24 Oct Reduce Uncertainty to Increase Business Valuation
In a previous blog I wrote about increasing the value of a privately-held IT company by building a culture of managing and reducing risk factors. In this post, I’ll cover four more areas where you can reduce uncertainty that will affect your company’s valuation.
Adopt long-term contracts with customers and suppliers – A business that has long-term contracts with customers and suppliers is less risky than that of its peers. These contracts are tangible evidence of “stickiness” with business partners and how they see you as a part of their company. In the eyes of a potential buyer, these contracts make your organization more valuable than simply showing revenue per customer.
Identify recurring revenue sources – Recurring revenue comes from repeat sales of products or services, which require no further cost to obtain. Predictable cash flow is more valuable than single-point transactions, and profitability is enhanced since there is little or no additional expense for these types of sales. Recurring revenues may be contractual, such as managed service or help desk support contracts, or they may be informal patterns based on past transactions between two companies. Of course, buyers pay more for contractual recurring revenues.
Implement marketing and sales systems with pipeline management and forecasting – Tracking your marketing and sales programs with a customer relationship management (CRM) system is recommended to build a repository of all of your interactions with your customers and prospects. This gives you the ability to quantify every sales opportunity and predict your company’s revenue. By tracking your marketing and sales efforts by the individual prospect, it will reduce the uncertainty pertaining to future earnings and be more appealing to a prospective buyer.
More financial transparency – Most small, private companies produce in-house financial statements and guard them closely. Rarely do business owners invest their money and effort to have financial statements reviewed or audited. Most buyers are aware of this and also understand that in-house, compiled financial statements may or may not conform to generally accepted accounting principles. But, if you anticipate selling your business to a larger, more sophisticated company, get an early start by preparing and developing the information the accountants will need to complete the process. The cost of preparing audited or reviewed financial statements may be high; but if you expect to sell your company for a substantial sum, that may be the price of admission.
From a buyer’s perspective, uncertainty diminishes the value and appeal of a potential acquisition. If you can reduce doubt, your company will be more valuable and more attractive. In my next post I will cover other risk factors that can reduce the selling price of an IT business.