The value of your company is partly determined by your industry. For example, cloud-based software companies are generally worth a lot more than printing companies these days. However, when businesses in the same industry are analyzed, major variations exist with respect to valuation. Because of the large number of Baby Boomer owners within the small business community, it is crucial for these business owners to consider building value now so they can obtain higher competitive offers when they transition out of the business. Here are ten things that will make your business more valuable than its industry peer group:
1. Recurring Revenue
The more revenue you have from automatically recurring contracts or subscriptions, the more valuable your business will be to a future buyer. Even if subscriptions are not the norm in your industry, you should be able to find some form of recurring revenue that will make your company much more valuable than those of your competitors.
2. Something Different
Buyers buy what they cannot easily replicate on their own, which means companies with a unique product or service that is difficult for a competitor to knock off are more valuable than a company that sells the same commodity as everyone else in their industry.
Acquirers looking to fuel their top line revenue growth through acquisition will pay a premium for your business if it is growing much faster than your industry overall.
Tired old companies often try to buy sex appeal through the acquisition of a trendy young company in their industry. If you are the “darling” of your industry trade media, expect to get a premium offer.
If you have a great location with natural physical characteristics that are difficult to replicate (imagine an oceanfront restaurant on a strip of beach where the city has stopped granting new licenses to operate), you’ll have buyers who understand your industry interested in your location as well as your business.
Buyers will pay a premium for companies that naturally hedge the loss of a single customer. Ensure that no customer amounts to more than 10 percent of your revenue and your company will be more valuable than an industry peer with just a few big customers.
If you’ve mastered a way to win customers and documented your sales funnel with a predictable set of conversion rates, your secret customer-acquiring formula will make your business more valuable to a buyer than an industry peer who does not have a clue where their next customer will come from.
8. Clean Books
Companies that invest in audited statements have financials that are generally viewed by buyers as more trustworthy and therefore worth more. You may want to get your books reviewed professionally each year even if audited statements are not the norm in your industry.
9. A “2iC”
Companies with a second-in-command who has agreed to stay on post-sale are more valuable than businesses where all the power and knowledge are in the hands of the owner.
10. Happy Customers
Being able to objectively demonstrate that your customers are happy and intend to re-purchase in the future and consistently make referrals will make your business more valuable than an industry peer that does not have a means of tracking customer satisfaction.
Like a rising tide that lifts all boats, your industry typically defines a range of multiples within which your business is likely to sell for; but whether you fall at the bottom or top of the range comes down to factors that have nothing to do with What You Do, but instead, How You Do It. Consider the following eight value drivers:
(a) Financial Performance: Your history of producing revenue and profit combined with the professionalism of your record keeping;
(b) Growth Potential: Your likelihood to grow your business in the future and at what rate;
(c) The Switzerland Structure: How dependent your business is on any one employee, customer, or supplier;
(d) The Valuation Teeter-Totter: Whether your business is a cash suck or a cash spigot;
(e) The Hierarchy of Recurring Revenue: The proportion and quality of automatic, annuity-based revenue you collect each month;
(f) The Monopoly Control: How well differentiated your business is from competitors in your industry;
(g) Customer Satisfaction: The likelihood that your customers will re-purchase and also refer you; and
(h) Hub & Spoke: How your business would perform if you were unexpectedly unable to work for a period of three months.
By working on these value drivers, your business can build significant value over time and, with the right tools and resources, you may be in the position to get offers of over 70% more than your industry peers. And, the sooner you start, you can not only expect a more valuable business, but a much more profitable one in the short term.