In the constant quest to improve profitability, small business owners explore many options. They ramp up marketing, improve service, hire sales reps and try to upsell existing customers. These and other things can certainly have a positive impact on short-term profits.
But do they really improve the long-term value of the business? When it comes to business valuations, there are many factors that fall outside of just financials. And while selling a business is the most common reason business owners seek a valuation, many owners are now using them for strategic planning and to identify value drivers that can accelerate growth and increase future earnings.
According to Fair Market Valuations, a leading business valuation firm, these are some of the key drivers that can boost the value of a small business:
1. A defensible market: A business with loyal customers and partners who will stick around regardless of the competition will make your business more valuable. That’s because such loyalty adds stability and predictability. It serves as a kind of “moat” around your business, and makes it harder for competitors to replicate.
2. Proprietary methods or technology: Businesses that develop a unique technology, tool, application or process of some kind as part of ongoing operations are more valuable. These don’t have to be patented to be valuable. But you should protect them with privacy and confidentiality. Make sure you are able to clearly explain the special purpose and benefits of whatever you have developed.
3. Strong market share: Is your company a high-profile leader in your market or industry? A dominant place or share of market can be a big value driver. Even if you aren’t a leader in your space, high brand recognition, product/service reliability and customer satisfaction will make your business more attractive to potential buyers.
4. Repeat customers: High customer retention rates, year after year, are another big value driver for your business. Do you have long-term contracts (more than 12 months)? A key value driver for service-based businesses is loyal customers who both want and need to stay with what you offer because they are satisfied and like your brand.
5. A diversified customer base: Businesses that rely heavily on a handful of major clients or customers are less valuable in the eyes of potential buyers. If one or more of those customers left, the business could suffer. According to Fair Market Valuations, a good rule of thumb is that 5%-10% of your clients should produce no more than 25% of your revenue.
6. Loyal employees: Business buyers and valuation specialists will almost always look at the average length of employment among your staff. They want to know that the people who are making the business a success will remain in place. Having a loyal, dedicated staff that is committed to the company’s success – regardless of ownership change – will be valuable to a potential buyer.
7. A production advantage: Has your business found a way to make a product or provide a service more efficiently and at a lower cost? A business that can bring a product to market below the average of what it costs others to do or deliver the same thing has a cost-advantage value driver. This can happen through production partnerships, unique financing or other ways.
These are just a few of the value drivers that can be found in almost any small business. Take a closer look at your own operations and you may discover hidden gems that provide additional value to your company.
For a formal valuation of your business, work with a professional business appraiser. Fair Market Valuations (www.fairmarketvaluations.com) is one option. Other places to search for a professional business appraiser include:
- The American Society of Appraisers (ASA) at www.appraisers.org. Under the “Find an Appraiser” tab you can search by name, location, industry or specialization.
- International Society of Business Appraisers (www.intlbca.com).
- National Association of Certified Valuators and Analysts (www.nacva.com).
- Institute of Business Appraisers (www.go-iba.org).
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