Value is a tricky thing to measure. This is due in part to the subjective nature of the term “value”. How one person evaluates the worth of something will often be vastly different from how another individual would appraise the same object. As the old cliché goes, one man’s trash is another man’s treasure. Business valuation can be subjective in that an acquirer can have strategic reasons for purchase that don’t rely on traditional methods of valuation. Even so, there are a number of value drivers that consistently and predictably increase the value of a business in the eyes of potential acquirers. In many cases, business owners can make relatively simple changes that will increase financial performance, growth potential, cashflow, profitability, stability, and customer satisfaction; all of which are attractive to business buyers. The following post contains tips and information on how to make your business more valuable and easier to run.
Step #1 Develop Recurring Revenue
As business brokers, we frequently speak with buyers that are concerned with revenue stability. No one wants to buy (or own) a business that is on a revenue roller coaster. Creating a recurring, predictable stream of revenue makes the business easier to run on a month-to-month basis and provides a foundation for future growth. There a number of ways to create recurring revenue. At the most basic level, this means having a product or service that people need on a regular basis. At the highest level, it involves multi-year contracts for your products and services. Almost any business can create recurring revenue. If you want more information on this topic we recommend reading “The Automatic Customer,” by John Warrillow. You can look at purchasing options here.
Step #2 Diversify Your Customer Base
A little bit of revenue from a lot of customers more valuable than a lot of revenue from one or two big customers. Generally, if you have a single customer that is responsible for 15% or more of your revenue it negatively impacts the value of your business due to the increased risk. If the loss of a key customer would cause financial hardship, your business will be less attractive. If your revenue is weighted toward one or two customers focus on stabilizing your business by balancing your customer base. One of the easiest ways to reduce your reliance on a big customer is to sell more of your products and services to your smaller customers. Examine your existing product and service offerings for opportunities to cross-sell to existing customers.
Find new customers/markets for your existing products and services. By adding new customers and customer segments you can target groups that have diverse seasonality or cycle to minimize revenue swings. Another advantage of expanding into a new segment is the ability to target segments with different cycles and seasonality to smooth out your revenue month to month.
Step #3 Focus on What Makes Your Business Special
The markets of today are vast and filled with numerous options for customers to choose from. This forces each company to differentiate to gain a competitive advantage over competitors in the same field. Factors that make a company unique can include innovation, speed of service/product delivery, overall quality of service/product, price, convenience, customer service, corporate social responsibility and the brand message/identity. By promoting what makes your company unique, you build a loyal customer base, and you decrease the possibility that your service/product becomes indistinguishable from competitors.
The Liberty Group of Nevada, Inc., and our business brokers are here to assist in the process of assessing and building value. To see how your business scores on 8 key value drivers take our 13-minute questionnaire and get your Free Value Builder Score. https://score.valuebuildersystem.com/the-liberty-group-of-nevada-inc/kathryn-guthrie
For more information, please visit http://thelibertygroupofnevada.com/.
Bolton, S. (2020, February 26). 3 Strategies to Diversify Your Customer Base. https://www.seed.partners/post/3-strategies-to-diversify-your-customer-base.
Brown, J. (2016, July 28). Six Ways To Increase The Value Of Your Business. Forbes. https://www.forbes.com/sites/johnbrown/2016/07/27/six-ways-to-increase-the-value-of-your-business/?sh=6e271332d956.
Kenton, W. (2020, September 16). What It Means to Commoditize. Investopedia. https://www.investopedia.com/terms/c/commoditize.asp.
Tracy, B. (2016, October 19). 7 Ways To Add Massive Value To Your Business. Entrepreneur. https://www.entrepreneur.com/article/282961 .
Warrillow, J. (2016, September 26). 10 Things That Make Your Business More Valuable Than That of Your Industry Peers. https://www.forbes.com/sites/johnwarrillow/2016/09/26/10-things-that-make-your-business-more-valuable-than-that-of-your-industry-peers/?sh=6bc7f8ba770f.