Did you start it with the dream of building it into a large and profitable business?

Did you have a targeted turnover in mind?

Did you just want to employ a great team of people?

Did you have a dream lifestyle you wanted to live?

Or, did you just want to work for yourself rather than take employment elsewhere? 

Whatever your reasons, the true value of your business will only be realised when you come to sell it.

But how do you ensure you maximise the value when the time comes?

One thing I can pretty much guarantee you, is that your business isn’t worth anywhere near what you think it is! All of the years of blood, sweat and tears mean nothing to your potential investors.

In short, all someone looking to invest in, or buy your business is interested in, is how much money it will generate them, with minimal input & effort on their part.

THAT’S IT!

But what makes one business worth more than another?

Why can one business sell for millions whilst the other in the same industry and doing the same level of turnover barely reaches 6 figures?

The value is generally based on the net profit you make which is then multiplied. Whilst there are industry ‘norms’ when it comes to valuing a business. It is possible to increase the multiplier applied to your individual business. The higher the multiplier, the more money in your pocket!

I have put together the following list to help you ensure your business is the one that goes for millions and not the latter:

Don’t put all your eggs in one basket

We all have that one customer, that spends like there’s no tomorrow and we focus most of our efforts on keeping them happy. In the short term, this is great! Who doesn’t love consistent, high profit work?! Be warned, this is far riskier than most business owners realise. Say something unexpected happens, the client goes into administration for example, it’s panic stations for you! If they make up 50% of your recurring revenue, your business has just been cut in half! If this were to happen, could you continue to operate and pay your bills??

Ideally, no single customer should make up more than 5-10% of your annual turnover. By maintaining a good spread of customers, this will increase the multiplier that your business value is based upon.

Profitable long-term contracts

Long-term contracts provide us all with a sense of security, however, a long-term contract is only good for you if it is profitable and provides economies of scale or operating efficiencies. Having several profitable long-term contracts will almost certainly add value to your business. The show an ongoing commitment from your customers and potential investors will know they’ll have revenues to invest for the future.

Long-term, loyal customers

We all love to hear from a happy customer! By implementing a system to collect reviews and set up a system to monitor customer satisfaction, you will see a significant return when it’s time to cash in. If you can demonstrate that your customers keep coming back and buy from you, again and again, builds value and increases your multiplier.

A management team that don’t need you

If your business won’t run profitably in your absence, it’s not going to be a particularly attractive proposition to a would be investor? Can you take annual leave without having to take phone calls and routinely deal with and reply to emails? No? Well you have some work to do to build your value here!

Businesses with a management team that take care of the day-to-day without your input are worth significantly more, than those where the business owner is integral to making things happen (providing they are prepared to stay on post sale). This is one of the most important and influential factors affecting the value of your business after the profitability.

Whilst scaling to ensure you have a team in place might not be what you initially wanted from your business, failing to do this will seriously affect the value of your business.

No investor wants to buy a business where they will be tied to the running of the business.

Recurring revenue streams

Recurring revenue streams, repeat contracts and subscriptions are the most attractive and valuable asset for any potential investor. Whilst not all industries lend themselves to this type of business model, it is often possible with some outside the box thinking. The more of this type of income you can generate, the more valuable your business will be.

Ask yourself, what can you do for your customers that would bring them value for a recurring monthly fee?

Cash production

It may seem obvious, but businesses that can generate cash are always valuable. Manage your debtors well and be merciless when tying up cash in stock and assets. Review your overheads on a monthly basis by reviewing your P&L, raise your prices as soon as your costs go up in order to maintain your profitability.

If your in a B2B market, your clients (providing they are good clients) will not care, as they will do the same and pass their increased costs on to their customers. Failure to do this may win you more work as your competitors raise their prices, but your profitability will decline rapidly turning you into a busy fool.

Sack your accountant

OK, maybe I jumped the gun a little there. But, you do need to ensure your accountant or finance team provides you with accurate, reliable and efficient accounting systems. Being on top of your numbers will pay you back 10-fold when you’re ready to sell. Not only that, but it’s just good practice. Imagine, you have a buyer, desperate to make you an offer and you’re struggling to put together some management accounts. Any potential investor wants to know that you and your team, know your stuff and have the business running like a well-oiled machine. If you’re lacking the basic information you need to run your business effectively, you’re going to look more like Del Boy than Sir Richard Branson! Who would you have more faith in??

Getting on top of your numbers and running your business from monthly management accounts will increase the multiplier! Run it without, and you’re likely to reduce the multiplier.

Become the best of the best

If you have a reputation for being the best in your industry (or at least being among the best) you will certainly attract the right sort of attention. Businesses regularly acquire their competitors if it helps them spread their services to a wider audience .

To quote US uber-investor Warren Buffet:

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”

Growth & Expansion opportunities

The ability to grow both your top and bottom line profits quickly is a very attractive proposition to a would-be investor. If you’re growing faster than your competitors, you will be both attractive and valuable. The more expansion opportunity for your business, the more valuable it becomes.

Have a strong USP

What are your USP’s? Do you produce something that your customers can only get from you? Do you provide a service unavailable anywhere else? If what you do, can’t be easily replicated, that builds value. If you’re not unique already, what can you do to differentiate your business from your competitors? If you can’t do anything, then you’re not going to be able to sell for a premium.

So now you know what you should do to build the value of your business, I should probably give you some pointers to what is likely to reduce the value:

Too much competition

Whilst we all love competition as a consumer, as a business owner it proves to be one of the biggest ongoing challenges. If the competition is high in your sector, you are forced to compete on price, that is of course, unless you niche. Once you start competing on price, it’s a slippery slope to the bottom. Niche however, and you will put yourself in a position where you can demand a higher price and generate higher than industry average profit.

High Overheads

If you’re reviewing you management accounts on a monthly basis, you should have your finger on the pulse with regards your overheads. As part of your review, are you looking at where these can be reduced without impacting on your ability to deliver a great service? Trim these and watch your profit grow. Fail to do this and a potential investor is going to look at the cost of running your business vs the profit that is being made and make a very quick decision to walk away. 

Risk of being undercut by foreign markets

Can China do it cheaper?

In all seriousness, if your product or service can be provided cheaper if sourced from elsewhere, the risk associated with investing in your business will likely be far too high for any potential investor to be prepared to take. If you are vulnerable to this, can you overcome this by automating any elements of the business to reduce your costs?

Over dependence on a single supplier

Just like having all your eggs in one basket with a single client, do you have all your eggs in one basket with a single supplier? If you’re over dependant on a single supplier, the risk of acquiring your business will likely be too high for an investor to want to take. If something happened to that supplier or your relationship with them, your business is at risk. Remember, investors want security, not risk when looking for an acquisition opportunity.

Summary

There are many factors to consider when looking to build value in a business, far more than those I have outlined in this article, this just covers what I’d consider to be the basics. If you can work on all of the points above, you’ll be well on your way to building a business that would be an attractive proposition to an investor in the future.

If you have read this and are now in a state of overwhelm, reach out and let’s chat.

Growing a business isn’t half as difficult when you have someone in your corner to support and guide you along the way.