you to realize a profit. Understand this will take time, anywhere from one to three years.
Grow Your Intangible Assets: Increase the “it” factor in your business. Intangibles give a company the “it” factor and can make up to 50 percent or more of a company’s value. A company’s tangibles are comprised of cash, receivables, fixed assets, real estate and other assets such as money market accounts and shareholder life insurance policies. However, these are not the desired items that create a company’s value. Guess what does? The intangibles! Intangibles such as clientele lists, contracts, leases, patents, copyrights, licenses, human capital, market share, repeat clientele, recognizable name or logo, reputation, excellent supplier/vendor relationships, excellent supplier pricing and terms, proprietary processes and designs all make a company’s value boom.
Stay Away From Litigation: EPA, EEOC, worker’s compensation claims, bonding troubles, citations, fines and penalties… these are bad things that can lower a company’s value, especially if the incident is reoccurring. Environmental cleanups, both current and unforeseen, reduce value as the company is responsible for the costs out of current and future profits, if necessary. Citations and fines many times become a matter of public record. Union affiliations and troubles also decrease the value of a business. Effective management can greatly minimize these incidents as well as control and reduce insurance costs.
Have a Sales and Marketing Program: Have a sales and marketing plan to generate new business and maintain existing business. Repeat clientele are essential value drivers in many industries. A high volume of repeat clientele signals efficient operations management and a core position within the community and industry at large. Have a plan to develop branding and recognition; name recognition within the industry or community within which the company operates is essential to viability. The Internet is one of the easiest and cheapest forms of advertisement. If you don’t have a Web site, develop and execute a very informational and user friendly one. Essentially, marketing via a well-constructed Web site captures the ever-increasing Internet sales business. Your Web site should contain information regarding your company’s history, product base, location, hours and human capital. If your business already has a Web site, seek out constructive criticism. Is it user friendly? Does it provide the essential information for clients and potential clients? Also, ask yourself, “Is this what I would expect and need from a business Web site?”
Engage in a Merger or Acquisition (M&A): One of the quickest and easiest ways to grow your business is to acquire or merge with another company. This expansion, combined with strategically planned growth, can boost a company’s value significantly over a relatively short period of time. Of course, the key words are strategically planned growth. Rash decisions and an ill-equipped crew of employees, conversely, can make life after a merger or acquisition a nightmare dropping business value into the toilet.\
5 ways to DECREASE the value of your business
Purchase Depreciable Assets to Reduce Your Company’s Taxable Income: This is a common tax savings “strategy” doled out by seemingly savvy tax return preparers to their unknowing taxpayer clients. The idea is that the allowable accelerated depreciation expense taken on the newly purchased asset decreases taxable income and taxes paid by the company (or by shareholder owners). Owners, please think twice before going down this path. What your tax preparer is telling you to do is decrease your company’s working capital and liquidity to fund an expense that will lower your company’s taxable profits. Ask yourself the following: A) Will this new equipment be used immediately and at full capacity very soon after the day of purchase? B) Would this equipment have been purchased otherwise? C) Should the money or credit to purchase the equipment be utilized for more necessary items such as inventory and supplies? If you answered “NO” to A and B, and “YES” to C, you may want to rethink your expenditure.
Maintain a Debt-Free Business: While this seems to make sense from a practical standpoint it does not in the operational and financial business worlds. A debt-free business can signal a number of things, including the business doesn’t have good credit or cannot qualify for credit. However, taking advantage of low interest rates and managing debt effectively positions the company positively with lenders, suppliers, vendors and potential buyers. Owners should utilize lines of credit to fund inventory purchases. Mortgages and loans should be utilized to fund equipment, real estate and acquisition transactions. Why use cash to make a big purchase when you can fund that asset acquisition with a loan? Your company will realize the benefits three-fold: Be sure to write off the loan interest for a tax break, free up cash to increase the company’s liquidity, and increase the company’s creditworthiness by making timely loan payments.
Don’t Keep Up With (or Don’t Keep a Watchful Eye on) Changes in Industry Technology and Trends: Beware of antiquation and obsolescence. Read trade magazines, attend industry trade conferences and become a member of, and get involved in, associations to stay abreast of the industry’s current performance. Get to know other industry participants; network with participants upstream and downstream of your industry specialization. In general, network with those who have their finger on the pulse of the future direction of the industry.
Don’t Have The Business Valued Regularly: Knowing the value of your business keeps an owner in control of his or her largest most valuable asset. If the value outcome isn’t what is desired, the owner is now in a position of control and can therefore make strategic changes to increase the value. Just because a company’s sales or gross profit are increasing doesn’t necessarily mean its value is increasing. Regular business valuations provide owners with a real-time “report card,” tracking changes in business value to identify and eliminate value inhibiting and destructive behaviors that often appear to be “business as usual.” As a general rule, a valuation should be updated approximately every one to two years, or under the following conditions: A) When a significant change in assets occurs (e.g., the company makes a substantial investment in equipment or other tangible assets, or sales change notably); B) When tax laws change; and C) When intentions change— either for personal reasons (marriage, divorce) or for professional reasons (bringing in new shareholders, or buying out or rewarding key employees). Business owners should engage only a credentialed and unbiased valuation expert who has extensive experience valuing companies within the particular industry.
Ignore The Competition: If you are not watching what competitors are doing wrong and what they are doing successfully, then you are not learning from their mistakes and conquests. Learning vicariously is a beautiful thing that can save you time, aggravation and money. But be careful: this is not a “‘monkey see, monkey do” strategy. An owner must judge what is most appropriate for his or her company by making the best decisions based on all available information, which includes keeping an eye on the activities-on of the competition.