Hire more sellers. Spend more on marketing and advertising. Downsizing operations and services. Sell more to existing customers. Fire middle management.
As a small business owner, you’ve heard, considered, or even taken some of the above actions to make your business more profitable. While these actions can have a positive impact on the bottom line, can they really have a positive impact on your company’s valuation? Will they maximize the purchase price of your business if you decide to sell your business? Let’s take a look at some of the key value drivers that can influence a company’s valuation, beyond financial metrics.
Does your company have a unique recipe, formulation, proprietary process, or other branding traits that differentiate your products from the competition and therefore differentiate your company? How do you stand out from the noise of your industry to stand out from the competition? A competitive small business that is highly marketable to business buyers should have at least one of the following characteristics compared to its peers: faster, cheaper, better quality. These characteristics are value drivers and, if positioned correctly, can have a positive effect on the company’s valuation and the perceived value of a potential buyer.
Regardless of competitive threats, have you won loyal customers or partnerships? Such scenarios can add significant value to a business by all but eliminating competition and maintaining a stable, forward-thinking presence. A defensible position is something that is very difficult to replicate. This could be a product or service that you have developed that is unattainable for your competitors due to the cost, time and resources it takes to “catch up”.
Has your company developed a unique application, tool, or technology as part of its ongoing operations? Does it give you a competitive advantage? If so, that proprietary innovation or intellectual property can be positioned as a key value driver for your business. Technologies or processes do not need to be patented to be of value, but privacy and confidentiality must be preserved. It is critical that non-compete and confidentiality agreements are strictly observed and enforced by the Company before and after any transfer of ownership. The benefits, application and purpose of your proprietary technology should be explained to a business valuation consultant.
Strong market share
Is your company way ahead of the immediate competition? Has your company implemented a roll-up strategy to buy out the competition? If your company was and is a high-profile leader in its market, a key value driver in a company valuation is dominant market share. Additionally, you may not be a leader in your field, but if your brand awareness, service/product reliability and customer satisfaction are very high, this can be very attractive to a strategic buyer. This goodwill driver should be adequately presented to an expert in a company valuation.
Is your business successful due to repeat business year after year? Do you have long-term contracts that exceed 12 months? A value driver in the contract or service business are loyal customers who constantly take advantage of the company’s offers due to their satisfaction and consistent brand loyalty. It’s important that your business isn’t overly dependent on a handful of major customers whose departure would cause significant damage to your business. A good rule of thumb is that 25% of your revenue shouldn’t be less than 5-10% of your customers. If the majority of your company’s sales come from a few customers, a discount will be granted on a company valuation due to a lack of uncertainty and stability.
What is the average length of service of your employees? A responsible corporate buyer will look for opportunities where current personnel, particularly management, remain in place after the current owner has left the company. Contracts with key employees, non-competition clauses, but above all loyal, committed employees who are committed to the success of the company regardless of a change of ownership are very valuable for a potential buyer and are therefore reflected in a company valuation.
Has your company found a way to become a low-cost producer of its products or services? Companies that can effectively market their product below the market average have a cost advantage as a value driver. This can be accomplished through key manufacturing partnerships, liens and financial commitments, unique employee contracts, etc.
There are many value drivers found in any small business that influence company valuation; these should be investigated on a case-by-case basis, ideally with the support of a professional advisor. Take a closer look at your business to uncover some of the hidden gems and unique benefits your business has to offer prospective buyers. While the primary drivers are reflected in your company’s past and future financial performance, some of these intangible value drivers can increase the buyer’s perceived value of your company and result in a higher purchase price. You can’t reap profits overnight, but a systematic emphasis on how to increase your value through day-to-day operations will put you on the right path to greater financial gains when you’re ready to sell your business.