How to Add Value to Your Business

March 6, 2017 by Jarred Berman

When it comes to purchasing real estate, the age-old proverb holds true: location, location, location.  When it comes to purchasing a business, the same holds true, except the proverb goes like this: valuation, valuation, valuation.

Valuation experts are looked at to ascertain a value, or a range of values, for the subject interest in question.  It is common place that valuation experts have three approaches to choose from when valuing an entity.  These are the income, asset and/or market approaches.  Each approach has both benefits and drawbacks that the expert has to weigh when considering which approach he or she will be using.  In brief, the three approaches are described below:

• Income – an approach to value utilizing cash flows generated by a business into one present value figure.
• Asset – an approach to value that determines a company’s net asset value or NAV, or its fair market value of assets less any liabilities.
• Market – an approach to value that seeks to determine value based upon recent transactions that are similar to the subject in the marketplace that are comparable.

Selling your business?  The following are some ideas on how to increase the value of your business, from a valuation expert’s perspective.

• Have written policies and procedures on how the business runs.  This includes having formal buy sell agreements in place, operating agreements signed and in effect, etc.  This includes having processes and routines figured out down to a science.  This will allow for easy transferability.  This is highly valued.
• Diversify your clientele.  Make sure your largest clients are from different industries and throughout the state, country, and world, if possible.
• Do everything you can do to make sure you have a steady earnings stream with no lulls.  Recurring revenue is golden.
• Maintain a high gross profit ratio.
• Pay yourself a fair market value for your services.  This is usually one of the largest adjustments a valuation expert makes.  If the business owner can prove the company is profitable under normal circumstances (absent the owner), its value increases (typically).  There are many reasons why an owner will want to pay themselves more or less than fair value.  This is beyond the scope of this blog.
• What separates your business or service from the rest of the competition?  By answering this question, you will start the process of differentiating your company and as long as you protect yourself from others who might try and steal your ideas, you will be adding value which will be noted when you look to sell.

Please reach out to us to see how we can help your company grow.