How to increase the business value of your small company
Make sure your business stands out
There are a ton of different valuation models and most of them have different advantages and disadvantages in regards to assessing a fair and trustworthy value of your company. However, they all have one thing in common: growth and profitability are the key drivers to creating value. Whether the valuation model directly or indirectly focuses on growth and profitability as key drivers, they always play a big role in the valuation process. Why? When your company consistently delivers higher returns than what your investors require – your company creates value far beyond the recorded values on your balance sheet. So how do you actually increase the value of your company? It’s an important question, and one we hope to answer here!
A valuable list
In 2017, smallbiztrends.com published an article showing 10 things that make your business more valuable than your industry peers. Two main points were clear: predictability and uniqueness. Here’s the list with the rest of their findings:
- Recurring revenue
- A unique product or service that is difficult to replicate
- Growth, especially if it’s above industry average
- Cachet: old-fashion companies acquiring younger, trendier companies
- Location
- Diversity
- Predictability
- Clean books
- A second-in-command for after sales activities
- Happy customers
Tracking your results
All of these statements are very important and, even though some of them might be overlapping, they are all worth mentioning. Another interesting observation is that they are all closely related to growth and profitability. Like we’ve mentioned before, the longer you have to prepare your valuation, the more control you have over its results. This is a pretty good reason to conduct a valuation annually, in order to track your improvements. See your conversion rates go up, your costs go down and your productivity increase! So, to be able to see the results over time, you need to make strategic decisions. Even though this list mentions valuable strategies, there are other actions you can take in order to increase the value of your company. A few suggestions are proven scalability, financial foresight and a strong competitive advantage. Keeping key employees on board is also a good strategy as they bring stability and invaluable knowledge.
Understanding a valuation
From a pure valuation perspective, the most important topics are recurring revenue, predictability, clean books and growth. The other activities mentioned in this list will generate those key drivers. This list gives you a pretty good understanding of which actions our valuation model takes into consideration in order to emphasize growth and profitability. It’s pretty much common sense that a buyer is willing to pay more if they see profits increasing, as it shows a more stable future. Make sure to align your actions with your value-creating-goals, to assign the task to the best person for the job and to always have a back-up plan! These lists will help you build a stronger and more valuable company! The key elements to improving value are 1) return above the cost of capital; 2) beat expectations implied in earlier valuation; 3) grow only if your returns are above cost of capital, i.e. focus on profitability first and growth thereafter. Earn your right to grow! Continuous valuations serve the purpose of helping you keep track of your results.