What’s it Worth? Value Drivers for Closely-held Businesses

By Brian Potter
Balance Sheet , Business Transition , Cash Flow , Management 0 comment Like

As business valuators and advisors, we are often asked, “What can I do to make my company more valuable?” While the value of a business is dependent upon myriad factors, measures that increase cash flow, decrease risk, or increase growth prospects for a business will have a positive effect on value. But what steps can you as a business owner take to bolster the value of your company? There are several strategies that you can implement (apart from obvious changes such as raising prices, cutting costs, or just hoping a rising economic tide will lead to continued growth) that will be accretive to value when the time comes for an exit. The key to maximizing the value of your business is stepping into the shoes of a buyer and understanding what will make your business more attractive, and ultimately more valuable, from their perspective.

  1. Maintain quality financial systems – Potential buyers will spend weeks scrutinizing the company’s financial books and records as part of the sale process. This process, known as due diligence, could uncover discrepancies, a lack of detail, or other issues with the company’s financials that lead the buyer to reduce, or in some instances, rescind their offer.

    Business owners can add value by implementing and maintaining adequate and documented financial systems and internal controls. This may include engaging reputable outside accountants to review or audit financial statements, hiring qualified managers and staff to ensure that the company’s accounting records are accurate and that necessary internal controls are in place, or obtaining the services of a qualified fractional CFO if the company does not have the proper accounting staff in place.

  2. Build, retain and motivate a strong management team – Buyers want to minimize the level of disruption faced by the business during the transition from one owner to the next. Ensuring that your company has a strong and qualified management team in place that is incentivized to remain with the company post-transaction will demonstrate that the business can operate without you. Having appropriate agreements and incentive packages in place can help you achieve this goal.
  3. Diversify your customer base – Reliance on a handful of key customers can expose your company to large declines in revenue if one or more of these customers ceases operations, moves their business to a competitor, or begins making your product or providing your service “in house.” This reliance is known as “customer concentration” and companies with higher degrees of customer concertation are inherently riskier (read: less valuable) than companies with a diversified customer base.
  4. Diversify your product or service offerings – Just as relying on a few key customers increases the risk inherent in your business, so too does a reliance on a key product or service. Expanding your product or service offerings can help reduce the risk of an investment in your company by insulating the business from changes in customer preference, potential supply-chain interruptions, sudden changes in the cost of inputs, etc.
  5. Don’t delay necessary investment in capital items – Buyers are interested in how you have positioned the company for growth going forward. As a result, they will analyze things like the condition of your company’s facilities and the required investment to bring those facilities up to par. A buyer that is required to make investments to repair or upgrade machinery, buildings or other fixed assets will factor these post-transaction costs into the amount they are willing to pay for the business.

The process of preparing your company for sale is a long and complex one. Business owners anticipating an exit should begin the process of planning years in advance and involve the services of experienced accounting, legal, tax and financial experts to steward them through the sale and pre-sale process.

Brian Potter

Managing Director at Stout
Stout is a leading independent advisory firm specializing in Investment Banking, Valuation Advisory, Dispute Consulting, Management Consulting, and Transaction Opinions, with 22 offices across the globe.Brian Potter is a Managing Director at Stout and head of the firm’s Chicago office. He leads Stout’s Valuation Disputes practice in Illinois where he provides business valuation and forensic accounting opinions to business owners, high net worth individuals and their advisors. He has testified in support of his opinions in numerous jurisdictions throughout the country and has presented and written on various topics, including business valuation, cash flow, understanding tax returns, forensic accounting, and occupational fraud.
Brian Potter

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