Many business owners don’t give a lot of thought to the value of their company until they start to consider their exit strategy. Since many owners of closely held businesses sink most of their wealth into building and growing the company over the course of their careers, selling the business is often the primary strategy for creating liquidity and embarking on their next chapter.
But sometimes, based on differences between rules of thumb or other methods used to get a ballpark valuation estimate, business owners may find themselves asking, “How can I increase the value of my business before I sell it?”
No matter how or to whom you intend to sell your business, you do have options for increasing your company’s selling price based on value — not just waiting to negotiate a higher sale price.
Any set of tactics you follow will likely take time to have a meaningful impact on your business value. That’s one reason it’s so important to build a succession plan and explore exit strategies in advance.
Here, we’ll review some of the most effective options for growing your business value before you move to sell, starting with these:
- Get aggressive about increasing sales efforts
- Invest in branding and marketing support
- Address customer concentration by diversifying your client base
- Review suppliers and vendors to address supply risks
- Improve data collection for more accurate and complete projections
- Evaluate whether a price increase is warranted
- Focus on growing your most profitable customer relationships
- Strengthen your team roster
- Improve profitability by addressing waste, efficiency, and redundancies
- Investigate whether top salaries should be normalized
- Support innovative thinking
Why Your Company Valuation Estimate Might Not Add Up
There are plenty of reasons your own business value estimates may not hold up in a company sale scenario. Plenty of business owners, especially of smaller- to medium-size companies, don’t conduct regular, periodic valuations. Or, the valuations they do conduct are for lending, insurance, or tax purposes. Depending on the reason for the valuation, it may follow very specific accounting standards that don’t apply elsewhere.
It’s also possible to receive a valuation estimate that doesn’t meet the expectations of buyers with an interest in purchasing your company. If that’s the case, rather than abandon the idea, working to achieve greater value can lead to great rewards down the road.
How to Increase the Market Value of Your Business
It makes sense that a selling owner would want to maximize business value, but realistically, any business can improve valuation results by using one or more of these strategies.
1. Make an All-Out Effort to Increase Sales
Historical and projected profits are among the most important considerations for any business valuation. Revenue often has a direct relationship with profitability, so it stands to reason that increasing sales can lend a major boost to your business value over time. You may have to come up with creative incentives for your salespeople to get there, but since most entrepreneurs face a sales challenge with gusto, you likely have a few ideas in mind already.
2. Invest in Your Brand and Marketing
Branding and marketing need to support your sales team’s efforts. Ensuring your brand is well-defined and consistent helps distinguish your company from competitors and can make the difference between commodity and premium pricing for your products or services. A strong brand can help you attract more customers and retain them better, too.
3. Address Customer Concentration Risk
Take a closer look at your customer base and evaluate whether your company relies too heavily on a single client or customer for its overall revenue. While you may have contentedly built your business on a really strong relationship, if your business changes hands, relationships may not hold the same value — and a buyer (like any valuation professional) is aware of this risk.
Even if it’s not a single customer, your client base could be concentrated in one industry, or a particular geographic area. Focusing on building out your business by selling into new areas or markets can help you reduce customer concentration risk.
4. Minimize Supplier Risks
The same approach to vendors can help you shore up risk, too. Many companies learned over the past few years how vulnerable their supply chains are to the whims of climate and weather, labor constraints, geopolitics, and yes — a global viral outbreak. Diversifying vendor relationships can help spread the risk more widely and improve long-term performance. It can also help you create opportunities to outsell your competitors in the meantime.
5. Dive into Data to Build More Accurate Projections
Most valuation professionals start with historical profitability data over the past three to five years, and so should you, with a close look at atypical, non-recurring, and nonessential expenses that could distort the overall picture. What else is important? When markets and/or interest rates are volatile, consider multiple forecast scenarios with, for example, varying interest rates applied to loans. If supply chain problems affected performance and profits, factor in different approaches moving forward. Most important, monitor results closely and revisit regularly.
6. Re-evaluate Pricing
When was the last time you took a good look at what you charge for products or services? If your margins can be increased by a simple price bump that customers are ready to accept, what are you waiting for? That’s not to say a price hike is always called for, or that you should assume your clients won’t balk (or worse, walk). But if you’re diligently monitoring your sales performance and revenue, you should know if a price increase is a good idea.
7. Grow Existing Customer Relationships
A lot of companies put outsized effort into acquiring new customers, only to make the mistake of disregarding the value of the customers they already have. Be sure you’re delivering value to those already on your books first. Update your offerings, cross-sell, upsell, reward loyalty, and find ways to optimize client retention and customer lifetime value.
8. Build a Top-Notch Team of Employees
A strong team roster is essential for turning your business into an attractive prospective purchase. Make sure you’re focused on retaining your best employees, and create professional development plans to improve skills of all your team members.
9. Address Waste, Inefficiency, and Redundancies
Recruit employees across the board to keep an eye out for opportunities to eliminate waste and improve efficiency. Consider idle equipment and worker downtime, excess movement of materials or products, excessive inventory, quality problems in production, and misuse of resources or talent. Most companies can find at least a few ways to control and reduce these drags on performance.
10. Be Aware of Overcompensation
Very highly compensated employees, especially those who have been with a company for a long time, can create market misalignments that can impact business value. It’s not necessarily common, but it’s important to be mindful and take a balanced approach. Are your compensation strategies properly balanced between salary/wages and bonus or commission opportunities? Are your bonus structures correct? Consider getting professional guidance conducting an internal pay audit to make sure your ranges are equitable and that they’re not exorbitant.
11. Incentivize Innovation
It can be hard to expect innovation from your teams if you don’t have the other pieces in place — a strong team roster, solid employee training and development, data and an understanding of your customers’ needs, etc. But innovation brings unparalleled opportunities to distinguish your offerings, build your brand, outperform competitors… and capitalize on the achievements.
Maximizing Net Proceeds on the Business Value You’ve Built
As a business owner, you have lots of choices — from strategies for improving performance and profitability to where you look for potential buyers, and beyond. And one strategic decision to consider is selling to an employee stock ownership plan (ESOP). Because of an ESOP’s tax advantages, an ESOP sale can actually net the selling owner proceeds that compare favorably with third-party sales.
By law, an ESOP pays fair market value for a company; it can’t pay a premium like some buyers can. But the transaction can offer flexibility that can benefit the seller over the long term. At least as important, selling to an ESOP enables a business owner to stay as involved with the company as they prefer, while still enjoying the benefits of access to the wealth built in the company.
And an ESOP’s unique tax benefits can also create a competitive advantage for the business by improving cash flow — which, in the hands of savvy leadership, can be used to support strategies for increasing profitability even more over time.
Learn more about how an ESOP sale could help you achieve your business sale objectives and more. Click below to download our free eBook and get started.
