Second only to how much is my business worth, one of the most common questions we are asked is how can I increase my business valuation? As corporate finance experts, who help to sell businesses, our primary aims are to advise business owners on how to find the right home for their business.
Defining what the right home means is never simply about price, but achieving a business valuation that is acceptable to the shareholders is often a major part.
People will sell their business for a broad array of reasons. For some, it’s time to retire and take the pace of life down a gear. For others, they’ve decided to try their hand at a different venture. Each sale we help achieve is totally unique and this is one of the challenges when it comes to determining value. (See our LinkedIn Blog: 5 Common Mistakes When Valuing A Business)
One of the biggest issues with standard desktop business valuation using a multiple is that it doesn’t take into account all those value drivers that are not shown in your accounts. Those things could make your company more valuable and help increase the multiple that a prospective buyer is willing to pay for your company.
So, how can you capitalise on these aspects of your business and drive value in your business sale? Here are 5 things that will drive your business valuation up.
1. Growth potential of the business
How it influences business valuation: Your organisation’s future ability to generate larger profits, expand its workforce and increase production will influence the level of interest and potential valuation from prospective acquirers.
How you can develop this: Create and formalise credible business plans that illustrate the future growth potential alongside supporting notes that demonstrate the achievability of these plans.
2. Recurring revenue
How it influences business valuation: Risk is a major influencer on business valuation – the lower the perceived risk, the higher the valuation. One of the things that has a significant impact on risk is the proportion of the company’s revenue that is recurring and dependable. Subscriptions, service and maintenance contracts, and licencing agreements are great value drivers, but being able to demonstrate longevity and repeat business should not be underestimated either.
How you can develop this: It’s good practice to review your client base, wherever contracts are in place, the longer the better. It may also be worth considering if you could transition or introduce a subscription-type model, services and maintenance contracts that will generate recurring income. In either case, you want to show buyers what portion of your company’s revenue is predictable and stable and how it can be counted on in the future with a high degree of certainty.
How it influences business valuation: Scarcity essentially refers to the level of difficulty a buyer would have in replicating aspects of your business without making an acquisition. It could refer to skill sets, experience, product development, manufacturing techniques, and a whole host of other things, including how often businesses like yours come up for sale.
How you can develop this: There are three things you should do to make the most of scarcity in a business sale situation. Identify, document and protect. Identify – because sometimes, when we are in the day-to-day, we don’t recognise the scarcities right in front of our faces. Document – so that you can demonstrate these to a potential buyer. Protect – it is worth reviewing contracts, patents, trademarks etc. so the buyer can be confident the scarcity won’t disappear once the deal is done.
4. The buyer’s motive
How it influences business valuation: One thing that is often overlooked when it comes to business valuation is the motive of the buyer. This can make a big difference to the price they are prepared to pay. The best prices are often forthcoming from companies who have a strong strategic motivation for acquisition.
How you can develop this: This is mostly something that is influenced during the negotiation phase of a deal, once you know more about what the motives of the buyer actually are. However, it is worth spending some time reviewing how the existing infrastructure of your business can help bring various possible strategic motives to life for certain types of acquirers.
5. Impact of having options.
How it influences business valuation: Having numerous interested buyers can have a significant impact on the multiple that someone might pay for your business, simply because there is now competition. Acquirers now have to consider the implications of not making a good offer. It changes the mindset to ‘How much do we want this company and how much are we prepared to pay?’ If you don’t have a choice, you will never know the true market value of your business.
How you can develop this: Get help with scoping out various potential buyers so that you can market your business more widely and create a ‘bid’ atmosphere that sparks healthy competition – and gets you results.
None of these value drivers are highlighted in your accounts, yet they can definitely drive the ultimate value of your business. Make sure you have ample information at the ready when you’re talking to buyers – not just the last 3 years’ accounts.
Are you wondering ‘How much is my business worth?’ Need more help highlighting the value drivers for your company and achieving your maximum business sale? Here at Entrepreneurs Hub, we work closely with our clients to ensure they are clear on their value drivers, including those that are not included in the financials. We’ll help you get properly prepared and then proactively market your business for sale by identifying a choice of interested buyers, presenting the opportunity to them and negotiating the sale. Our goal for our clients is to find the best home on the best terms and most importantly achieve the best price.